Baldwin Insurance Group, Inc. Q2 FY2020 Earnings Call

Greetings, and welcome to the BRP Group, Inc. Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. (Operator provided instructions.) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Austin Rock, Director of Strategy & Partnerships. 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 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. With that, I will now hand the call to Trevor Baldwin, Chief Executive Officer of BRP Group.

Thanks, Austin, and good afternoon, everyone. Welcome to our second quarter 2020 earnings call. We appreciate you are taking the time to join us and your interest in BRP Group. During today's call, I will provide some brief highlights on our accomplishments during the quarter. Brad Hale, our Chief Accounting Officer, will then provide a more detailed review of our Q2 results and Kris Wiebeck, our Chief Financial Officer, will wrap up with a few quick comments on our balance sheet and recent expectations regarding our outlook for the future. We will then open up the line for questions. To start off and said simply, Q2 was the best quarter we have had as a public company and potentially ever when you consider the broader economic landscape. For the quarter, we recorded year-over-year organic revenue growth of 19% and total revenue growth of 55%, marking another quarter of industry-leading growth, highlighting our differentiated go-to-market strategies across our business, and our ability to nimbly adapt to a rapidly evolving and challenging operating environment. Notably, we continue to see accelerating momentum in our MGA of the Future business, which grew revenue 39% in the quarter and for the first time is now included in our organic growth figure. We could not have accomplished these results without the incredible commitment and engagement of our colleagues of whom I could not be more proud and their unwavering support of our value clients during this challenging time. On the partnership front, we continued to execute on our strategy, successfully adding five new partners that generated annualized revenue of over $47 million, including significant additions in our Middle Market Group that we covered previously on our announcement call in early June. Including two new partnerships announced in July, our year-to-date total stands at 11 completed partnerships representing $82 million of annualized revenues. Looking ahead, in terms of number, size and the quality of opportunities, we believe that our current partnership pipeline is the best it has been in the company's history. This allows us to continue being highly selective and laser focused on firms with industry-leading talent, unique and additive expertise and firms that we feel confident will help facilitate our goal to deliver double-digit organic growth well into the future. Regarding COVID-19, the situation continues to evolve, but as evidenced by this quarter's results, our business is performing well and we believe that we remain well-positioned to do so going forward. Taking a step back, since inception we've been exceptionally thoughtful about building a resilient business that could thrive in tougher economic conditions. And we think our Q2 results are firm validation of our efforts. This is the culmination of years of sensible investing in our infrastructure, our go-to-market strategies, our partnership strategy, and the hiring and development of fantastic people to serve and support our clients. One final note on the colleague front before I turn the call over to Brad to echo an announcement we made in early July, we are thrilled to welcome Erin King as our new Chief Colleague Officer. Erin joins us from Publix, a Fortune 100 company where she most recently served as Human Resources Director. Publix is on an elite list of just a few companies to be awarded Fortune 100 Distinction of Best Companies to Work For 21 consecutive years since the award's inception in 1998, an environment Erin was integral to creating and nurturing. She's aligned to our colleague and client first vision and has walked the road we plan to continue building. With that, I'll turn the call over to Brad to go into more detail on our Q2 results.

Thanks, Trevor and good afternoon to everyone on the call. For the second quarter, we generated revenue growth of 55% to $51.3 million. The revenue growth was driven once again by our hybrid growth model, namely organic growth, combined with contributions from new partnerships. Our organic revenue growth for the quarter of 19% includes for the first time our MGA of the Future platform, which we onboarded on April 1 of last year. 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 had been acquired on January 1, 2020. For second quarter 2020 unaudited pro forma revenue was $55.8 million, up 60% from the prior year. 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 that date nor the results that may be obtained in the future. GAAP net loss for the second quarter of 2020 was $7.9 million or $0.18 per fully diluted share. Adjusted net income for the second quarter of 2020, which excludes share-based compensation, amortization, and other one-time expenses, was $6.5 million or $0.10 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 second quarter of 2020 rose 84% over the prior year period to $8.4 million. Adjusted EBITDA margin was 16% for the second quarter 2020 compared to 14% in the second quarter of 2019. Recall, we had noted on our prior call that we had expected adjusted EBITDA margin for the second quarter of 2020 to be akin to fourth quarter levels, given the pandemic and our ongoing investment. Three things to note, as we think about our business to seasonality and the timing of our revenue recognition over the next few quarters. First, as we've mentioned in the past, our adjusted EBITDA margins are seasonal in nature, with Q1 being the strongest quarter, while we usually record lower margins in the second half of the year. Second, as we do every quarter in the earnings supplement available on our IR website, we have updated the quarterly pro forma financial statement to reflect the partnerships we closed in the second quarter, as if we owned those businesses since the beginning of the year. You will see a significant increase in Q1 revenue versus what we presented last quarter, which is predominantly driven by the two deals we announced on June 1, Rosenthal and TBA/RBA. To provide some additional clarity regarding the aggregate seasonality of partner firms, we have also added a new line to our year-to-date completed partnerships disclosure on page 10 of the earnings supplement we released earlier this afternoon. As a reminder, the pro forma financials we present are not projections of future performance. Lastly, as Trevor mentioned, our partnership pipeline is as strong as it's ever been. From a timing standpoint related to future acquired revenue, we currently anticipate deal closings to be almost exclusively in the fourth quarter. As a reminder, the exact timing of partnerships are subject to change. As we have provided in the past, results for our individual operating segments can be found in the earnings supplement on our investor relations website. We won't go into all four segments in detail in our prepared remarks. But I did want to spend a moment on our MGA of the Future platform, given the continued momentum in that business. The MGA continued to outperform in the quarter, growing 39% compared to the prior year period. During the quarter, policies in force increased by nearly 45,000 from March 31, 2020. We expect the MGA will continue to significantly contribute to our goal of sustainable double-digit organic revenue growth. And as we have previously mentioned, we remain focused on deploying extremely efficient and highly scalable MGA technology within new products that can be distributed across the entire BRP platform with limited and in many cases, no customer acquisition costs. Also, as a number of analysts and investors have been more focused on the renter's insurance space, over the past few months, we thought it may be helpful to provide a few specific incremental highlights in our business. While we ended the quarter with 445,988 policies, as of August 12 policies in force climbed to over 474,000 as momentum continues to accelerate. On June 30, we had our single largest new business date ever selling 2,483 new policies. However, that is now only the third best day ever. Eclipse on July 30 and then again on Friday, July 31, when we sold 3,218 policies. The 31st of July is traditionally our largest new business day of the year. Despite growing this quickly, we continue to maintain loss ratios materially better than what we believe is the industry average of approximately 65%. As of July 31, our MGA of the Future business employed just 29 full-time colleagues, which includes the colleagues currently focused on the rollout of our home and flood insurance products. As such, our 474,000 policies in force gives us a ratio of one colleague for a little over every 16,000 policies, which we believe is industry-leading, comparing favorably to both industry incumbents and those in the InsurTech arena and a testament to the quality and efficiency of the technology. Lastly, a few stats on our success penetrating our current footprint and continued runway for growth. We said in the past that amongst our distribution partners, we have around 15 million renters units in our current footprint, which is a third of the approximately 45 million total rental units across the U.S. As of July 1, 2020 our renter solution was turned on within buildings that represent approximately 6.7 million units versus 4.6 million units a year ago. So, we are having very good success working with distribution partners to make our solution available in more of their buildings, but still have ample runway in terms of turning on our solution in all 15 million units in our current distribution partners' footprint. And this is even before considering the opportunity set tied to additional future distribution partners. From a penetration standpoint, we've also been doing a better job of capturing a higher percentage of renters within the buildings in which our solution is available. As an example, a year ago, our penetration of the 4.6 million units in which our solution was available was 6.6%. Among those same 4.6 million units today, our penetration stands at 7.5%. So, in summary, we feel good about the runway ahead of us in the MGA of the Future, as we continue to turn on units in our footprint, add new distribution partners and increase penetration amongst our existing distribution partner network. With that, I will now turn the call over to Kris.

Thanks, Brad and good afternoon to everyone on the call. A few closing remarks before we hit Q&A. During the quarter, we took multiple steps to bolster our balance sheet, which positions us to continue investing in the growth of our business, our people and new partners. In June, we upsized our revolving credit facility by $100 million to a total size of $400 million, importantly with no adverse changes to terms or duration, expanding our bank group and maintaining our low cost of capital. We also brought $135 million of new equity capital onto the balance sheet via follow-on offering, which leaves our leverage today slightly over one times, which we believe positions us to capitalize on the partnership pipeline that Trevor mentioned at the outset, and that is as good as it's ever been. As we've said in the past, we continue to believe that three and a half to four times is a prudent run rate for our business. And we'd be comfortable taking leverage opportunistically up to around 4.5x if the situation warranted. As we move ahead, we expect the broader economy will continue to be impacted by COVID-19 for the balance of this year and into 2021. However, the resiliency of our business model and growth strategy continues to be evident in our performance. Thanks to our commitment to investing in our technology, our tools, and our people. As such, going forward, we still feel confident in our ability to generate low double-digit organic growth in this environment. In closing, we will, obviously, continue to closely monitor the macro environment, but as we stand here today, we are very happy with our second quarter results. We're as confident as ever in the quality, durability and growth of the business. And we have never been more bullish in our partnership pipeline. 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 be conducting the question-and-answer session. (Operator provided instructions.) Our first question is from the line of Greg Peters of Raymond James. Please proceed with your question.

Good afternoon, BRP Group. I'd like to go back to a bunch of the commentary Brad provided around the renter's product. Maybe start from a perspective of talking to us about the persistency of your customers in all four of your segments. I know, in particular, it's been an issue of concern with other companies in Medicare and in the apartment business. So, maybe you can give us some perspective on how your persistency is holding up.

Yeah, Greg. Hope you're doing well this afternoon. As we think about, and look at persistency in our business, in our Middle Market segment, we believe that it's in the low-90s. And we have not seen any material change to that over the past few months and into the COVID period. When we look at our Medicare business, we believe our approach of going to market where we're engaging through communities to bring solutions to our clients, where they feel most comfortable, enables us to build a very strong relationship with our client. As plans change or their providers decide they may change their network of plans that they accept, that relationship in turn enables us to be their trusted advisor, ultimately the one that they come back to and reach out to for advice on other plan options. So, ultimately, we believe that our go-to-market approach enables us to deliver a more favorable retention rate than many of our peers that are focused on more internet or call-center-driven sales styles. In the MGA of the Future business, and in particular the renter's product, persistency on a policyholder basis is certainly not what you would see in a traditional homeowners or middle market client segment. But what we focus on is the persistency of the unit in the building, because that's what we're really tied to: distributing through the property management and software providers that oversee those buildings. While one renter may end up moving out and not necessarily retaining our product, we're focused on whether we obtain the next renter coming into that unit. We haven't disclosed specifics around that retention rate, but we believe our overall retention relative to peer renter solutions is above average.

And the Mainstreet business?

The Mainstreet business, we see high 80s to low 90s overall retention.

Greg, I would add on the renter's what Brad commented on about how we look at persistency: if you look at the kinds of buildings we were active in, our penetration increased year-over-year from June 30 to June 30. That's exciting to see from the business, and that's more how we think about it.

Sticking with the renter's for a second: can you comment on how your acquisition costs match up with the revenue you're generating? In some of these other models, it's become painfully clear that they're cash-flow negative for a couple of years and really need the persistency to be high to get to cash-flow positive. Perhaps you can comment on your business model as it relates to cash flow and acquisition costs.

That's a great question, Greg. The day we bind a renter's policy, it's cash-flow positive for us. Our acquisition costs on that business are structured so that as soon as that policy is bound, we have made a profit. As such, that's why the MGA of the Future business has been profitable now for over three years and has a growing healthy stream of cash flow.

Then just sticking on the renter's: how's the integration going? When you talked about the Rosenthal acquisition, you talked about revenue synergies in part through the MGA of the Future. How is progress going on that front?

We've held a couple of strategy calls between the MGA of the Future team and the Rosenthal team. The first 90 days of a new partnership are focused on successfully onboarding and welcoming our new colleagues in a manner that is consistent with who we are and our culture. Then we focus on deploying our go-to-market capabilities and tools to enable accelerated growth. I'd say we're in the beginning stages of rolling out cross-sell revenue opportunities between them and the MGA of the Future. That's a process that's going to take a few quarters before we begin to see real traction.

Got it. Thanks for those answers. One last numbers question: I noticed an increase in payables in the cash flow statement. Can you talk about what was going on there?

Greg, thanks. This is Brad. It's just a function of a buildup of advanced premium payments for many July effectives, which was just a timing thing for the quarter.

Got it. Thanks for your answers.

Thanks, Greg.

Thank you. Our next question is from the line of Elyse Greenspan with Wells Fargo. Please proceed with your questions.

Hi. Thanks. Good evening. My first question was to get more color on the deal pipeline. You made some comments about deals closing in the fourth quarter; I wanted to understand whether they are more tilted toward Q4. Also, you had $226 million of debt at the end of the quarter and then paid down $125 million in July. Was the paydown due to having excess cash on hand for deals that might close immediately? Would we see the leverage tick up as deals materialize? Just trying to tie those questions together related to deal activity.

Hey, Elyse. It's Kris. I'll take them backwards. Absolutely. Regarding where the pipeline is hitting: it's the best pipeline we've ever had. Knowing that it's likely to close in Q4, we paid down the line. It's a revolving line and that gives us more buying power to execute in Q4. It was purely treasury management as to why we paid it down. We did something similar last December. The pipeline is the strongest we've had and, as Brad said, we expect a couple of small things in Q3, but the majority would be in Q4. Those timings are subject to change, but there's a lot of reasons why some folks depending on what happens with the election may want to transact in Q4. On that point, in the investor supplement we tried to take what we'd closed year-to-date and lay out the phasing so you can more easily see how things may have happened historically with the revenue we closed on year-to-date.

That's helpful. In terms of the pipeline, can you give a sense of the size of deals? Maybe not too specific, but what's the mix of smaller and larger deals and what might potentially close in Q4?

Elyse, what we can say is the pipeline of partnership opportunities and the firms we're in meaningful dialogue with represent the largest overall pipeline — a collection of the largest firms we've been in dialogue with in the history of our organization and, frankly, among the highest-quality organizations that remain independent across the U.S. We are exceptionally excited about the organizations we're in dialogue with.

In terms of margins, you pointed out seasonality and that typically margins are weaker in the back half of the year, with some investment in Q2. How should we think about investment combined with deals you brought on, and how that will affect Q3 and Q4 margins compared to last year or Q2?

Elyse, a couple of things: we laid out the ASC 606 phasing and pro forma margins. You did end up hitting revenue in Q1; we took pro forma revenue in Q1 up to $78 million, which is important when looking at the rest of the year for margin. From a stance, we see a big opportunity to keep investing in this market. I think we made the right call in Q2 to be front-footed and lean into investment opportunities. We've already seen a few pay off and expect more to pay off going forward. We continue to invest into Q3. From a modeling standpoint, we probably don't want to take margin back from Q2; if anything for Q3, holding Q2 pro forma margin is a good place to be. A bit depends on how many investments we make, but we probably won't take margin back, so hold it steady for now.

You reported about 11% organic growth in the quarter. If I back out the MGA, that's strong growth in your other businesses. Within everything else, does that 11% feel like a good run rate for the rest of the year, even given COVID-related headwinds?

Look, 19% organic overall with the MGA and when the country is down 32% on GDP and we're plus 19%, that's 50 percentage points better. We don't want people to assume 19% forever. We've said to think about this business in the long run at 10% to 15%. For Q3 itself, you've heard from other brokers that it's probably the low quarter for the industry given COVID impact and stimulus uncertainty. So, think on the lower side of that 10% to 15% range in the interim. It's a fluid situation, but we still feel really good: Q2 was exceptionally strong and we feel good about double-digit growth going forward, but tell folks to think on the lower side for now due to uncertainty.

Okay. Thank you. I appreciate all the color.

Thanks, Elyse.

Thank you. Our next question is from the line of Meyer Shields with KBW. Please proceed with your question.

Thanks. I want to follow up on geography: many regions you're operating in were doing relatively well with the pandemic, and I'm thinking of Florida specifically. There were increases in infection rates; hopefully they are slowing down now. Could you talk a bit about month-to-month economic progress in your geographic footprint?

Hey, Meyer. A few things: as we look at the combined impact of rate and exposure on our book through July in the Middle Market business, it sits at roughly 3%. In the commercial line side of our business, it sits at roughly 1%. So, thinking about the relative impact of rate and client exposure, we're seeing pretty healthy rate increases similar to our peers — call it high single digits. Offset to that is shrinkage in exposure units of our client base: revenues, payrolls, headcount. Importantly, despite that relative tailwind of combined rate and exposure being around plus three for us, we meaningfully outgrew that because of our ability to win and onboard new clients at a rate that exceeds industry peers. More specifics: it's held steady around plus two to plus three for the past few months, so not materially moving up or down. Looking ahead, Q3 and potentially Q4 could be tougher as many businesses burn through stimulus dollars and may need to resize. For our existing client base, restaurant, hospitality and lodging clients' renewed revenue is down about 24% through July, which includes exposure unit shrinkage offset by positive rate. Our performance despite headwinds goes back to investments in our platform and equipping risk advisors with tools to be successful in a virtual environment. MGA of the Future provides another data point: in some geographies more meaningfully impacted in the middle to back half of Q2, new policies issued in Florida are up 45% and in California up 45% year-over-year, highlighting the resiliency and durability of that tech-enabled distribution model we've built.

Quick question for Kris: looking at the slide with pro forma revenues of this year's partners, that's tremendously helpful. Is there anything unusual in the seasonality of expenses for those companies?

Not particularly. Only that our commission expenses mirror commission revenue. So, when commission revenue is higher, we'd be accruing the associated commission expenses. But nothing specific to call out on the expense side.

Meyer, I would add: when you look at our business, during seasonally high revenue periods margin tends to be meaningfully higher, because we have certain costs that are more fixed — operating expenses, client service and admin payroll — that don't fluctuate with revenue. So, in high-revenue periods you'd expect materially better margin, and in low-revenue periods you'd expect lower margin.

That's helpful. Final question: how are sellers thinking about the prospects of political change or higher capital gains taxes coming into effect next year, and how material does that seem to be?

Over the past 30 days it's become something that's started coming up. I wouldn't say it is a deciding factor for why people are making a decision to potentially partner, but it's a contributing factor particularly as we get closer to the election. On the margin it's probably helpful as we look at pipeline and deal flow in the back half of the year, but it's mainly for people saying, if I'm going to do something in the next three to five years, there's a reason to accelerate that into 2020 rather than wait.

Perfect. Thanks so much.

Yeah.

Thank you. Our next question is from the line of Pablo Singzon of JPMorgan. Please proceed with your question.

Hi. Good afternoon. I wanted to dig more into segment organic growth numbers. If I'm doing my math correctly, Middle Market had a strong quarter, about 15% organic, but Mainstreet and Medicare were softer. Was it the same factors driving the softness there as in the first quarter?

Pablo, with Mainstreet there was some contingent income headwind that will continue through the second quarter effects. In our Medicare business, where we serve clients in communities and places where they feel most comfortable, the COVID environment has impacted our ability to get in front of people the same way. To address that, we've been making meaningful investments to position ourselves for success in the back half of the year. We launched our digital marketplace under the Guided Medicare Solutions brand about a month and a half ago and we've already enrolled our first members on Medicare Advantage plans through that platform, enabling agents to have a completely digital enrollment experience with their clients and plan members. We're excited about that. For Medicare and Mainstreet, the contingent income headwinds will likely begin turning into real tailwinds in Q4 and through 2021 as rate action flows through the book of business.

Second question about MSI: how do you square the strong performance of MSI against a rental market that should be seeing stress in renewals or new leases? Are you seeing stresses in your portfolio and how comfortable are you growing around those headwinds? What are you doing that's helping you grow around those potential headwinds?

Pablo, it highlights that our ability to grow the renter's book of business is not necessarily tied to people signing leases. Our tech-enabled distribution model integrates through software providers who at times manage rent payments or other interfaces with tenants, which provides a venue for offering renter's insurance on an ongoing basis. We continue to improve our ability, in partnership with distribution partners, to market that solution and get in front of tenants, as highlighted by increasing penetration and turned-on units in our distribution partners' portfolios.

Would it be fair to say that as long as occupancy rates stay stable — and they have been stable in the sections of the portfolio you're covering — we should expect continued growth in renter's? Is that a fair macro-level way to think about the renter's market as it relates to MSI?

Yes, I think that's a fair way to think about it, Pablo.

Okay. Thank you.

(Operator provided instructions.) There are no further questions at this time. I will now turn the call back over to Trevor Baldwin for any closing remarks.

Thank you everyone for joining us. We are super pleased with the performance of our business and the strength of our colleagues in helping us deliver for our clients during what was a really challenging environment. We look forward to speaking with everyone in a few months to talk about Q3. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.