Baldwin Insurance Group, Inc. Q4 FY2021 Earnings Call

Greetings. Welcome to the BRP Group Fourth Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Operator provided instructions. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Bonnie Bishop. Please go ahead.

Thank you, Operator. Welcome to the BRP Group's Fourth Quarter 2021 Earnings Call. Today's call is being recorded. Fourth quarter 2021 financial results, supplemental information, and Form 10-K were issued earlier this afternoon and are available on the company's website at ir.baldwinriskpartners.com. Please note that remarks made today may include forward-looking statements which are based on the expectations, estimates, and projections of management as of today, including certain expectations related to COVID-19 and other matters. Forward-looking statements are subject to various assumptions, risks, and uncertainties, and a variety of factors that are difficult to predict and which may cause actual results to differ materially from those contemplated by such statements. For a more detailed discussion of those factors, please refer to the company's earnings release for this quarter and to our most recent SEC filings, including our most recent Form 10-K, all of which are available on the BRP website. During the call today, the company may also discuss certain non-GAAP financial measures. For a reconciliation of these measures to the most closely comparable GAAP measures, please refer to the company's earnings announcement and supplemental information, both of which have been posted on the company's website at ir.baldwinriskpartners.com and can be found in the company's SEC filings. Lastly, we are pleased to have published our inaugural ESG report today, which is also available on our IR website. I will now hand the call over to Trevor Baldwin, Chief Executive Officer of BRP Group.

Thank you, Bonnie. And good afternoon, everyone. And thank you for joining us for our fourth quarter earnings call. I will share brief remarks, followed by Brad, who will cover select financial and business highlights from the quarter and fiscal year. And then Brad, Kris and I will take the questions. I want to start by thanking the amazing colleagues and partners at BRP. In another tumultuous year, you continued to deliver for our clients at the highest level, which couldn't be more evident in our results. Q4 was another excellent quarter to finish a record 2021 highlighted by organic growth of 18% and total revenue growth of 129% for the quarter. For the year, we achieved organic revenue growth of 22% and total revenue growth of 135%. We increased our margin for the year by 200 basis points while investing significantly in the business to drive our continued outsized future growth in 2022 and beyond. Our partnership strategy again exceeded our expectations as we announced 16 new partnerships during the year, contributing more than $206 million of acquired revenue. The MGA of the Future demonstrated strong growth of 36% during the quarter, despite a 2020 comparable quarter in which we recorded effectively five months of revenue related to our master tenant legal liability product. We continue to execute in multifamily, now with over 700,000 HO4 policies in force, while also making continued progress in both flood and homeowners. We launched our Florida admitted homeowners product last week with launches in additional states of both admitted and E&S products to follow over the course of 2022. We expect flood and homeowners will be important contributors to our growth in 2022 and beyond. On the partnership front, we had another active quarter to wrap a third consecutive year of outperformance. In November, we announced the addition of two more top-100 brokers, Wood Gutmann and Bogart, which added important property and casualty capabilities and relationships in Southern California, and Construction Risk Partners, which newly establishes our national construction risk management practice. These two partnerships marked the completion of seven top-100 partnerships since the beginning of Q4 2020, which makes BRP the partner of choice for roughly one-third of the top-100 firms that have transacted over the last two years. We're also excited about the additions of Brush Creek Partners, which strengthens our expertise in several verticals, including cyber and technology, and Arcana Insurance Services, which enhances the MGA single-family real estate offerings. We remain extremely proud of the reputation we have achieved as the partner of choice for some of the most well respected and highest-quality firms in the industry. We welcome our new partners to the BRP family and are confident they will contribute meaningfully to our continued success. Looking to 2022, our pipeline remains robust, including active discussions with firms across a range of sizes, geographies, and specializations. Importantly, our reputation as a destination employer is also being validated on the organic hiring front. During the year, we added more than 800 colleagues through organic hiring, representing over a 50% increase to our 2020 year-end colleague base. Combined with the new colleagues added from 2021 partnerships, our total headcount at year-end was approximately 2,800 colleagues. At the leadership level, we were pleased to name Raj Kalahasthi as our Chief Digital Information Officer to oversee our enterprise technology organization, build out our strategic IT capabilities, and help drive tech-enabled innovation. Raj has over two decades of IT leadership experience with a history of helping companies navigate through intense periods of transformational growth and change. We also promoted Seth Cohen to General Counsel and Corporate Secretary. Seth is an accomplished legal strategist, and his broad expertise will be valuable as our firm continues to grow and execute on its long-term objectives. Finally, we're particularly excited about the appointment of four new professionals to our Board of Directors. They exemplify our ability to attract exceptional talent to our business with a diverse range of experiences, perspectives, and skill sets. Finally, I want to again extend a huge thank you to all of our amazing colleagues and partners who have been the driving force behind another fantastic year of performance. You're the reason our business is in the strongest position in the firm's history. With that, I will turn the call over to Brad to go into more detail on our fourth-quarter and full-year results.

Thanks, Trevor. Good afternoon to everyone joining us today. For the fourth quarter, we generated revenue growth of 129% to $159 million. For the year, we delivered revenue growth of 135% to $567 million. We generated organic growth in the fourth quarter of 18%, with all four segments hitting double-digit organic growth for the quarter. Organic growth was 22% for the full year with three out of four segments—Middle Market, Main Street, and Specialty—in double-digits. We recorded a GAAP net loss for the fourth quarter of $44 million or a loss of $0.41 per fully diluted share. GAAP net loss for the full year was $58 million or $0.64 per fully diluted share. Adjusted net income for the fourth quarter of 2021, which excludes share-based compensation, amortization, and other one-time expenses, was $12 million or $0.10 per fully diluted share. For the full year, adjusted net income was $81 million or $0.80 per fully diluted share. A table reconciling GAAP net loss to adjusted net income can be found in our earnings release and our 10-K filed with the SEC. Adjusted EBITDA for the fourth quarter of 2021 rose 91% to $20 million compared to $11 million in the prior-year period. Adjusted EBITDA margin was 13% for the fourth quarter of 2021 compared to 15% in the prior-year period. Adjusted EBITDA for the full year grew 157% over the prior year to $113 million. Adjusted EBITDA margin was 20% for the full year at the upper end of our March 2021 expectation of a 100 to 200 basis point improvement over the 18% margin in 2020. Additionally, as we do every quarter in the earnings supplement available on our IR website, we have updated the quarterly pro forma financial statements to reflect the partnerships we closed in the fourth quarter as if we had owned those businesses since the beginning of the year, which increases the revenues in quarters one through three versus what we presented in previous quarters. In addition, we want to point out 2021 pro forma revenue and EBITDA of $719 million and $175 million, respectively, as significant partnership activity at the end of the year makes our business going into 2022 very different from just rolling actual 2021 results forward. On the capital front, we took advantage of what we saw as a receptive market backdrop to complete an upsized Term Loan B add-on of $350 million in December. We are well-positioned to execute on M&A and to achieve our expected completion of $100 million to $150 million in acquired revenue in 2022. A few items regarding expectations for Q1 and the full year 2022. First, for the first quarter of 2022, given the strong performance across our business in January and February to start the year, we expect to generate organic growth between the midpoint and top end of our long-term 10% to 15% double-digit organic growth goal. Additionally, we anticipate adjusted EBITDA margins for the first quarter approximately 200 to 300 basis points lower than first quarter 2021 because of the run rate on investments made in the back half of the year and changes to the seasonality of our business as a result of 2021 partnership activity. As a reminder, our adjusted EBITDA margins are seasonal in nature with Q1 being the strongest quarter. For the full year of 2022, on the back of significant investments made in the business last year, and thus far in 2022, it is our current expectation that organic growth for the year will be modestly above our 10% to 15% target. Like last year, we continue to identify high-return opportunities that will boost organic growth over a long period of time. On adjusted EBITDA margin, we currently anticipate investing nearly $50 million back into the business with a concentration in our MGA of the Future and Main Street businesses primarily in headcount and technology. These investments will create new products and teams that should be contributors to 2022 organic growth and an important catalyst for 2023 organic growth. Recall, we executed a similar strategy last year that has worked out exceptionally well as you saw in the last three quarters of 2021. So we expect we will earn an attractive return on the capital we're deploying, and that it will have a long-lasting compounding effect on growth. Despite this large investment in new teams and solutions, we still expect an additional 50 to 100 basis point increase in the adjusted EBITDA margin for the full year above last year's 20%. In summary, we are excited about our results during the quarter and for the full year. With the momentum we have carried into 2022 and due to the prospect of another very strong year in partnerships and organic growth, I echo Trevor’s thank you to our colleagues who have been the driving force in propelling us to new heights and positioning us for continued strong performance. 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 a question-and-answer session. Operator provided instructions. Your first question comes from Greg Peters with Raymond James.

Well, good afternoon, everyone. I guess I'd like to start off with the growth results in your guidance for fiscal year '22. With organic doing really strong in all segments, I'm curious as we think about this upcoming year, is there any particular segment that you expect to do better than the others or, I guess put another way, can you give us some ideas on where you think organic's going to break out by segment?

Hey, Greg. This is Trevor. Good afternoon and good to talk with you. And great question. So as you articulated, we have seen strong performance across all of our segments as we exited '21 and have entered '22. We expect that we'll see meaningful organic growth contributions from all four segments in fiscal year 2022. Similar to prior years, the MGA of the Future and our Specialty segment will continue to be at the top end of organic growth for our business and we would expect meaningful double-digit organic growth in the balance of the operating segments.

Just as a point of clarification on the MGA of the Future: I think LeaseTrack becomes a part of the organic calculation in '22. Can you just clarify how the rollout of that is going with your customers?

Yeah, LeaseTrack has been just a fantastic success story, Greg. Not only has the core of that software platform revenue base grown meaningfully under our ownership, it has also unlocked the significant growth that you've seen over the course of the year in our master tenant legal liability solution that was launched in the fourth quarter of 2020. We would not have seen the growth in that new product line without the incremental software capabilities that we were able to add into the business from LeaseTrack. By all accounts it's a success standing on its own; the software on its own has been a great success. But when you think about the combined contributions it has enabled across the broader business, I would characterize it as a home run.

Excellent. My other question was just on margins and there's been a lot of rhetoric in the marketplace around wage inflation and specifically the ability to retain and attract talent and you've, you've had a lot of people. And I did note your compensation ratio was a little bit higher than maybe what we're looking for in the fourth quarter. Maybe you can speak to your expectations around the commission component and our compensation composition of the margin assumption for '22 in the context of the comments I just made?

Yes. Greg, another great question. The headline is we feel fantastic about our ability to continue to add talent, retain talent, and do so in an effective and efficient manner that supports profitable growth in our business. Specific to the fourth quarter and the compensation ratio you saw there, that's not necessarily reflective of the overall comp ratio for the business on a full-year basis because of the seasonality of our revenue streams, as you know. So when you look at full-year compensation ratio for the business in 2021, it was actually down year-over-year compared to 2020 as we continued to scale up the business, gain efficiencies, and improved productivity in our business operations. As I think about the impact or potential impact of wage inflation, I think we're best positioned among our peers to be able to grow through that without feeling real pressure for a number of reasons. One, if you recall, in the depths of uncertainty of COVID back in March of 2020, when many organizations were freezing pay, holding bonuses, and putting a stop to hiring activity, we paid raises, we paid bonuses, and we kept hiring. So we didn't fall behind relative to keeping our colleagues' pay pacing with the increases in CPI during that year. Additionally, when you look at our overall headcount, it's up nearly 100% over the course of the past 12 months. As we've added many of those people through organic hiring, they're coming in at market wage rates already. And then lastly, when you look at our overall compensation mix, approximately half of it is variable in nature, tied directly to the fortunes of the revenue streams that those individuals are compensated off of.

Got it. Thanks for the answers. I'll let others ask questions.

Your next question comes from Michael Phillips with Morgan Stanley.

Hey, thanks. Good evening, everybody. In the MGA you talked a little bit about before, I kind of want to get an update on the priorities where you see the biggest priorities for the MGA outside of renters.

Absolutely. The MGA of the Future business is performing exceptionally well. We have terrific momentum not only in our legacy renters business, but also with the recent launch last week of our inaugural homeowners product with the admitted Florida solution going live. In addition to that, we expect to roll out both admitted and E&S product across the U.S. over the course of the remaining months and quarters in the year with a plan to have a 50-state solution live on an E&S basis and a multi-state solution live on an admitted basis by the end of the year. We think that the homeowners initiative is going to be a meaningful driver to organic growth at the MGA. In addition to the continued momentum we see in the renter space, we've stood up a new product team that is in the process of developing and launching incremental products, and we expect those will be significant contributors to continued organic growth in 2023 and beyond. We could not be more excited about the position of the MGA of the Future, the significant investments we've made in that platform, and the ultimate growth that they will yield and the value creation that will generate for our shareholders.

Thanks. Just to clarify, the Florida homeowners product is admitted or E&S?

The product we launched last week is admitted and that's on rated paper. I also want to clarify, Mike, we do not take any balance sheet risk on that product or any of the admitted products.

What impact do you think there could be on acquisition multiples as rates rise? Is there a certain point where rates rising could stall M&A or push multiples meaningfully lower?

Great question. Our perspective is that multiples likely peaked last year as we anticipate a rising-rate environment over the balance of 2022 and potentially into 2023. I suspect that we'll see an impact on valuation multiples where you will see them pull down modestly. I do not believe you're going to see a wholesale shift in valuation in the space, but we've certainly seen some signs of modest softening in overall valuation.

Next question comes from Yaron Kinar with Jefferies.

Thank you. Good afternoon, everybody. My first question: given some of the underlying assumptions behind the organic growth estimates for 2022, can you talk about how you foresee the overall economy developing over the course of the year and the rate environment as well?

Yes. Good question and good to talk with you. As we think about the impact of GDP growth and the overall rate environment on our organic growth, they are not meaningful contributors to the overall result. As we sit here today, there's likely going to be some economic choppiness due to geopolitical instability, supply chain challenges, and wage inflation that are impacting businesses broadly. We expect that we'll continue to see a hardening rate environment, albeit one that is slightly off the pace of what we saw in 2021. When you blend the impact of rate and economic growth together, it's a modest tailwind to the overall organic growth profile of the business. As a frame of reference for the building blocks of organic growth for our organization, there are four drivers: retention of prior-year client revenues, rate and exposure unit expansion or contraction, and new client wins. Our client retention is likely modestly better than peers but not a material differentiator. The impact of rate and exposure was a modest tailwind in 2021—about 2.3% in Q4 and 3.5% for the full fiscal year. The largest driver of overall organic growth is our ability to win new client relationships at a rate that meaningfully exceeds industry peers.

Got it. And how long, by your estimate, does it take a new producer you hire to hit full capacity?

The answer varies depending on the segment. Broadly speaking, it's about three years on average for a new hire to become fully productive. As you think about the roughly 800 colleagues added organically last year and our business generating roughly $257,000 of revenue per colleague, you can think about those hires yielding roughly $200 million of incremental revenue over the next three years. There are parts of our business, particularly in Main Street where we're making significant investments this year, where a risk advisor can get up to speed and meaningfully contribute to new business growth within three to six months.

Got it, that's very helpful. One final question: with expectations that interest rates will creep up in coming months, does that change your approach to debt or funding acquisitions through debt?

As we sit here today, we feel well hedged through interest rate caps that are laddered across multiple years to protect our existing debt position. Additionally, looking at our share price, we believe we're seeing one of the largest gaps between share price and intrinsic value of our business since we've been public. Even with increasing interest rates, we believe debt capital will remain the most efficient funding source for continued M&A growth in our business.

Next question, Elyse Greenspan with Wells Fargo.

Hi, thanks. Good evening. My first question: you reaffirmed that $100 million to $150 million M&A guide on the revenue side for 2022. Do you have a sense of the seasonality there? Would you expect deals to be backend-weighted? How do you see 2022 shaping up in terms of transaction timing?

Hi, Elyse. It's Kris. Great question. As you saw, we did a lot in Q4. We thought Q1 would be quiet, and it has been quiet. We would expect that, as you're building models, you would start to see revenue flowing in from new 2022 partnerships starting in Q2 and then into Q3 and Q4.

Okay. And then in terms of the organic guide, you said midpoint to top end of that 10% to 15% for Q1, but you also said you'll be modestly above that target for the full year. Is that because organic growth will pick up as we move through the year across all segments, or is it concentrated in certain segments like Main Street or MGA where investments are coming online?

Broadly speaking, Q1 is historically our seasonally lowest organic quarter due to timing of when new business comes online. In addition, we've made meaningful investments in growth initiatives that are now coming online and we expect those to have a growing impact as the year goes on, particularly in both our MGA and Main Street businesses.

Lastly, you called out that incremental $50 million you're going to invest back in the business this year. How should we think about future years? Is this a one-off re-investment program or something you'll consider similar to this each year?

This is not an expectation of an every-year event. We're making significant investments in our proprietary technology platform and MGA platform to position it to scale across multiple product launches this year and next year. I suspect the investments will be fully absorbed into a mature productivity state over about a three-year timetable. We expect those investments to yield at least about a 5x return on invested capital from a value creation standpoint over that period.

Next question, Josh Shanker with Bank of America.

Yes, thanks very much. If you think about the capital raises you guys have done over the past 18 months and treat it as kind of a treasury that you're putting money into to do acquisitions, is there anything left over in that treasury, or is all the capital you've put forward for acquisitions going forward expected to be internally generated or done with future capital raises?

Josh, it's Brad. We're very pleased in hindsight to have taken advantage of an upsized Term Loan B in December, which freed up our revolver capacity and gives us flexibility as we look at 2022. As Trevor mentioned earlier on the call, we will focus on our internally generated operating cash flow and the debt capital markets to execute on our 2022 strategy.

Given the comments about the stock price relative to intrinsic value being lower than it's been, would you be very reluctant to raise capital in the equity markets under these conditions?

Yes, that is accurate.

Next question, Pablo Singzon with JPMorgan.

Hi. I had a question about your organic growth for 2022. To what extent is beating your long-term range dependent on a very successful rollout of the new products, specifically the MGA and the Main Street investments?

This year we expect the investments we made last year to yield 200 to 400 basis points of incremental organic growth that otherwise would not have occurred.

The $50 million of investments you're making this year, will that be excluded from adjusted EBITDA margin or will that flow through the P&L?

That will be real expense in our P&L that suppresses our actual EBITDA margin. As Brad said in the prepared remarks, we will expand margin in our business modestly while investing an incremental $50 million above regular run-rate reinvestment. That speaks to the margin accretion that exists in our business and the mature margin profile that we can ultimately operate at.

Last one: the Medicare business — there's been disruption in the Medicare market, especially among online platforms. Can you comment on your Medicare business positioning and whether you see opportunity given some of the disruptions?

Great question. We recognize revenue in our Medicare business differently than pure-play publicly traded Medicare brokers. Specifically, we fully constrain revenue under ASC 606 and recognize revenue on a one-year expected cash basis for a Medicare policy. COVID certainly had an impact on our Medicare business due to our community-based go-to-market strategy. As we've been coming out of the COVID environment and after the most recent annual enrollment period in fall 2021, we saw a meaningful uptick in activity and are encouraged about the business model and go-to-market strategy. We expect to see a meaningful rebound in organic growth in that business in 2022 as a result.

Next question, Meyer Shields with KBW.

Thanks. Two quick questions. First, the $50 million is incremental above the $30 million you invested in 2021, correct? Second, can you provide an update on the Florida homeowners market and how much carrier capital is available that the MGA can access?

Yes. The $50 million is incremental above the $30 million we invested in 2021. Think of the $30 million from last year as an end-of-year investment above normal trend. As we grow into that investment, it's about three years before it becomes fully productive and operating at a more mature margin profile. That $30 million will be roughly a $10 million to $12 million drag in 2022 and then effectively neutral in 2023. The $50 million is an incremental reinvestment program above that and will have a similar three-year trajectory to becoming fully productive.

Okay, great. And the Florida homeowners market — with companies being downgraded or pulling back, what's your view and how much capital is available for your MGA to access?

There's a bifurcated answer. The Florida homeowners marketplace is in the worst shape it's been in my 15-year career in the industry. There's a real need for regulatory reform that has not yet occurred. It's not a sustainably functioning market in the current state. That said, we believe with appropriate risk selection strategy there is an opportunity to build a very profitable homeowners book in the state given our unique distribution strategy and superior risk selection. As a result of that strategy, we've been able to source significant risk-based capital to support our homeowners product. We launched our first admitted product in Florida last week, and we'll be launching a second admitted product in Florida in the coming months, as well as E&S products. Our opportunity in the state is significant, but you have to really understand the nuances of operating in Florida and what can get you in trouble quickly.

I will now turn the call over to Trevor for closing remarks.

Thank you, everyone, for joining us for our fourth quarter and year-end 2021 earnings call. We look forward to interacting and speaking with you all in the coming weeks and months. Take care.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.