Baldwin Insurance Group, Inc. Q1 FY2020 Earnings Call

Greetings and welcome to the BRP Group Inc. First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Operator provided instructions to participants regarding the telephone conference controls. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Brad Hale, Chief Accounting Officer. Thank you. You may begin.

Thank you, operator, and good afternoon. By now, everyone should have access to our earnings announcement and slide presentation, which was released prior to this call and which may also be found on the Investor Relations portion of our website at baldwinriskpartners.com. Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements, which are based on the expectations, estimates and projections of management as of today. The forward-looking statements in our discussion are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC, including our Form 10-Q filed today for a more detailed discussion of the assumptions, risks, uncertainties and other factors that could impact the future operating results and financial condition of BRP Group, including those related to the potential effects of the COVID-19 pandemic on our business, financial condition and results of operations. On this call, we refer to the effects of COVID-19 and related government shutdowns, stay-at-home orders, business closures, travel restrictions, social distancing and other preventative measures, business disruptions, economic contraction and COVID-19-related developments by generally referencing COVID-19 or the pandemic. We disclaim any intentions or obligations to update or revise any forward-looking statements, except to the extent required by applicable law. Also our discussion today will include references to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure can be found within our earnings announcement and earnings supplement slide presentation, both posted on our website at ir.baldwinriskpartners.com or in our SEC filings. In addition, this call is being webcast and an archived version will be available after the call on the Investor Relations portion of our website. I would now like to introduce Trevor Baldwin, Chief Executive Officer of BRP Group.

Thank you, Brad, and good afternoon, everyone. Welcome to our first quarter 2020 earnings call. We appreciate your taking the time to join us and your interest in BRP Group. During today's call, I will provide some brief highlights on our first quarter performance, as well as provide an update on the current macro environment and our recent investments and growth strategy. Our Chief Financial Officer, Kris Wiebeck; and Chief Accounting Officer, Brad Hale will then present our first quarter financial results. And finally, we'll open the line for questions. Before we go further, our thoughts and good wishes continue to be with you, our colleagues, our clients, our partners, our investors and all of your families during these unprecedented times. And thank you to these stakeholders and our analysts, who are, once again, taking the time to join us this afternoon. It is very much appreciated. The first quarter was quite strong for our business, particularly with respect to revenue and adjusted earnings, as the impact of the COVID-19 pandemic only began to manifest in March. We continued our strong progress in executing on our pipeline of high-quality partnership opportunities, BRP's nomenclature for strategic acquisitions, successfully acquiring four new partners in the quarter and reported industry-leading growth. As we move ahead, while we expect to see additional impact from COVID-19 to the third quarter and possibly longer, thus far the resiliency of our business model and growth strategy has shown through in our results. The continued success of our growth strategy has been propelled by the technology infrastructure we have invested in building, as well as our unique go-to-market approach and breadth of sales enablement tools allowing for our continued execution of client stewardship commitments and ongoing new business generation, which has the added benefit of highlighting for potential new M&A partners, the value of becoming part of our platform. Having significantly strengthened our balance sheet through the IPO and subsequent expansion of our credit facility over the past year, we are well positioned to continue executing on our growth strategy in 2020. For the first quarter, we generated revenue growth of 82% to $54.2 million. The revenue growth was driven once again by our hybrid growth model, namely organic growth combined with contributions from new partner acquisitions. As Kris will explain in detail later on, core organic revenue growth for the quarter inclusive of our MGA of the Future business was 17%, highlighting the momentum we are carrying into the second quarter. In particular, our MGA of the Future platform continued to outperform in the quarter, growing 41% organically. And with the one-year anniversary of that acquisition now passed, we're looking forward to including it in our organic revenue growth totals moving ahead and will no longer need to report organic plus MGA. We expect it will significantly contribute toward our goal of generating sustainable double-digit organic revenue growth well into the future. To give you a further sense of how effective our proprietary technology stack and MGA of the Future platform has been, thus far in the second quarter, we've seen policies in force increased by 18,000 from where they stood on March 31 to nearly 420,000 policies in force, despite the economy being broadly shut down nationwide. On the last day of April, we sold over 2,000 new policies up from over 1,300 on the last day of March and we grew new policies issued by 37% during the month of April as compared to the prior year. As we've noted before, we're eager to apply and leverage the extremely efficient and highly scalable MGA technology and other capabilities toward developing other products that can be distributed throughout the entire BRP organization. As it relates to COVID-19, we experienced the lowest period of new business during the last few days of March and the first week of April. However, the business responded nicely in the back half of April. For example, on an organic basis, our two largest segments Middle Market and Specialty sold more new business in April of 2020 than April of 2019 further showing the resiliency of our model. As we further assess the COVID-19 impact on our business, we are continuing to closely monitor our Middle Market operating group as we believe it will feel the most significant impacts of the pandemic should the economic contraction persist and businesses act to further reduce their workforces. During the first quarter, we completed four partnerships that generated annualized revenue of over $30 million. Thus far in the second quarter, we have closed in an additional three partnerships and have bolstered our Middle Market operating group with two of those acquisitions Insurance Risk Partners and Southern Protective Group that generated annualized revenues of approximately $9.5 million. Importantly, we believe all three of these partners operate businesses in end markets that are relatively well positioned amidst COVID. Insurance Risk Partners expands our capabilities in attractive segments of the mission-critical energy, utility and infrastructure industry sectors, while Southern Protective Group bolsters our already meaningful risk and insurance capabilities for the health care industry with particularly strong competency in the area of liability for medical malpractice. We also acquired a Specialty partnership Pendulum, one of the leading providers of risk management and risk reduction consulting services and solutions to the health care and aging services industry. Thus, as of today, we have already closed seven partnerships in the first 4.5 months of 2020 that generated annualized revenue of approximately $42 million. We also still maintain a strong partnership pipeline which we continue to prudently monitor and evaluate in light of the current economic and health environment. In addition to enabling us to move seamlessly into a virtual-first environment across our business, the investments in our technology infrastructure and capabilities have allowed us to continue executing on our partnership strategy and delivering for our clients in our core business. We were able to close on partnerships over the last 60 days because of all the hard work we did significantly strengthen our balance sheet over the past year. With a $300 million revolving credit facility and a strong cash position of $52 million as of March 31, we believe we are well positioned to weather the economic pressures and as prudent close on additional partnership opportunities. We will continue to remain thoughtful regarding our balance sheet, but given our borrowing capacity and relatively low leverage, we believe we remain well capitalized to navigate the current challenging environment. Our strategic focus remains firmly on our growth and long-term success, which will be realized through our ability to deliver on our client stewardship commitments, win new business at a rate that meaningfully exceeds our industry peers and thoughtfully expand our footprint and capabilities with the ongoing addition of new high-quality partner firms, despite the current economic and operational challenges. To that end, while we continue to closely monitor the economic and health situation, we are prudently moving forward with our plans for targeted investment across the BRP platform to support our anticipated long-term growth. This includes incremental investments in talent at our MGA of the Future platform to further augment its capabilities and continue to make progress on the development of our Florida homeowner solution. This also includes accelerating the expansion of our offices in Tampa and investing further in our partnership, recruitment and integration teams throughout the next several months as well as ongoing investments in growing our sales force across our operating groups, as they highlight the durability of our go-to-market approach in the current economic and virtual-first environment. Additionally we believe there could be incremental near- to intermediate-term opportunities to add top-tier sales talent, as our approach to managing through the current crisis highlights our powered by people philosophy, further solidifying our status as a trusted and destination employer for our industry's top talent. While some of these thoughtful but incremental investments would impact near-term margins, particularly when combined with the expected impact from the current COVID-19 operating environment, we believe our long-term-oriented shareholders recognize the unique and meaningful opportunity for value creation that exists as we continue investing to build on our momentum and position ourselves for growth during this unprecedented time. We are fortunate to have a very resilient business with reoccurring revenue streams, which allows us to be defensively positioned in times of economic downturns. We are not however relying exclusively on the resilient characteristics of our business to carry us successfully forward. Instead, we are proactively accelerating many important initiatives across our platform to realize enhanced efficiencies from our technology investment and business process automation tools and initiatives to be well prepared for when the economy rebounds. Our recurring revenue business is coupled with a solid balance sheet and access to capital, which enables us to continue to source new partnership opportunities as well as move forward with investments for the long-term growth and success of our business. We remain excited for our future and believe, we are well positioned to weather the storm to accomplish our long-term goals. Most importantly, I want to express, how proud I am of our colleagues and their unwavering commitment and ability to serve our clients in these times. Some of our clients have faced tremendous economic pressures and heart-wrenching realities as a result of the pandemic, and our colleagues are working incredibly hard to develop and deliver innovative solutions and strategies for mitigating costs and risk in their time of need. If you are a client listening to this call, thank you for your ongoing trust and confidence in our teams. And if you're still a prospective client, please do not hesitate to reach out to our teams to see how we can provide you with leading insights ideas and strategies for mitigating your cost of risk and optimizing your insurance programs. With that, I'll now turn the call over to Kris and Brad, who will walk through some additional first quarter financial highlights.

Thanks, Trevor, and good afternoon to everyone on the call. For the first quarter of 2020, we grew revenue, which is comprised of total commissions and fees by 82% to $54.2 million, compared to $29.8 million in the prior year period. This increase was driven by new partnerships and organic growth. Our organic growth for the quarter of 5%, 12% with the MGA was inclusive of a negative 500 basis point impact from a decrease in contingent payments in Mainstreet, as we noted would occur on our prior call and other income in Medicare. Core organic revenue growth, when adjusted for these items was 10%, 17% with the MGA. Organic revenue growth is also inclusive of a negative 100 basis point COVID-19 reserve. As we previously noted, we believe this decrease in contingent payments is due to higher loss ratios and our personal insurance book, largely related to hurricane loss creep in 2019 that will be behind us after the second quarter of this year. We expect this reduction in profit sharing income to be partially offset starting in Q4 2020 and across all quarters in 2021 as insurance companies take rate across their Florida Homeowners book, which should increase our core commissions. Essentially, while this was a headwind to contingent income today, it should become a strong tailwind to client commission and fee revenue in the future. While we don't plan to provide this type of breakout of contingent income going forward, in light of COVID-19, we thought the incremental layer of detail will be particularly helpful in portraying the underlying health and momentum of our core business during the first quarter. As evidenced by our growth in underlying client commissions and fee revenue. Also as a reminder, we acquired MGA of the Future on April 1, 2019, and thus moving forward MGA of the Future revenue will be included in our organic revenue growth figures. Given that partnerships are an important portion of our ongoing growth strategy in our regulatory filings, we also provide revenue metrics on an unaudited pro forma basis. This provides investors with a more apples-to-apples comparison, as if our 2020 partnerships have been acquired on January 1, 2020. For first quarter 2020, unaudited pro forma revenue was $56.6 million, up 34% from prior year. As a reminder, this $56.6 million does not include any partners closed after Q1. It only includes the Q1 partnerships. Unaudited pro forma information should not be relied upon as being indicative of the historical results that would have been obtained if the partnerships had occurred on a bad date nor the results that maybe obtained in the future. Commissions, colleague compensation and benefits expense for the first quarter of 2020 were $34.5 million, an increase of $18.3 million compared to the first quarter of 2019, primarily due to the onboarding of new partners, which accounted for $14.5 million of the increase. The remainder of the increase was aligned with our year-over-year organic revenue growth and incremental costs of operating a public company. Operating expenses for the first quarter were $8.9 million, an increase of $4.9 million from the first quarter of 2019, due primarily to expenses associated with operating as a public company and rent professional and operating costs related to new partnerships. Amortization expense for the first quarter of 2020 was $3.6 million. An increase of $2.7 million from the prior year period, primarily due to intangible assets capitalized and purchased customer accounts capitalized in accordance with new partnerships. First quarter 2020 interest expense was $0.6 million, a $1 million reduction compared to the first quarter of 2019 as we repaid the full outstanding debt and accrued interest on our subordinated debt in the fourth quarter of 2019. GAAP net income for the first quarter of 2020 was $4.7 million or $0.07 per fully diluted share. Adjusted net income for the first quarter of 2020, which excludes share-based compensation amortization and other one-time expenses, was $12 million or $0.19 per fully diluted share. 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. Adjusted EBITDA for the first quarter of 2020 rose 39% or $3.9 million to $14 million, compared to the first quarter of 2019. Adjusted EBITDA margin was 26% for the first quarter of 2020, compared to 34% in the first quarter of 2019. Brad will now provide a breakdown of revenue by group.

Thanks Kris, and good afternoon to everyone on the call. For the first quarter, our middle market segment reported revenue of $22 million, an increase of $5.5 million or 33% compared to the first quarter of 2019. Our Specialty group generated revenue for the first quarter of 2020 of $17.4 million more than quintupling its revenue compared to the first quarter of 2019. Specialty’s revenue growth was driven by our 2019 MSI partnership completed in April 2019, which accounted for $11 million in revenue and our Highland Risk solutions partnership completed in January 2020, which accounted for $2.9 million in revenue. Policies in force on the MGA of the Future platform as of March 31, 2020 were approximately 401,500, an increase of nearly 27,000 from the prior quarter end and up over 107,000 policies from March 31, 2019. Last year, MSI saw an approximate 19,000 sequential increase in policies in force in the same quarter. So this quarter once again represented meaningful acceleration in growth. Moving to our Mainstreet group, first quarter 2020 revenue was $8.3 million, an increase of $1.8 million or 27% compared to the first quarter of 2019. Finally, our Medicare segment generated first quarter 2020 revenue of $6.4 million, up $2.5 million from the first quarter of 2019. I will now turn the call back over to Kris.

Thanks Brad. As we've noted previously, we manage our business based on our long-term growth objectives and focus on full year performance rather than quarter-to-quarter, particularly given the timing of completed partnerships can shift. As such we believe our full year and pro forma results are better barometer to how we are executing. Thus far in the second quarter of 2020, we closed three partnerships for total cash consideration of $36 million. These partnerships generated total annualized revenue of over $11 million, bringing the amount of annualized revenue acquired thus far in 2020 to over $42 million. In the current environment, we have continued to generate interest from and maintain a healthy pipeline for potential partners. Turning to our balance sheet. As of March 31st, we had cash and cash equivalents of $52.1 million and long-term debt of $60.4 million. As a reminder in March being prudent with regard to the current environment and our LOI pipeline, we converted the accordion feature of the facility into a full commitment and now have a committed line of $300 million that has no debt maturing until September of 2024. As of May 12th, cash and cash equivalents stood at $54 million and we had long-term debt of $84.9 million. As a result of our more positive outlook for operating capital, we converted $10 million of cash we had drawn in March to fund partnership that closed on May 1st. Thus, we have over $255 million of available unrestricted cash and revolver capacity to execute on our plans. We believe our balance sheet cash, low net leverage and access to liquidity continues to stand out in the current environment. We've always thought to manage the business for the long-term and to look forward and plan ahead, allowing us to be where the world is moving to and not moving from. In that light, we want to reiterate that due to the pandemic, we expect that our seasonality with respect to adjusted EBITDA margins will be skewed due to the impact of winning reduced amounts of new business during this time and some reductions in revenue from existing clients especially in middle market coupled with our Mainstreet business seeing slightly lower contingent payments until the end of June. Thus, we expect our second quarter adjusted EBITDA margin to be more akin to what we would normally record in the fourth quarter, which is normally our seasonally weakest quarter. As Trevor mentioned earlier, we are also moving ahead with investing in our business with an eye toward our long-term growth, while continuing to closely monitor the macro environment should there be continued delays in the economies reopening. We are fortunate in that we have a strong presence in states where the COVID-19 outbreak has to date been relatively less severe. Our exposure to the Southeast, which appears right now will open back up sooner than other states that have been more significantly impacted by the pandemic should provide a better near-term business environment for our clients and us. While we do have exposure to some of the more significantly impacted geographies with our national client base, it is not nearly as large as our exposure to the Southeast. We are also fortunate to have a large amount of clients who are considered essential businesses as evidenced by our Specialty wholesale business being almost entirely health care-related. We have ample capacity to be nimble with respect to our operations and acquiring new partnerships. And as we continue to take the temperature of the economy, we can either continue to move forward and allocate capital to new high-quality partnerships or keep our powder dry should the economy not show signs of recovery. This is a fluid situation. But as we sit here today, we find ourselves in a preferred position compared to many businesses and we are more optimistic than we were in late March when there were many more unknowns. With that, I thank you for your time and we'll now open up the call for Q&A. Operator?

Thank you. We will now begin our question-and-answer session. Operator provided instructions for the Q&A session. Our first question comes from the line of Greg Peters with Raymond James. Please proceed with your question.

Good afternoon. Three quick questions for you. Clearly you're being very successful with the growth of the MSI business. Can you talk about where that growth is coming from? Is it done on a geography basis? With new customers? Can you just give us some color and flavor of why it's growing so rapidly?

Yes. Hi, Greg, this is Trevor. And I hope you're staying safe and healthy and appreciate you joining us this evening. Specific to the MGA of the Future, we're continuing to see that growth across our national footprint. As you may know we're licensed in doing business in all 50 states. And I think this – the results we're seeing there really highlight the resiliency and power of the technology we have there enabling us to be a true 24/7 business and insurance solution. To give you some kind of anecdotal evidence, while I mentioned in my earlier prepared remarks that we saw the lowest new business results across our business in late March and the first week of April, we saw new business for the MGA platform increase in April as compared to March with new policies issued growing 37% on a year-over-year basis. And then as we sit here in May, new policies issued have accelerated even further from there. In addition to that, as we look at how our new business is occurring across our geographic footprint, I can highlight that new business or new policies issued between April 1 and May 11 in some of the harder hit states of New York, New Jersey, in Illinois and Massachusetts were up 39% on a year-over-year basis. And specifically to the four counties that make up New York City, our new policies issued during that same time period were up roughly 44%.

Okay. Thanks for the color. The second question is just on the deals in the pipeline. We've heard from others that there's been a pause in the marketplace. But – and there also is the very real prospect that the deal multiples have come down. Can you talk about what – how – the multiples that you paid for the deals year-to-date? And is there an expectation going forward because of this economic crisis that you might be able to get these high-quality properties at a lower price?

So what we're seeing Greg is that our pipeline continues to be really strong both in partnership opportunities that we've been cultivating for quite some time, as well as new opportunities that we continue to see and that come in even as recently as this week. So from an activity standpoint, while we may not be seeing as many represented deals as we did pre-COVID, the overall deal flow we're seeing is still at a really healthy level. As respect to pricing, it's really deal-specific. So if you have a potential opportunity that may be more acutely exposed to industry sectors or geographies that are being heavily impacted by the current crisis then there's certainly going to be some meaningful structural and pricing changes to how those deals are done. So far the partnerships we've closed have been businesses that we believe are incredibly resilient and defensively positioned to the current environment. And while the overall valuations are shifting somewhat, it's still on an incredibly fluid environment. And so we continue to evaluate that in real time.

Okay. The final question is around the free cash flow. For the first quarter it looked like it was about flat compared with last year. And I'm just curious what the drivers of that. And embedded in the balance sheet, I noticed there was a big jump in premiums receivable. Maybe you could also comment on what's going on there?

Yes. Brad do you want to provide some color there?

Yes. I would say, we noted Greg that profit sharing was substantially down from the prior year in our personal lines businesses. So that certainly hurt free cash flow in Q1 on a comparative basis. And if you look to the rise in premiums receivable, that's not flagging an issue on uncollectibles, that's more timing of a significant portion of for instance our employee benefits, business in the middle market is those effective in the first quarter which brings the seasonality we've referenced before. So you do get a rise in premiums receivable as a result of that as well, given that a lot of those policies have monthly payment terms.

Got it. Thanks for the answers.

Thanks, Greg.

Our next question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed with your question.

Hi. Thanks. Good evening. My first question is about organic growth and the outlook, primarily for Q2 but also for the other quarters of this year. You seem more optimistic than you sounded at the end of March, pointing to what appears to be better new-business levels in April and May. So, thinking about all your businesses combined, how does Q2 look from an organic perspective? And as we consider how some business gets recorded in the later quarters of the year, given COVID and the state of the economy, how do you see organic growth for the balance of 2020?

Yes. Elyse, when we break down the drivers of organic growth in our business, they are the same as our peers: new business, client retention, and the effects of exposure units and rate or insurance pricing. As I mentioned earlier, our new business results have continued to grow and improve compared with the trough in late March and early April. For example, in our Middle Market business in April, risk adviser head count was up 52% year over year and total new business revenue was up approximately 62% year over year, which translates to roughly a 7% increase in productivity per risk adviser year over year. In Mainstreet, total new business in April was up about 38%, driving roughly a 5% increase in productivity for our sales advisers year over year. That highlights the durability of our client engagement model and the effectiveness of our technology and tools in enabling our risk advisers to be successful in the current virtual environment. Since the COVID outbreak, client retention trends have been improving year over year. From a rate perspective, similar to what you are hearing from peers, pricing continues to be a positive tailwind. The main unknown is the impact on exposure units, which most meaningfully affects our Middle Market business. We have good real-time visibility into what we are seeing. For example, the combined impact of rate and exposure in Middle Market was roughly negative 1% in April, but we have seen improvement, with last week showing a roughly 5.4% net impact of rate and exposure on our renewal book. That said, the situation remains fluid. As businesses return to work and the economy reopens, it is still uncertain what the new normal will look like and what actions businesses may take regarding head count, revenues, and other exposure units. That is the biggest unknown we continue to spend a lot of time monitoring in real time.

That's helpful. I guess, when we put that all together I mean you seem pretty positive on the components of organic. So I guess if you were to sum it up, it sounds like we might see a little bit of a slowdown in the Q2, but it seems like we would still be within positive territory.

Yes. I think that's safe to say Elyse, but I just want to highlight it's a really fluid environment in light of the current pandemic. And so we're hesitant to get too prescriptive with that.

Okay. That's helpful. And then in terms of the margin commentary, I felt like last quarter you guys kind of insinuated right if there had been a severe pullback that maybe some investments might be put on hold a little bit. So can you just comment on what you saw and why you guys kind of are deciding to ramp up some investments right now? Is it just maybe some of your businesses are like MSI are growing stronger than expected? Just walk us through the thought process on the investments and kind of the drag that that's going to have on your margin?

Sure. So as you alluded to there was a lot more unknowns when we last talked in late March. And for our business, for our footprint heavily in the Southeast, it's been better than our worst-case scenarios thus far, right? Trevor said, it's still fluid, but we are more optimistic. We also just find ourselves in a good capital position, a good leverage position and really an ability to make investments at a time when others are pulling back, which should allow us to grab more talent to ultimately serve our clients and build a long-term durable business. So, some of the margin is certainly our plans to be opportunistic in Q2 when others aren't. But it's fluid. We're monitoring it. We don't want to get too far out ahead of ourselves, but we do think there's a unique opportunity here to make good investments that will pay off in the long run.

Yeah. I would just highlight there Elyse, it's not necessarily the same investments we would have been planning on pre-COVID. These are very informed investment decisions to really bolster our efforts, where we're seeing outsized success in the current environment. So, as we shared with the results we're seeing in the MGA of the Future platform and how that's really highlighted the resiliency of that business model and their tech-enabled go-to-market strategy, which is informing further investments there or in other parts of our business, where we've highlighted continued improvement in our overall sales productivity we're continuing to make investments there as we're seeing those pay off.

Okay. Thank you. Thank you for the color.

Thanks, Elyse.

Our next question comes from the line of Meyer Shields with KBW. Please proceed with your question.

Great. Thanks, and good evening, or good afternoon. Kris, I think you mentioned there was 100 basis point headwind to organic growth in the quarter. And I was hoping you could clarify. Is that a bad debt provision? Is that auditor return premiums?

I'll let Brad answer or follow on. But effectively, what we did is we looked at the revenue that we had booked and we generally have kind of a bad debt uncollectible revenue for an annual basis. And what we did at the end of Q1 is we actually doubled our annual reserve in the quarter for COVID right, just trying to look at what's going on with some of our clients and estimate kind of what a COVID exposure would be. We'll obviously keep looking at that. But that's what generated the 100 basis point hit there.

Yeah. I would say, it's sort of incremental cancellation reserve from our historical practices given the current environment and evaluation of our client base, with respect to recognized revenue that could be subject to cancellation in the future. Obviously, highly subjective, and we'll continue to monitor that in accordance with the accounting standards, but that's what that number represents.

Okay. No, that's very helpful. I think this is a question for Trevor. You mentioned potential recruitment, and obviously, there's a lot of activity going on among some of the larger brokers. I was hoping you could flesh that out a little more?

Yeah. Meyer, so what I would share is I think our response and how we've been really focused on remaining colleague and client centric amidst the current challenging operating environment has really continued to build on and bolster the trust, we have with our colleagues and highlighted our status as a true destination employer for the industry's top talent. So as you see some of our peers taking more broad-brush action that maybe needed or warranted in their businesses, we think that's going to create opportunities for high performers that may have gotten swept up in cost-saving actions that aren't necessarily as surgical as they could have been.

Okay. That's very helpful. Thank you so much.

Thanks, Meyer.

Our next question comes from the line of Pablo Singzon with JPMorgan. Please proceed with your question.

Hi, guys. So I just wanted to follow-up on MSI, which held up much better than I expected. I think if – look at industry data it shows that new leases actually had a meaningful decline in April, which makes your results I guess even more surprising. So I just want to dig deeper into the story. Is it really more about increased penetration or maybe over a presence in certain market segments, where new leases didn't decline as much? And I was pretty surprised by your commentary in New York just given how things have frozen up here, but any additional color would be helpful.

Great question, Pablo. So it's a number of things. It's one, we continue to get better at and more effective at how we're driving policy uptake in the communities that were embedded. Two, we continue to turn on more and more communities through our channel partners, making our tech-enabled solution available that really becomes that solution of convenience at point of lease. And three, it's continuing to bring on new channel partners. So it's really – it's a combination of expanding the potential doors, we have access to. It's becoming more effective at how we market our solutions to those doors; and three, gaining further wallet share inside our existing channel partners.

Got it. And just a follow-up to that. If we put aside new partnerships, if you could sort of speak to how penetrated you are in your current relationships, right? Because you raised a point that maybe you're not turned on in all buildings or communities, but I guess some sense of how much more runway there is to go there.

Yes. I mean with our existing channel partners, there's over 15 million units. As we shared on the call, we're roughly 420,000 policies in force today. So, there's pretty massive runway ahead of us.

Got it. And then, next question I had was on the acquisitions that you had disclosed for the second quarter. I noted that there was a nice pickup there. The acquired EBITDA margin went from 17% in the first quarter to 35. I think it was two Middle Market deals and one Connected Risk deal. If you could just provide some color, and I know each deal could be different: was that driven more by the Connected Risk deal, or did you see those kinds of margins in the Middle Market deals as well?

Yes. I'd say that was really more driven on the Middle Market side, Pablo. As we've shared before at the onset of the year, I think we talked about kind of an average expected EBITDA margin per aggregate partnership revenue of around 29%. We still feel like that's probably a good number to be using and thinking about for a full year basis. And just any given quarter, any given partnership, it's going to be lower or higher than that it's really very much deal-dependent.

Yes. And just on deals, Trevor, this will be my last question. So I guess if you think about revenues, over a year, assuming no material change in the business, you reach the acquired revenue you had modeled when you did the deal. But for acquired EBITDA, what kind of lag should we assume when incorporating that into our models? I presume it's more than one year for EBITDA to flow through after revenue, but could you explain how to think about EBITDA flowing through the model?

Yes. What I'd share, Pablo, is that it definitely isn't going to fully show up in the first 12 months following the partnership because you'll have incremental integration expenses associated with bringing those partner firms on board. So the way to think about it is on a last-twelve-month basis, around month 18 after the partnership is when it could be fully realized on an actual basis.

All right. Thank you for the answers.

Thanks Pablo.

There are no further questions. I'd like to hand the call back to Trevor for closing comments.

Thank you. We sincerely appreciate all of the interest in everyone who joined us this evening for our first quarter 2020 conference call. We hope all of you continue to remain safe, healthy and relatively sane during these unprecedented times and look forward to being with you hopefully soon. Take care.

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