Ladies and gentlemen, greetings, and welcome to the BRP Group, Inc. Second Quarter 2022 Earnings Conference Call. Operator instructions were provided. As a reminder, this conference is being recorded. I will now turn the conference over to Bonnie Bishop, Executive Director of Investor Relations. Please go ahead.

Thank you, operator. Welcome to the BRP Group second quarter 2022 earnings call. Today's call is being recorded. Second quarter financial results, supplemental information and Form 10-Q were issued earlier this afternoon and are available on the company's website at ir.baldwinriskpartners.com. Please note that remarks made today may include forward-looking statements subject to various assumptions, risks and uncertainties. The company's actual results may differ materially from those contemplated by such statements. For a more detailed discussion of these risk factors, please refer to the note regarding forward-looking statements in the company's earnings release for this quarter and to our most recent 10-K and subsequent periodic filings, including our most recent Form 10-Q, 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. I will now turn 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 second quarter of 2022 earnings call. During the call, I will share a few brief remarks, followed by Brad, who will address select financial and business highlights in the quarter and then Brad, Kris, and I will take questions. In short, Q2 was an excellent quarter, highlighted by organic growth of 24% and double-digit organic growth across all 4 segments. This sustained level of outsized organic growth is being powered by some of the strongest internal underlying fundamental growth drivers we have seen since our IPO. The MGA of the Future posted its best quarter in our history as a public company with organic growth of 70%, and MainStreet recorded organic growth of 33% for the quarter. Both results show that the investment initiatives we've highlighted during the last several quarters are beginning to bear fruit. We remain particularly excited about the momentum building in the MGA. As of today, we have homeowners products live in 14 states, including 2 admitted AM Best A-rated products in Florida, 1 in Massachusetts, and E&S products live in 14 states including Florida, Texas, and California. In May, we also started managing a portion of the over $200 million premium builder-sourced admitted homeowners book from QBE, a new agreement we originally announced in March. As we previously signaled, the launch and ensuing momentum and the distribution of our proprietary homeowners' products had a material positive impact on our second quarter organic growth rate in the MGA and we expect that to continue to be a meaningful contributor to organic growth during the balance of the year and into 2023. In April, we completed the acquisition of Westwood, our largest partnership to date. As a reminder, Westwood is a personal lines-focused insurance distribution platform that is embedded with 14 of the top 20 new homebuilders in the U.S. to provide purpose-built homeowner solutions to new homebuyers. Importantly, May and June saw strong revenue growth in excess of 20% for Westwood, exceeding our initial expectations. The benefit of increased client retention, meaningful rate increases and a roughly 15% improvement in homebuyer capture rates significantly outweighed any impacts to new business from a slowing home sales environment. While we expect the backdrop for new home sales to be challenging for the balance of 2022, we remain confident that continued channel partner expansion, capture rate improvement, increasing retention and property rate tailwinds will continue to overcome any home sales headwinds and drive overall strong growth for Westwood. In closing, the outperformance in our results year-to-date, the strong underlying momentum and fundamentals across all of our segments and the durability of our business model leave us confident that our strong performance will continue for the remainder of the year. I want to thank our clients, our trading partners, and our outstanding colleagues who drive our continued outperformance; as a result of our colleagues' dedication and efforts, the business is in its best position in its history. With that, I'll now turn the call over to Brad.

Thanks, Trevor, and good afternoon to everyone joining us today. For the second quarter, we generated revenue growth of 94% to $232 million. Organic growth in the second quarter was 24% with all 4 segments hitting double-digit organic growth for the quarter. These are excellent results especially considering the extremely strong prior year. We recorded GAAP net income for the second quarter of $17 million or income of $0.14 per fully diluted share. Adjusted net income for the second quarter of 2022, which excludes share-based compensation, amortization and other one-time expenses was $26 million or $0.23 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 2022 rose 112% to $42.5 million compared to $20 million in the prior year period. Adjusted EBITDA margin was 18% compared to 17% in the prior year period. I do want to point out that we had some meaningful earn-out payments this year, specifically the MGA of the Future earn-out in April, which because of GAAP rules in aggregate contributed to the $48 million running through our free cash flow from operations as a negative item. Adjusted for this earn-out payment and the change in AR and AP because of our carrying of fiduciary cash, free cash flow from operations improved compared to the same 6-month period in the prior year. A few items regarding expectations for Q3 and the full year 2022. First, for the third quarter of 2022, given the strong performance across our business, we expect to generate organic growth in the high-teens. Additionally, because of changes in the seasonality of our business as a result of 2021 partnership activity and the closing of Westwood, we will provide some additional color beyond what we normally provide for Q3 projections. Currently, we expect revenue for Q3 2022 to be roughly $230 million and for adjusted EBITDA margin to be in line with our 17% in Q3 2021. We are slightly increasing our expectation for organic growth for the full year to the high-teens. As Trevor mentioned, we are deploying the nearly $50 million investment we discussed on our Q1 earnings call, concentrated at our MGA of the Future and MainStreet businesses, primarily in key colleague additions and technology development, which as you saw in this quarter's results is already paying off. These investments should contribute to organic growth in Q3 and Q4 of 2022 and beyond. Despite this outsized investment in new teams and solutions throughout the year, we still expect an additional 50 to 100 basis points increase in the adjusted EBITDA margin for 2022, above last year's 20% consistent with the expectation we have given all year. In summary, we remain excited about the performance across all of our business and the momentum we have carried into the third quarter. With that, I thank you for your time and we will now open up the call for Q&A. Operator?

Operator instructions were provided. Our first question comes from the line of Greg Peters from Raymond James.

A good starting point for the questions would be around the organic results. You're posting some, especially in specialty and MGA of the Future, some substantial rates of growth. One of the questions we get from investors pretty consistently is about the sustainability of these really strong organic results looking out beyond just this year. Perhaps you could give us some additional detail what's driving it and how we can gain some confidence when we think about 2023 and 2024?

Greg, I appreciate the question. I'm not going to provide specific guidance into 2023 or 2024. But it may be worthwhile to spend a little time on what's driving the overall results and why we believe the outsized organic growth is sustainable. First, we talked about the fact that the launch of homeowners product was going to be a meaningful driver to organic growth in the year; we launched that product initially at the end of the first quarter. The momentum there has really picked up and contributed meaningfully to a record organic growth quarter for the MGA. Additionally, we're seeing broad-based strength and performance across all of our segments, which is evidence that the investment program that we made last year and the further $50 million of investments we're making into the business this year are paying off and driving results. We are pleased with the early signs of success from those initiatives. The momentum with the homeowners product launch and the rollout of that product across the country suggests overall organic growth momentum will continue.

Associated with revenue growth another important component is acquisitions. You have, what, $75 million left on your revolver. Cash flow has been constrained because of payouts. How should we think about your M&A capacity going forward? I know previously you had some targets. Have those targets shifted at all? What are you thinking about M&A?

Our outlook for M&A for the balance of the year hasn't changed from the last call. We continue to expect to be at the low-end of that $100 million to $150 million range for acquired revenue for the year. We're at $96 million announced M&A as of this call so far this year. We expect to be able to continue delevering the business as a result of growth in top and bottom line and margin expansion over time, and that will create capacity to fuel incremental M&A. We're not going to give guidance for 2023 at this time, but we feel really good about the position we're in. The business's position and our reputation in the industry make us the premier home for the industry's premier businesses that drive outsized stakeholder value, bring unique industry sector and product line capabilities and have the attributes to continue delivering the double-digit organic growth we expect of ourselves and our partners.

Embedded in your answer you mentioned deleveraging. I'm looking for a clarification of where you are in that process and what your targets are. That's my last question.

Our net leverage is roughly 5.5x. As Trevor mentioned, we are committed to delevering the business over the next 12 to 18 months through continued outsized organic growth.

Operator instructions were provided. Our next question is from the line of Elyse Greenspan from Wells Fargo.

Maybe my first one would just be following up on the debt side. So is that 5.5x after the deal that you guys announced last week? And then, can you just remind us over time where you would like your leverage to be?

The 5.5x I referenced was pre the deal we announced last week, but we paid less than 10x for that deal. So it was largely neutral to net leverage. In addition, we've made no change to our long-term target of 3.5 to 4.5x. We believe we can get back in that range over the next 12 to 18 months with growth in the business.

You guided for the third quarter organic growth in the high-teens. When you think about that, I'm assuming you expect another strong quarter from the MGA of the Future business. Does that guide imply double-digit growth again in all of your segments or how do you see the third quarter relative to all of your businesses?

I'm not going to provide specific segment level organic growth forecasts. What I can tell you is we expect continued strength and momentum across the entirety of our business. Our guide reflects our characteristic conservatism given the uncertainty that exists globally today.

You haven't seen a slowdown as you went through the second quarter? I was assuming you did note a slowdown towards the end of the quarter.

No, there is no slowdown. As I mentioned in my prepared remarks, the underlying fundamentals of the drivers of the organic growth that we saw in the second quarter are as strong as they've ever been since our IPO. New business as a percentage of prior year commissions and fees was at an all-time high for us on a quarterly basis of roughly 30%. When you think about the levers of organic growth that are internally controllable — both new business and attrition — they have never been stronger. We've seen an ebbing of the impact of rate and exposure. On a year-to-date basis, it's about a 2.5% tailwind to organic growth. In the quarter it was relatively flat. We're exceptionally pleased with the strength and momentum of the fundamentals and expect that to continue through the back half of the year.

One final question. You mentioned you're starting to see a benefit of the new hires helping organic this year. In the past you had mentioned there is a lag from hiring until they are fully operational. Should we expect a greater tailwind in 2023 on organic relative to what you end up seeing in 2022 from those new hires?

We expect a tailwind from the hires both in 2022 and into 2023 and beyond. We hired about 475 new colleagues in the second quarter, bringing year-to-date headcount growth from new hires to about 850, which is a really high rate of hiring. I expect that rate of hiring will begin to moderate and normalize as we get into the back half of the year and into 2023, but we expect continued momentum as a result of the breadth and depth of talent that's come into our business and the new product developments and innovation that is being driven as a result.

Operator instructions were provided. Our next question is from the line of Pablo Singzon from JPMorgan.

Last quarter when you provided your organic growth outlook for the year, you had assumed some kind of economic slowdown. Are you assuming sort of the same scenario for your higher outlook this quarter? And if you think about the balance of the year, where are you assuming potential softness in a pretty strong heightened organic growth outlook?

Great question. The past two quarters we've delivered exceptional organic growth results despite contracting GDP, and implicit in our guidance for continued elevated levels of organic growth is continued softness in the overall economic environment. That highlights not only the resiliency of our industry and our business model but the balance and strength of revenue drivers across BRP and the unique contributions from our various segments.

On that point, the acceleration in organic growth in MainStreet and Medicare was notable this quarter. Any color you can provide on what's happening fundamentally and what's happening on the ground that's driving that growth?

Medicare has been very strong in both the first and second quarters, reflecting the business coming out of the COVID operating environment. Our go-to-market strategy in that business is community-oriented and often face-to-face, and the resumption of more normal operations has enabled momentum there. For MainStreet, it's a combination of things. Our legacy operations across Florida are performing exceptionally well in a challenging market environment, bringing unique solutions to clients seeking homeowners capacity. We're seeing an uptick in results due to our scale and market access. More broadly, we've been investing heavily in MainStreet to expand the business nationally; we've hired over 100 new risk advisers into that business this year. While it's still early days, we're pleased with the early signs of success with that national expansion.

Last one: I was hoping to get more perspective on the homeowners MGA product. When do you expect to be fully rolled out? In the states you're in now you manage in 14 states; are you concentrated in a couple like Florida? Who are the distribution partners you're tapping to sell the product? Obviously you have your own MainStreet agents, but are you expanding beyond that for this MGA product?

There's a lot in that question. We expect to be fully rolled out with our national suite of products over about an 18-month period from now, so still a good bit of work ahead. The majority of distribution is internal — our MainStreet business and the Westwood platform — and we also have some external distribution. Florida represents less than 10% of the premium on the books today, which is approximately $75 million of premium we've bound, inclusive of the QBE book we began managing in May. We're building a balanced portfolio. The type of business we're writing is super preferred; we're off to an exceptional start albeit early days. Overall performance-wise, loss ratios have ticked down across the MGA modestly year-over-year. We continue to see terrific growth performance and exceptional profitability for our risk-bearing partners across the portfolio of products and programs we're managing.

Operator instructions were provided. Our next question comes from the line of Michael Phillips from Morgan Stanley.

A quick follow-up on that last comment. When you defined it as 'super preferred', can you give dollar amounts of the size of the homes you're targeting in terms of limits?

In general, we're targeting homes with a Schedule A replacement cost value between $250,000 and $3 million. The sweet spot is really in the $300,000 to $750,000 range today.

Given the backdrop of fears of GDP contraction and recession, anything you're hearing from your clients about their own confidence going forward?

It's industry-specific. Our innovation practice, which serves life sciences, technology, Web3 and crypto-type companies, is having a tough environment: those businesses are struggling to raise capital, valuations have come down and employment is down. That's a real recession in that subsector. Conversely, other classes like our construction practice have never been busier. So it's client industry sector and geography-specific. Overall, we're not seeing dramatic pullbacks in exposures relative to payrolls, revenues and inventories, but clients report a challenged operating environment from inflation, higher input costs and wages, and difficulty attracting talent. The complexity and uncertainty create more demand for the advice and solutions we provide, so while we may see pockets of economic weakness, demand for our services is increasing.

Is that one of the reasons why we could expect to see some line items within your middle-market consulting and service fees continue to move up?

Yes.

Operator instructions were provided. Our next question is from the line of Meyer Shields from KBW.

Are there any non-admitted or excess and surplus lines homeowners products available on the MGA? And is there a plan for that?

Yes, we have non-admitted E&S homeowners products live in 14 states and expect to have E&S homeowners product live across the majority of all 50 states by the first quarter of next year.

I was hoping you could talk more about M&A. I understand the outlook hasn't changed. Can you update us on the pipeline? If you could magically solve some of the leverage that currently needs deleveraging, how quickly could you jump back on a more aggressive M&A path?

The flow of M&A opportunities we're seeing remains relatively high, but the underlying quality of those businesses has fallen off somewhat materially. I think many of the really high-quality businesses came to market over the past 18 to 24 months when valuations were elevated. There are still quite a few very high-quality businesses we know well and stay in regular communication with, but we've seen a lull in the type of assets that excite us from an M&A standpoint relative to organic growth attributes, depth and breadth of specialization and unique go-to-market capabilities.

Operator instructions were provided. Our next question comes from the line of Josh Shanker from Bank of America.

You don't like separating the MGA of the Future growth out from MainStreet, but given 70% growth in the quarter, can you talk about how we should think about the margin profile of that business? It requires a lot of investing and is still in early stages, but where are you in terms of long-term goals around margin there, even if it's qualitative? Where does that go in the next year or two?

The long-term margin profile of that business can operate at better margins than the rest of our business because of the tech capabilities. Right now, we are investing deeply into that business, so you aren't seeing that margin lift yet. I don't want to give specific guidance about future margins, but we're making the investments now because we see the growth opportunities and the technological capability in that business means the margin potential is even better than the rest of the company.

To add color, of the $50 million above normal course reinvestment program we announced this year, roughly $30 million was earmarked for the MGA. That gives you a sense of the magnitude of investment. The investments are largely talent and technology across development, product teams and distribution specialists. As we scale into new products, many of which are not generating revenue yet, we'll absorb the incremental cost layered into the business to launch these new products. To give sense of scale, we have over 45 new products in the pipeline we're working on to launch over the next 18 to 24 months.

Is there a risk that the MGA of the Future business is growing so fast that its short-term margin profile, which is different from MainStreet, becomes a headwind to margin because the fastest-growing business doesn't yet produce the margins?

That business produces margin. Per Brad's guidance, despite the elevated level of investment we're making to drive this growth, we still expect to improve margin for the overall business year-over-year.

On an unrelated topic, what are your thoughts on fixed coupon debt versus variable coupon debt given where markets are right now?

It's a function of the cost of fixed versus variable and how we view the interest rate curve over time. We've managed our cost of capital effectively. We had our variable debt hedged fairly fully until last quarter when we sold three quarters of those hedges to pull forward the protection we had purchased and convert that into cash on our balance sheet. Even at today's rate levels, our fully loaded debt stack costs around 5%, which compares favorably to similarly-sized peers borrowing in the fixed rate market. We continue to manage cost of leverage effectively.

Operator instructions were provided. Our next question comes from the line of Yaron Kinar from Jefferies.

How do you see the growth profile for Westwood given a potential slowdown in the housing market on the one hand, and inflation and higher P&C rates on the other? Any changes to your outlook for Westwood revenues?

Short answer: no change in outlook for growth in Westwood. While we expect home sales activity to come in slightly in the back half of the year, we expect that to be more than overcome by improvement in capture rates we're seeing in the business and underlying rate and exposure expansion on the book. We do business with the largest new homebuilders across the country, which tend to be more insulated. In June we saw new home closings down 17% broadly; the builders we work with were down less than that. Our lead flow, while down, was more than overcome by improved capture rates. We're pleased with Westwood's performance and confident in the results they'll continue to deliver despite a more challenging homebuilding environment.

You said in the past you see your platform as one of the premier tech-enabled insurance platforms in the industry. Given the travails in the insurtech industry, what lessons have you learned and how do you see BRP positioned relative to other insurtechs?

Important distinctions: I wouldn't characterize us as an insurtech; we're a tech-enabled insurance brokerage and distribution platform building the insurance broker of the future. We leverage deep investments in technology to innovate how we deliver solutions to clients. The challenges in the broader insurtech community highlight key differences. We take zero balance sheet risk as an insurance company; we are a broker and MGA that sources risk capital to sit behind and support proprietary products, but we don't take balance sheet risk. We also focus on all stakeholders — the policyholder and the risk capital provider — with an equilibrium that allows product to be priced to persist, pay claims when they occur, and still deliver acceptable returns to risk capital partners. That's core to sustainability.

To be clear, I'm not asking about balance sheet. I was thinking of distribution-focused companies like Policygenius as comps in the brokerage space.

Compared to many distribution-oriented insurtech businesses, we are not a front-end lead-driven growth model. We power the insurance transaction inside third-party ecosystems, enabling a more seamless and convenient insurance purchasing experience. The minute we bind a policy for a new client, it's profitable on our platform. We don't rely heavily on paid lead flow; we embed ourselves at the point of transaction and deliver proprietary, purpose-built solutions for specific ecosystems, enabling outsized and importantly profitable growth.

Operator instructions were provided. Our next question comes from the line of Pablo Singzon from JPMorgan.

Quick follow-up: can you provide some perspective where cash or interest expense might go in the next couple of quarters given exposure to floating rate? What quarterly level do you think you'll hit as a cap and any thoughts on how you manage it down?

Every 100 basis point increase in one of the floating rates costs us roughly $900,000 per month. We continue to evaluate our cost of capital to be as efficient as possible and will consider cap swaps, other hedging instruments or the fixed rate market for the best cost of capital going forward.

When we sold the caps, we retained a 1.5% cap. So where fed funds is today, the one we capped is actually the only one that would still be paying us; the others would be even or slightly out of the money. We were able to put about $19 million of cash onto our balance sheet. We've been fairly prescient about the reality of rising interest rates going back 12 to 18 months. We watch this carefully. The other thing to remember is when Brad's math shows incremental interest cost, we also have the benefit that as we increase margins, every time we increase our margin by a point, we can more than offset a 1% increase in interest. So we have other levers versus peers that may be running at more mature margins and wouldn't have that flexibility.

Operator instructions were provided. Our next question is from the line of Weston Bloomer from UBS.

Can you disclose how much of the investment spend in dollar millions you saw in 2Q, and how much is baked into Q3 and Q4? I'm trying to get a view of core margin excluding investments and what you view the core margin profile to be once the $50 million runs off. My rough math is mid-20s. Curious on your thoughts and the timing to get there.

I'm not going to get into quarter-by-quarter specifics, but you can think about the investment program being about a 600 basis point drag on margin in the year. Those investments don't fully earn into mature margin in 12 months; it's going to take about 3 years, and we still expect that to be the case.

A follow-up: does the revenue guidance you provided for Q3 assume any plug for additional M&A from here, or is it based on organic growth and the deal you disclosed in August?

It does not include a significant plug. It assumes the revenue from the deal we did in August.

All right. I think we can wrap up. I want to thank everybody for taking the time this evening to listen in on our Q2 earnings. I want to thank all of our colleagues for their dedication to executing for our stakeholders. Our business would not be in the incredibly favorable position it is today without all their dedication and hard work. I look forward to talking with all of you next quarter. Take care.

Thank you, sir. The conference of BRP Group, Inc. has now concluded. Thank you for your participation. You may now disconnect your lines.