BRP Group, Inc. (Baldwin Insurance Group) — Q3 2023 Form 10-Q
Business context and period. BRP Group is an insurance distribution and services company operating through Insurance Advisory Solutions, Underwriting, Capacity & Technology Solutions (UCTS), and Mainstreet Insurance Solutions. This unaudited filing covers the quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Commissions and fees | $306.3m | $259.4m | $933.9m | $734.7m |
| Operating income (loss) | $0.1m | $(29.9)m | $(12.8)m | $35.3m |
| Net income (loss) | $(32.0)m | $(46.7)m | $(101.5)m | $14.7m |
| Net income (loss) attributable to BRP Group | $(17.6)m | $(24.8)m | $(55.7)m | $6.7m |
| GAAP diluted EPS | $(0.29) | $(0.43) | $(0.93) | $0.11 |
| Adjusted EBITDA / margin | $64.0m / 21% | $41.9m / 16% | $204.6m / 22% | $157.3m / 21% |
- Revenue grew 18% in Q3 and 27% year to date. Management reported organic revenue growth of 19% in Q3 and 20% year to date, compared with 28% and 22%, respectively, in 2022.
- Q3 operating results improved substantially from the prior-year loss, but the nine-month operating result moved to a loss. The nine-month net loss included a $55.1m loss from revaluing contingent consideration, compared with a $10.8m gain in 2022.
- Interest expense was $30.6m in Q3 and $87.6m year to date, up from $20.8m and $45.7m. Higher rates were the principal driver of the increases.
- Operating cash flow was $22.8m for the first nine months, versus cash used of $16.7m in 2022. Investing activities used $16.9m, compared with $407.5m, reflecting substantially lower acquisition spending. Cash, cash equivalents and restricted cash totaled $194.4m at period end, including $79.0m of unrestricted cash and $115.4m restricted cash.
- At September 30, debt included approximately $1.0bn outstanding under the term loan and $324.0m under the revolver. The company reported $276.0m of available revolver capacity. Debt rates were 8.94% on the term loan and 8.42% on the revolver. The company was in compliance with credit covenants.
Material changes and management commentary
- Revenue growth reflected organic expansion and revenue from 2022 acquisitions that had not yet reached a full year of ownership. BRP completed no Partnerships during the first nine months of 2023, compared with three in the prior-year period.
- UCTS and Mainstreet posted strong year-to-date revenue growth; UCTS growth included renters’ and homeowners’ products and activity under the QBE Program Administrator Agreement. Management said about 90% of UCTS revenue came from its MGA of the Future platform during the first nine months.
- Compensation expense rose with revenue, inflation, share-based compensation and investment in new products and distribution. Two new MGA products launched in Q3: high-net-worth homeowners and habitational commercial property.
- Management expects interest expense to increase during the remainder of 2023 and into 2024 if rates remain high. Interest-rate caps cover $300m of debt through March 2024 and $1.2bn through November 2025; the filing estimates a 100-basis-point rate increase would add $10.3m to annual interest expense after considering the caps.
- After quarter-end, two senior executives agreed to retire at year-end. The company expects approximately $8.0m of Q4 costs, including severance and early payment of 2023 bonuses.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management believes cash, operating cash flow and available borrowing capacity will be sufficient for working capital and commitments for the next 12 months and beyond.
- Contingent earnout liabilities were $273.3m at period end; the estimated maximum exposure was $847.1m. The fair value is based on Level 3 assumptions, including acquired-partner growth projections. Changes in those assumptions can materially affect earnings. The company reported $332.0m of undiscounted expected future earnout payments.
- Debt is floating-rate and secured by substantially all BRP assets. The credit agreement includes a maximum total first-lien net leverage covenant of 7.00 to 1.00. The filing identifies acquisition sourcing, valuation and integration as risks; it also describes ordinary-course legal matters that management does not expect to have a material adverse effect.
- BRP maintains a full valuation allowance against its deferred tax assets. The company also has a $4.7m commitment to the University of South Florida through October 2028; management anticipates the board chair will fund half.
Important facts for investors to verify
- Whether organic revenue growth and adjusted EBITDA performance continue, and how those non-GAAP measures reconcile to GAAP results.
- Cash generation, unrestricted liquidity and leverage, including the cost and availability of floating-rate debt.
- Future contingent earnout settlements and the effect of valuation changes on reported earnings and cash needs.
- Q4 executive-retirement costs and any other significant nonrecurring expenses.
- Whether the disclosed outlook assumptions and risks have changed since the filing date.