Baldwin Insurance Group, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Hurricane Impact: The third quarter was affected by Hurricanes Helene and Milton, with the company focusing on assessing colleague safety and assisting client recovery.
• Financial Performance: Organic revenue and core commissions and fees revenue grew 14% year-over-year. Adjusted EBITDA grew 14% or 18% normalizing for the sale of connected risk earlier this year. Adjusted EBITDA margin expanded ~60 basis points to 21% and adjusted free cash flow grew 15% to $27.8 million. Year-to-date, adjusted EBITDA margin accretion was ~160 basis points to 24% and adjusted free cash flow was $99.2 million.
• Earn-out Obligations: Remaining estimated undiscounted earn-out obligations stand at approximately $194 million. Paid $115 million in cash earn-outs year-to-date, with expected add-backs of compensation expense related to colleague earn-out incentives.
• Business Resiliency: Strong underlying performance and resiliency of the business model were displayed, with outsized results in sales velocity and new business production across segments.

Segment Performance

• IAS: Overall organic revenue growth for the quarter was 7%, bringing year-to-date total to 9%. Organic commissions and fees revenue was up 6% for the quarter and 10% year-to-date. Absorbed 4.7% headwinds from rate and exposure compression, but new business production remains industry-leading with sales velocity 22% in the quarter, year-to-date sales velocity 21%, and year-to-date new business production at $95 million, a 46% increase over the same period last year.
• UCTS: Had organic revenue growth of 26% and commissions and fees growth of 31%. Multifamily and home portfolios thrived with 26% and 39% organic commissions and fees growth respectively. 2023 new product cohort and Juniper Re each added 2.5 points to the UCTS total organic growth rate.
• MIS: Delivered total organic revenue growth of 14% and commissions and fees revenue growth of 11% despite moderating personal lines rate and exposure environment and capacity challenges in some markets. Westwood added another major builder partner, its seventh in the last 12 months, and national mortgage and real estate operation is on track to breakeven on a run rate basis in 2025.

Guidance

• Fourth Quarter 2024: Expect revenue of $325 million to $335 million and organic revenue growth toward the high end of the 10% to 15% long-term range. Anticipate adjusted EBITDA between $61 million and $66 million and adjusted diluted EPS of $0.25 to $0.29 per share.
• Full Year 2024: Expected adjusted EBITDA of $310 million to $315 million, year-over-year margin accretion of approximately 200 basis points, and adjusted free cash flow of $140 million to $150 million.
• 2025: Preliminarily expect organic growth toward the mid-point of the 10% to 15% long-term target, margin accretion of approximately 25 basis points to 100 basis points, and continued improvement in adjusted free cash flow conversion. Reflects strength in segment fundamentals, conservatism in rate and exposure assumptions, and operating leverage from scaling.

Risks

• Westwood Reinsurance Arrangement: Obligation to help QBE source reinsurance for the builder-focused homeowners program may result in $10 million to $15 million of adjusted EBITDA impact in 2025, already contemplated in 2025 guidance.
• Hurricane Activity Impact: Cautious view on loss ratio sensitive contingents post recent hurricane activity, leading to conservative view on fourth quarter and full year 2024 earnings results.

Question and Answer

• Q: Tommy McJoynt with KBW on Westwood's carrier capacity mix, contract length, and underwriting profitability A: Trevor Baldwin stated the report on Westwood contains inaccurate info. QBE Program Administrator Agreement with Westwood goes through May 2025 and extends to May 2027. Builder program loss ratio has outperformed by 800 basis points per year over 10 years. Expect $10 million to $15 million adjusted EBITDA impact in 2025 related to reinsurance arrangement.
• Q: Hristian Getsov with Wells Fargo on IAS growth acceleration and macro sensitivity A: Trevor Baldwin cited strong new business results, easy prior year comp, and visibility into continued new business. Mentioned construction and employee benefits as macro-sensitive areas, but confident in growth profile due to outsized new business delivery.
• Q: Gregory Peters with Raymond James on margin guidance and organic growth rate A: Trevor Baldwin explained Q4 conservatism due to rate and exposure headwinds and storm-related contingent impact. On 2025, margin accretion includes $10 million to $15 million EBITDA impact from QBE reinsurance. Organic growth driven by net new business, internal innovation, and secular trends in segments like MIS and UCTS.
• Q: Pablo Singzon with JPMorgan on QBE reinsurance impact on EBITDA, cash flow guide, and rate and exposure comments A: Trevor Baldwin explained MGA program structure and QBE transition impact. Brad Hale noted cash flow guide change due to revised adjusted EBITDA guidance and higher cash interest expense from bond issuance. Trevor Baldwin discussed rate and exposure headwinds as gliding off over time, with initial impact most prominent in early 2025.