Baldwin Insurance Group, Inc. Q3 FY2025 Earnings Call

Ladies and gentlemen, greetings, and welcome to the Baldwin Group Third Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bonnie Bishop, Executive Director, Investor Relations. Please go ahead.

Thank you. Welcome to the Baldwin Group's Third Quarter 2025 Earnings Call. Today's call is being recorded. Third quarter financial results, supplemental information and Form 10-Q were issued earlier this afternoon and are available on the company's website at ir.baldwin.com. Please note that remarks made today may include forward-looking statements subject to various assumptions, risks and uncertainties, including, for example, our strategy with respect to our capital allocation in the future. The company's actual results may differ materially from those contemplated by such statements. For a more detailed discussion, please refer to the note regarding forward-looking statements in the company's earnings release and our most recent Form 10-Q, both of which are available on the Baldwin website. During the call today, the company may also discuss certain non-GAAP financial measures. For a more detailed discussion of these non-GAAP financial measures and historical reconciliation to the most closely comparable GAAP measures, please refer to the company's earnings release and supplemental information, both of which have been posted on the company's website at ir.baldwin.com. I will now turn the call over to Trevor Baldwin, Chief Executive Officer of the Baldwin Group.

Good afternoon, and thank you for joining us to discuss our third quarter results reported earlier today. I'm joined by Brad Hale, Chief Financial Officer; and Bonnie Bishop, Executive Director of Investor Relations. We generated strong overall results in the third quarter despite a dynamic operating environment and the expected persistence of certain idiosyncrasies we highlighted last quarter. Organic revenue growth in the quarter was 5%, bringing our year-to-date organic revenue growth to 9%. Adjusted EBITDA was flat year-over-year, bringing our year-to-date adjusted EBITDA growth to 9%. Adjusted EBITDA margin and adjusted diluted earnings per share contracted slightly in the quarter. On a year-to-date basis, adjusted EBITDA margin is roughly flat year-over-year and adjusted diluted earnings per share has grown 11% year-over-year. We previously discussed two temporary items that we expected to have a finite impact on our results over the near term. First, a procedural accounting change in our Insurance Advisory Solutions segment impacting timing of when we recognize commission revenues. And second, the reduced commission from QBE that went effective on May 1 on the builder-sourced homeowners’ book of business we are rolling into our recently formed reciprocal exchange BRIE. As a reminder, these are temporary headwinds persisting through the first half of 2026, which then reverse into tailwinds as these are not revenues that are lost, just deferred relative to when they will be recognized in our P&L. Adjusting for these items, total commissions and fees organic revenue growth in Q3 would have been 10% and total overall organic revenue growth would have been 9%, bringing the year-to-date totals for both metrics to 11%. In Insurance Advisory Solutions, overall organic revenue growth was flat compared to the third quarter of 2024. Removing the impact of the procedural accounting change, overall organic revenue growth was 4% and organic growth on core commissions and fees was 6%. Sales velocity remained top decile at 20% in the third quarter, bringing year-to-date sales velocity to 19%, highlighting our consistent ability to take share and win new business. In fact, as we sit here today, our backlog of won but not yet booked new business that should bind in the first half of 2026 is sitting at a historic high for our firm, including several 7-figure commission and fee client wins from large global competitors, highlighting the demand for our innovative advice and solutions in the marketplace and the growing power and impact of our integrated operating platform. We are consistently performing in the top decile for new business generation in our industry based on recent industry data showing the median at 12.2% and the top quartile at 15.9%, reinforcing the effectiveness of our go-to-market strategy and the positive regard clients and prospects have for our teams and the solutions we are delivering. The impact of rate and exposure or renewal premium change was a meaningful headwind at minus 5.7%, reflective of the continued client caution tied to macro uncertainty and reduction in large cat-exposed coastal property pricing, partially offset by ongoing rate action in certain litigation-exposed casualty lines of business. From where we sit today, we expect the third quarter renewal premium change headwind reflects a floor going forward from which we will see incremental improvement over the coming quarters. However, we don't anticipate this will fully reverse into a tailwind in the near term, highlighting the importance of our industry-leading new business generation capabilities to drive sustainable growth over time. In our Underwriting Capacity & Technology Solutions segment, organic revenue growth came in at 16%, driven by continued strength in our multifamily portfolio, which grew commissions and fees at 16% and our commercial umbrella portfolio, which grew organic revenue 15%. As discussed last quarter, we continue to maintain underwriting discipline in our E&S homeowners’ book in a rapidly softening property environment, which was a 400 basis point drag on UCTS organic growth in the quarter. In July, we began migrating renewals of the builder book away from QBE into the reciprocal insurance exchange we launched earlier this year, which thus far is performing in line to slightly better than expectations. Additionally, following the transaction we announced with Hippo, we have begun work with the Hippo and Spinnaker teams on a second builder homeowners insurance program, which we expect to launch next year. Over time, we expect it will materially increase our capture rate of Westwood's builder business into proprietary MSI programs, which sits at around a 30% capture rate today. This should unlock a meaningful growth opportunity for MGA and expand vital insurance capacity for our builder partners and their homebuyer customers. In our Mainstreet Insurance Solutions segment, organic revenue growth was slightly negative, driven by the one-time commission reset on the QBE Builder book and continued elevated attrition in our Medicare business due to the broader managed care marketplace disruption. Removing the impact of the one-time commission reset on the QBE Builder book, overall organic revenue growth was 8%. As a reminder, this impact will persist until April of 2026, after which it turns into a multi-year tailwind as the commission reduction we are absorbing today reverses back into fee revenues for our attorney-in-fact vehicle, which manages the reciprocal exchange. I want to take a minute to talk about the exciting momentum we are seeing across our embedded home insurance businesses. As I mentioned last quarter, in December, we launched our new technology platform and digital experience to support the seamless sale of home insurance at point of mortgage origination and home sale. This quarter, our embedded mortgage and real estate business went live with 3 new mortgage and real estate channel partners, bringing the total channel partners live on our platform to 10. Included in the partners who went live on our platform in Q3 was a top 20 mortgage originator who went live in mid-August and has shown very promising proof points of success. In our second week post go-live, we sold over 150% of the volume achieved by their previous insurance partner in their best day ever over a two-year period, and we have maintained those elevated volumes. These results are enabled by our proprietary technology platform that powers our digital insurance buying experience and the seamless nature of this process in the mortgage and real estate transaction flows. In fact, when a potential homeowner engages through our digital experience, we bind a home insurance policy for them at a rate that is 3.5 times what is achieved through nondigital channels. The power of our technology platform and digital agent experience includes AI-powered real-time agent advice, which is driving tremendous momentum in conversion rates and presents opportunity for margin expansion in the medium to long term. We remain bullish on the growth prospects for this business as we continue to make progress towards simplifying the homeownership journey through our embedded technology. Our pipeline of new embedded partners in this channel is as strong as we have seen yet with our implementation backlog well into 2026. As we mentioned last quarter, we completed the acquisition of Hippo's Homebuilder Distribution network in July. We are now live and facilitating the home insurance process for 20 of the top 25 homebuilders across the country. Our builder partners account for 57% of all new homes built in the U.S. and 93% of the homes built by the top 25 builders in the U.S. In aggregate, the partners in our combined embedded home insurance strategies drove over 500,000 home and mortgage closings in 2024, which accounts for roughly 12% of homes sold in the U.S. annually, positioning us as the leading embedded personal lines distribution platform in the $500 billion premium U.S. personal lines market. Before I turn it over to Brad to provide additional details on our Q3 financial performance, I want to share a strategic update that marks a pivotal moment in our evolution. Today, we're announcing our 3B30 Catalyst program, a 3-year transformation program launched during the third quarter of 2025. Catalyst is designed to accelerate the infusion of automation, business process optimization and artificial intelligence to transform and elevate our workforce, building on our two foundational pillars of talent and technology for building the broker of the future and meeting our aspirational goal of 3B30. This initiative is designed not only to elevate the work and impact our colleagues are delivering on a daily basis, but to unlock new avenues for growth. By aligning our workforce and technology investments with the demands of a rapidly changing market, we are positioning ourselves to accelerate innovation across our client engagement model and insurance product offerings, enhance client and colleague experience through smarter, more agile client service delivery, empower our teams to elevate their focus on high-impact growth-driving activities and enable enhanced real-time decision-making by streamlining processes, data and systems. We anticipate a cumulative transformation charge of approximately $40 million by the end of 2028 with cumulative savings over the same period of approximately $50 million and projected run rate annualized savings of $40 million by the end of 2028. We expect savings to ramp over time with no material savings in 2025, $3 million to $5 million in savings in 2026 and $10 million to $15 million in 2027. The 3B30 catalyst program is designed to accelerate our ability to capture operating leverage across our business while simultaneously enhancing growth, both organically and through M&A. Cash restructuring charges of approximately $40 million reflect the savings to cost ratio of roughly 1.25x and are largely related to workforce transformation and technology implementation. The charges represent less than 10% of expected free cash flow over the next 3 years and do not impact our expectation to deliver double-digit free cash flow growth driven by strong growth in revenue, operating income and working capital improvements. This is an important step forward for our firm, one that reflects our commitment to positioning ourselves for the rapidly evolving technology landscape, further bolstering our status as a leading destination for our industry's top talent and accelerating our pace to fulfill our vision for the broker of the future. As we move forward, we remain focused on delivering long-term value for our clients, colleagues and shareholders, driving growth and innovation and expanding margins and free cash flow. In summary, we're pleased with our third quarter results in such a dynamic insurance market and macro-operating environment. While we expect we will continue to face an insurance marketplace in transition, we are increasingly confident in our ability to deliver in 2026 and beyond as evidenced by the strength of the underlying momentum in the business. We sincerely thank our clients for placing their trust in us to provide strategic guidance, expert insights and innovative solutions in an ever-changing risk landscape. We also extend our deep appreciation to our colleagues for their steadfast dedication and tireless efforts in delivering meaningful results for our clients and valued insurance partners. With that, I will turn it over to Brad, who will detail our financial results.

Thanks, Trevor, and good afternoon, everyone. For the third quarter, we generated organic revenue growth of 5% and total revenue of $365.4 million. Looking at the segment level, organic revenue growth was flat in IAS, up 16% in UCTS and down 2% in MIS. We reported a GAAP net loss for the third quarter of $30.2 million or a GAAP diluted loss per share of $0.27. Adjusted net income for the third quarter, which excludes share-based compensation, amortization and other one-time expenses, was $36.5 million or $0.31 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 third quarter was roughly flat at $72.5 million compared to $72.8 million in the prior year period. Adjusted EBITDA margin declined approximately 170 basis points year-over-year to 19.8% for the quarter compared to 21.5% in the prior year period. Adjusted free cash flow for the third quarter was up 26% to $42 million compared to $33 million in Q3 2024. The increase in adjusted free cash flow was driven by improved working capital, which we communicated would normalize in the back half of 2025. We ended the quarter with net leverage at approximately 4.1x, down from Q2 2025 and remain on track to hit or exceed our goal of 4x by the end of the year. On that topic, with the business entering this period of a positive inflection on our financial profile through improved free cash flow, reduced leverage and line of sight to achieve our goal of bringing leverage under 4x and maintaining it there going forward, I want to take a minute to talk about capital allocation priorities. First, our highest and best use of capital is organic reinvestment in our business, whether it is the technology platforms we have built to support our leading embedded insurance franchise, continued investment in specialized insurance talent or ongoing investments in scaling our sales force, these investments drive our highest returns measured on both an internal rate of return and return on invested capital basis. We have ample opportunity to continue these investments at elevated returns with the governor on those investments being the margin accretion objectives we have outlined and remain committed to. Second is M&A, where we have proven over the past 5 years, we can be disciplined allocators of capital to drive enhanced business results and strong financial returns. We are enthused by the quality of opportunities in our pipeline, and we plan to remain thoughtful relative to our capital allocation strategy, resulting in an M&A cadence that is more episodic in nature. Third, and a new leg of the stool for capital allocation at Baldwin behind internal reinvestment and M&A, we are adding share repurchases. We believe this can be an important tool used opportunistically to deploy capital when we see market dislocations to create compelling return opportunities for our shareholders. Consistent with the foregoing, based on discussions held with our Board of Directors, once our net leverage is comfortably under 4x, our Board intends to authorize a share buyback plan of up to $200 million, subject to maintaining our long-term leverage goals. On the capital management front, in September, we announced the successful repricing of our Term Loan B to SOFR plus 250 basis points, a 50 basis points improvement on the spread or approximately $5 million of annual interest expense savings. We also entered into a floating to fixed interest rate swap agreement with a notional amount of $500 million, which exchanges 1-month SOFR for a fixed rate of 3.244%. Moving to expectations. For the fourth quarter, we expect revenue of $345 million to $355 million and organic revenue growth in the mid-single digits. We anticipate adjusted EBITDA between $68 million and $73 million and adjusted diluted EPS of $0.28 to $0.32 per share. Consistent with prior years, we are also sharing a broad initial view of 2026 financial expectations. We preliminarily expect 2026 revenue in the $1.66 billion to $1.7 billion range, organic growth in the high single digits, adjusted EBITDA in the $380 million to $400 million range and adjusted diluted earnings per share between $1.95 and $2.10. This would result in a 5-year CAGR for all of those metrics in the high teens to low 20s percent. In addition, we expect double-digit growth in operating free cash flow. As we've previously indicated, we expect an acceleration of organic revenue growth in the back half of 2026 once we lap the idiosyncratic headwinds discussed. In summary, we are pleased with the overall performance of the business year-to-date as we continue to navigate a dynamic operating environment. We continue to see incredibly strong internal fundamentals across all three of our segments and feel confident in our ability to generate durable outsized results for shareholders. We will now take questions.

Our first question comes from Gregory Peters with Raymond James.

I would like to begin by discussing the results in the IAS segment. You mentioned several points in your remarks, specifically regarding the flat organic growth. You noted that when excluding the revenue recognition change, organic growth was up 4%. You also highlighted the strong sales velocity. I'm trying to understand the apparent discrepancy between your consistent message of robust sales velocity and the IAS organic numbers. Perhaps the revenue recognition change is a key factor here and will influence changes moving forward. I wanted to give you a chance to elaborate on this.

Yes, it's Trevor. Let's break down a few points. First, we achieved a sales velocity of 20% this quarter and 19% year-to-date. We are very pleased with these strong results, as they place us in the top decile compared to the industry. This reflects the value our teams provide to clients and prospects, and we have confidence in this momentum. Notably, we have a substantial backlog of clients that we have won but not yet booked, including some major clients from large global brokers, indicating ongoing momentum. Second, we need to address the accounting procedural change we've implemented, which results in approximately a $7 million revenue headwind and a $5 million EBITDA headwind for the quarter. It’s important to note that this is not lost revenue; it's a matter of timing. We are transitioning to recognizing revenue based on policy expirations rather than when we receive cash on a monthly basis. Therefore, this revenue and EBITDA will be recognized next year when the policies expire. Third, regarding rates and exposure, the renewal premium change was a 5.7% headwind this quarter, which marks a low point based on our historical data and suggests we expect it to stabilize moving forward. I anticipate gradual improvement over the next few quarters, likely normalizing to a neutral or modest tailwind by the second half of next year. When we drill down into our Property and Casualty business in IAS, we note a 2.8% headwind from rates and exposure, which can be broken down into about one-third from rates and two-thirds from slow exposure due to client caution. In the employee benefits area, we experienced an 800 basis point headwind primarily driven by exposure due to the softer employment market. Given current trends in health care costs and renewal dynamics, we expect this to return to normal levels by early 2026 as we see improved rate pull-through from elevated medical loss ratios observed in the industry. Overall, we are in a period of about 12 to 18 months dealing with headwinds from renewal premium changes. We previously indicated we expected a 2% to 3% headwind for this year, and we are currently experiencing a 2.5% headwind year-to-date, which we anticipate will remain consistent for the full year. Looking to next year, we expect this headwind to ease and potentially turn into a slight tailwind as we navigate past elevated rate pullback periods, particularly in large property exposures susceptible to catastrophes. We are optimistic about the IAS business fundamentals, with strong client retention and new business momentum. However, we do foresee 6 to 9 months of continued insurance and macro market headwinds reflected in the waning renewal premium change pressures. Ultimately, regarding the overall risk dynamics—considering the frequency and severity of natural catastrophes, and issues related to social inflation in casualty markets—it’s difficult to envision a scenario where renewal premium changes won’t remain in the low to mid-single digits over time. If we normalize that, with the current 5.7% reduction seen in renewal premiums, IAS would indeed demonstrate double-digit growth this quarter.

I just want to clarify the procedural change. Is it correct that there will be a couple of quarters of headwind? After that anniversary, will there be about four quarters of an unusual benefit before returning to a more normalized rate?

Yes, that's the right way to think about it, Greg.

The second question I had was about the organic revenue performance in the Underwriting Capacity & Technology Solutions business, which has been very consistent and strong with impressive results. I'm curious about the competition you're encountering in that market. This question is prompted by Progressive's recent quarterly call where they mentioned that renters insurance is a focus area for them. So I'm wondering, although it doesn't show up in your numbers, what competitive pressures you are observing in your UCTS business?

Yes. I would say that we have a diverse range of products, covering both commercial and personal lines, which include property, short tail, casualty, and mid to long tail. It's not a one-size-fits-all situation; competitive dynamics and market pressures differ from product to product and line to line. Overall, we are very strategic about the products we bring to market, making sure we identify effective ways to establish a strong competitive advantage through our product development, underwriting practices, pricing strategies, and distribution methods. Regarding renters insurance, there are various approaches in the market. We position ourselves as an embedded insurance provider, partnering with ERP technology platforms and property management firms to integrate our solution into their operations. Thus, our renters product isn't sold through conventional channels. I believe that Progressive's approach is more similar to what GEICO or Lemonade offer, which is a traditional market strategy that we aren't competing for. Our renters customers choose our product because they can access it quickly within the leasing workflow, making it a convenient option. Next year, we plan to launch an innovative renters product that will be seamlessly integrated into the rent payment process, which we're enthusiastic about regarding the potential momentum and increased market penetration. We are confident in our competitive position. While there are competitors, we've been active in this space for some time, hold a significant market share, and believe strongly in our competitive strengths stemming from our technology platform and its contribution to our market strategy.

Our next question comes from Charlie Lederer with BMO Capital Markets.

Quick one on your preliminary outlook for 2026 organic of high single digits. What are you, if anything, embedding for the attorney-in-fact fees and BRIE and also the embedded mortgage channel revenue?

Yes, this is Trevor. I would say that we have basic assumptions in place for the attorney-in-fact, and while I wouldn’t describe it as minimal for embedded, it’s definitely not overly ambitious. This is a business we plan to grow gradually. We are really excited about the progress we’re seeing there. I mentioned some early positive metrics from our mortgage partners that have started using the platform. We're very pleased with the strong backlog we have. Our digital agent workflow, which is integrated into the mortgage process, is fostering a smooth insurance purchasing and binding experience, leading to impressive conversion rates. When potential homeowners engage with our digital service, we secure a home policy for them at 3.5 times the rate we achieve through traditional methods. Consequently, we're already exceeding our initial projections and expectations regarding conversion rates in the mortgage segment, and we are very optimistic. There is a lot of momentum in this area. We expect it to have a growing influence on our financial results, but not a significant impact in 2026.

That's helpful. If I exclude the forward sales you mentioned last quarter and account for some of the challenges this quarter from the accounting change, and considering the forward sales were already accounted for this quarter, the acceleration seems quite evident. Is that primarily due to sales velocity? Sales velocity appeared to be a bit slower, so I'm trying to connect the dots. Maybe it's just a shift in business mix. I'm curious if you can provide any additional insights.

I mean, I guess I'm not fully following the question, Charlie. Like sales velocity was 20%, so quite strong. When you say pull forward, you mean the impact of the procedural accounting change and how that pushes out the timing of recognizing revenue?

I was referring to the two energy clients you mentioned last quarter that contributed to the increase in IAS organic. Perhaps I'm...

Yes. Those were pulled forward into the second quarter, correct?

Yes. If you consider that, it's a significant acceleration. I'm not sure if that's due to business mix, but I was just trying to understand.

Yes. I'm following you, Charlie. So yes, I think I would point you to rate and exposure and the headwinds that created as an offset. But yes, as you heard, we're feeling really good about the underlying momentum in the IAS business. It's somewhat masked by the market renewal premium change dynamics and this accounting change that's just simply pushing revenue into next year. But at 20% sales velocity, that's as good as it gets. And we're super pleased with the momentum and the backlog of new business and how that positions us into 2026.

The next question comes from Elyse Greenspan with Wells Fargo.

I guess I have a follow-up trying to parse together some of just the commentary on IAS and specific to the guide, right? I think you guys said organic mid-single digits, right, I think, in the fourth quarter. What are you assuming for IAS? And then within the guidance next year for high single-digit organic, I think you said that's back half heavy. So do you expect to start like in the low single digits and pick up? And then also, what does that imply, I guess, for IAS embedded within the guide next year as well?

Yes. Elyse, this is Trevor. So consistent with past practice, we're not going to get into segment level OG guide. What I would say is we feel good about mid-single digits for Q4 across the business. As we look towards 2026, we feel good about high single digits and we would expect organic growth to accelerate through the year, particularly in the back half as we lap the 2 idiosyncratic headwinds that we called out that come to an end then. As you've overheard in some of the earlier Q&A, we have strong new business momentum in the IAS business. We have had pretty meaningful renewal premium change headwinds, some driven by rate, some driven by exposure. We expect that we've seen the floor there and that, that begins to ebb. But I would still expect RPC headwinds in the first half of next year before that begins to normalize.

In the revenue guidance for next year, what assumptions are you making regarding M&A? I understand it depends on when the deals close, but what is included in next year's guidance for any level of M&A?

Yes. I would say we have a nominal amount of M&A embedded into next year's guidance. We continue to maintain a strong pipeline with a lot of really interesting opportunities, but it's nominal to the guide we provided for '26.

And then the savings that you guys outlined like $3 million to $5 million next year, right, I think $10 million to $15 million in '27. Is the expectation that those will all fall to the bottom line and help margin? Or is there some level of reinvestment being contemplated as well?

Those savings articulated are net of reinvestment.

Our next question comes from Pablo Singzon with JPMorgan.

So maybe first one for Trevor. I know you spoke about employee benefits early on this year. I was a bit surprised by your uptick. I think you had mentioned something like an 800 bps headwind there versus about 300 bps in P&C. Is there anything unique about the employers you place insurance for? Maybe they work in industries that are more economic sensitive? And just given the weakness in the labor market that's being widely reported on today, what gives you confidence that you'll see a recovery in IAS OG next year?

Yes, Pablo, I don't think there is anything particularly unique about our employee benefits client base. Most of our largest benefits clients are located on the West Coast, with a strong focus on technology. This likely skews our client base a bit more towards that area, reflecting the trends we've observed with early adopters of AI and similar advancements. Regarding our confidence in the OG and the expected acceleration for next year, it's not based on a stronger labor market, but rather on the real-time visibility we have into healthcare costs and how these will influence health insurance premiums. There has been a notable increase in healthcare costs this year, which is well recognized in the managed care sector, but it’s also present in the traditional pre-65 market. While this situation is beneficial for our business in several ways, we see that as costs rise, the demand for our advice and innovative solutions increases. Our scale and the range of tools and capabilities we offer allow us to provide value that many smaller competitors cannot match. Additionally, rising premiums naturally lead to increased revenues for a commission-driven business like ours.

Okay. That's helpful. And then second question is just on the PBE and the ramp-up in attorney-in-fact fees, right? So I guess the question there is holding premium volumes constant, and this goes to basically the gap between the commission you lost and how much you still earn in fees, right? How many years will it take you to sort of get back to your previous state, assuming premium volumes are the same, right?

Yes, we expect it to take 2 to 2.5 years from May 1, 2026. Importantly, Pablo, for the time being, we account for that AIF on the equity method. And so it will not come into revenue. It will come into EBITDA.

Our next question comes from Andrew Anderson with Jefferies.

Sorry, maybe I have some more questions about the reciprocal. In response to an earlier question, you mentioned you were expecting a nominal benefit from the reciprocal in organic. Is any part of this contributing to organic? Could you clarify that a bit?

Yes, Andrew, thanks. It's Brad. No, there's no benefit to organic on the reciprocal. I think that was in reference to the other part of that question. The only benefit of the AIF is the direct earnings benefit where we get 75% of the earnings under the equity method.

Okay. And then when we're talking about this turning into a tailwind, and you kind of just mentioned a moment ago, it sounds like it could take 2 years to fully flip over. And I think the fee income would be on kind of the policies binding and on a look back. So I guess I'm struggling with how it turns into a tailwind in the second half of '26? It feels like maybe you're past the peak of the headwind, but there still is a headwind persisting until we get to the end of 2 years. Is that the right way of thinking about it?

No, no, it's not. So on April 30, 2026, the headwinds from the commission step down going from 31 to 26 on the QBE program ceased to be a headwind because the entire portfolio will have annualized on to that 26% commission rate. At the same time, the attorney-in-fact, which we own, will be accruing revenue in at 5% of premium as earned into the reciprocal. And that's an important distinction because commissions are booked upfront upon policy binding, whereas AIF fees are booked over life of the policy ratably. And so there is a difference in the earn-in rate from a timing perspective, which drives some of this. And then there's also the timeline that it takes to roll all of the premium off of QBE in all of the states we're doing business into the reciprocal. And so while the first 12 months, you fully absorb the commission reduction, it takes us a couple of years to fully roll all of that premium off of QBE in all of the states we're doing business in fully into the reciprocal. The AIF does not begin earning AIF fees until those premiums renew into that reciprocal vehicle. Now importantly, we started with Texas on July 1, which is the largest state in the QBE portfolio and we will likely be following thereafter with California, which is the second largest state. And so we intend to get through the states with the largest volumes of premium next year and have the vast majority of that premium rolling in. As a result, the AIF fees, they're already beginning to earn they're just not meaningful at this point in time, but they will build month by month. And after that 2 to 2.5-year time period should be fully run rated in.

Our next question comes from Brian Meredith with UBS.

Two questions. Just first one, Trevor, just curious your assumptions as far as how much you're going to be able to renew in the reciprocal in your guidance? And what is it looking like so far?

Yes. We are currently renewing at a slightly better rate than we had initially expected. We are being cautious by maintaining a higher cancellation reserve. However, we have noticed that cancellation rates have stabilized at a level lower than what we originally anticipated.

Great. That's helpful. The second question is about capital management. I appreciate the insights you provided on getting comfortably below 4x before buying back stock. However, given the current trading price of your stock, which seems to be below its intrinsic value, why wouldn't you consider using some of the free cash flow you're generating to buy back some stock now? It appears to be a solid return on investment.

Yes. Thanks, Brian. So look, we do, as we mentioned in the prepared remarks, intend to authorize a buyback program once our leverage is comfortably below 4x. We've been incredibly vocal publicly about reaching that guide and the critical importance of financial flexibility that comes post reaching that sort of less than 4x. Importantly, we don't intend to use buybacks programmatically. Really, this adds a tool to the toolkit for us when we're seeing periods of dislocation in our stock price. It is very clearly a third option for us for capital deployment after, as we talked about organic investments and M&A. But certainly, there are times where it makes financial sense, as you indicated. That decision point will really be whether we feel like we can generate significantly better risk-adjusted returns at that point in time through a buyback versus deploying capital through M&A. And we leverage various valuation techniques and metrics as well as our line of sight to the M&A pipeline in making that decision. So 4x remains a priority, and that's why we're not stepping in now.

But Brian, we agree with your general sentiment, which is it is a very attractive investment opportunity right now. And we just feel like we've made very strong commitments to our shareholders around prioritizing getting leverage under 4x before all else. And so we'll be there shortly, and then we'll see where things stand.

Our next question comes from Tommy McJoynt with KBW.

When you give us that $40 million annualized run rate savings from the expense program, what expense line denominator should we reference to get to a result of thinking about Baldwin's automation efforts will take out x percent of expenses out of the business?

Yes, you should largely think about that as being related to workforce transformation.

Okay. And then you did mention the 3B30. I don't know if I just didn't hear it, but when you first introduced it a year ago, it was 3B30 in 5. Is there a timeline for that program still? And is it still the same?

Haven't changed. Same timeline.

Our next question comes from Pablo Singzon with JPMorgan.

Regarding the UCTS business, about $15 million of the organic revenues generated this year come from a rental program that has transitioned to a captive format. Do you anticipate that business will grow next year? Also, do you foresee additional conversions? Essentially, instead of earning a commission, you are now recognizing a premium, which contributes to organic growth. I'm curious about your plans for that segment of UCTS.

Yes, Pablo, we would expect it to continue to grow, but not at the rate on a relative basis that it is now. We think about that captive as really being an opportunity to optimize the economics on a very well-run, low volatility program. And so you should really think about that as our way of accessing the appropriate level of supplemental and contingent revenues on a high-performing program. And with that, I think we're going to wrap up for the evening. So I want to just thank you all for joining us on the call. We're really excited for the growing momentum we have across our business as we head into 2026. In closing, I want to thank our colleagues for their hard work and dedication in delivering innovative solutions and exceptional results for our clients. And I also want to thank our clients for their continued trust and confidence in our teams. Thank you all very much, and we look forward to speaking to you again next quarter.

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