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spk03: Greetings and welcome to the BRP Group Inc. Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.
spk07: Thank you, Operator. Welcome to the BRP Group's 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 released 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.
spk09: 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, Chris, 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 four 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. VMJ of the future posted its best quarter in our history as a public company with organic growth of 70%. And Main Street 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 two admitted AM Best A-rated products in Florida, one 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 in 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 it to continue to be a meaningful contributor to organic growth during the balance of the year and end of 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 home builders 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% at Westwood, exceeding our initial expectations. The benefit of increased client retention, meaningful rate increases, and a roughly 15% improvement in home buyer 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 challenged for the balance of 2022, we remain confident that continued channel partner expansion, capture rate improvements, 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.
spk10: 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 four 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 14 cents 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 in our 10-K files at 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 six-month period in the prior year. A few items regarding expectations for Q3 in 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 a just-even 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 Main Street 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 point 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?
spk03: Thank you, sir. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from the line of Greg Peters from Raymond James. Please go ahead.
spk13: Good afternoon, everyone. And I suppose a good starting point for questions and answers would be around the organic result. I mean, you're posting some, you know, especially in specialty and MGA of the future, some substantial rates of growth. And, you know, one of the questions we get from investors pretty consistently is about the sustainability of these really strong organic results going, looking out beyond just this year. And perhaps you could give us some additional detail what's driving it and, you know, how we can gain some confidence when we think about 23 and 24.
spk09: Hey, Greg, this is Trevor. Good afternoon and appreciate the question. So, you know, one, I'm not going to get into providing specific guidance in the 23 or 24, but I think Maybe what could be worthwhile is just spending a little bit of time around kind of what's driving the overall results and why we believe kind of the outsized organic growth that you see from us is sustainable over time. So first, we've talked about the fact that the launch of home 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. And as you can see, kind of the momentum there is really picked up and contributed meaningfully to, you know, what proved to be a record organic growth quarter for the MGA. Additionally, you know, 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 that we're making into the business this year are really paying off and driving results. And so we are really pleased with the early signs of success we're seeing from the initiatives coming out of those investment programs, the momentum we have with the homeowners product launch and the rollout of that product across the country, and expect that the overall organic growth momentum will continue.
spk13: okay and and then you know associated with revenue growth another important component you know is is acquisitions and uh i guess you know when we look at i guess you have what 75 million dollars left on your revolver um cash flow has been constrained because of payouts what do we think how should we think about your m a capacity going forward um You know, I know previously it had some targets. Just wondering if those targets have shifted at all, what you're thinking about M&A.
spk09: Yeah. So, you know, 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 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 delivering the business as a result of growth and top and bottom line and margin expansion over time. And that will create capacity to fuel incremental M&A. And so we're not going to get into guidance for 2023 at this time, but we feel really good about the position we're in, the position the business is in. And the reputation we have in the industry as being the premier home to the industry's premier businesses that drive outside stakeholder value, bring unique, inclined industry sector and product line capabilities, and have all the necessary attributes to continue delivering the double-digit organic growth that we expect of ourselves and our partners.
spk13: Embedded in your answer, Trevor, you mentioned deleveraging, and I'm just looking for a clarification of where you are in that process and what your targets are, and that's my last question.
spk10: Hey, Greg, it's Brad. So our net leverage is roughly five and a half times. As Trevor mentioned, we are committed to delevering the business over the next 12 to 18 months through continued outsized organic growth. Got it.
spk04: Thanks for the answers. Thanks, Greg. Next question.
spk03: Thank you. Our next question is from the line of Elise Greenspan from Wells Fargo. Please go ahead.
spk01: Hi, thanks. Good evening. Maybe my first one will just be following up on the debt side. So is that five and a half 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?
spk10: So the five and a half I referenced was pre the deal we announced last week, but we paid less than 10 times for that deal. So it was largely neutral to net leverage. And then in addition, sorry, I didn't hear the second half of the question. In addition, we've made no change to our long-term target of three and a half to four and a half times. And as we said, we believe we can get back in that range over the next 12 to 18 months through the growth in the business.
spk01: Great. And then you guys said that you, you know, guided for the third quarter, right, organic growth in the high teens. So when you think about, I'm assuming you expect another, you know, pretty strong quarter from the NGA of the future business, but does that guide imply, you know, double-digit growth again in all of your segments, or how do you see the third quarter, you know, relative to all of your businesses?
spk09: Yeah, at least we, I'm not going to get into specific segment level organic growth forecasting. What I can tell you is we expect continued strength and momentum across the entirety of our business. And, you know, in that guide is our characteristic conservatism as a result of all the uncertainty that exists across the world today.
spk01: But you haven't seen, like, I guess if you went through the second quarter, would you say as you went through the months of the quarter that growth was kind of consistent? I'm assuming you didn't observe a slowdown towards the end of the quarter.
spk09: No, there's no slowdown, Elise. In fact, 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 started. New business is a percentage of prior year commissions and fees was at an all-time high for us on a quarterly basis of roughly 30%. And so when you think about kind of the levers of organic growth that are internally controllable, which is both your new business and your attrition, it's 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. And so we're exceptionally pleased with the strength and the momentum of the fundamentals and expect that that will continue through the back half of the year.
spk01: Great. And then one final question. As we think about 2023, I know you guys mentioned that you're starting to see a benefit of the new hires, right, helping organic this year. But I think in the past, right, you had mentioned, right, there's a lag from hiring until they're fully operational. So I would assume there would be a greater tailwind in 23, right, on organic relative to what you end up seeing in 22 from those new hires.
spk09: We expect a tailwind from the hires both in 22 and into 23 and beyond. We hired about 475 new colleagues in the second quarter, bringing the year-to-date headcount growth from new hires in at about 850, which is continued really, really high rates of hiring. I expect that 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 that we'll see continued momentum and results as a result of the breadth and depth of talent that's come into our business and all the incredible solutions, new product developments, and overall innovation that is being driven as a result.
spk01: Great. Thanks for all the color.
spk09: Thanks, Elise. Next question.
spk03: Thank you. Our next question is from the line of Pablo Singsong from JP Morgan. Please go ahead.
spk02: Hi. Thank you. Last quarter when you provided your organic growth output 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 I guess if you think about the balance of the year, where are you assuming potential softness and a pretty strong heightened organic growth outlook?
spk09: Yeah, hey, great question, Pablo. So, you know, 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. And I think that just highlights not only the resiliency of our industry broadly in this business model, but more specifically the balance and strength of revenue drivers that exist across the BRP business. and all the kind of unique contributions from our various segments.
spk02: Got it. And on that point, Trevor, so I know these are not your largest businesses, but the acceleration in organic growth in Main Street and Medicare was pretty notable this quarter. Is there any color you can provide there with what's happening fundamentally and I guess what's happening on the ground that's driving that growth?
spk09: Yeah. So, I mean, Medicare has been very strong, both, you know, in first and second quarter. And really, that reflects the business coming out of kind of a COVID operating environment. As you'll recall, our go-to-market strategy in that business is very much community-oriented, doing business, often cases face-to-face. And so, you know, the resumption of more normal kind of business operating environment has really enabled us to drive momentum there. And we're very much bullish on that continuing. On the Main Street business, you know, a combination of things. One, our legacy operations across Florida are performing exceptionally well in a very challenging and turbulent market environment. And just doing exceptional work bringing unique solutions to our clients who are really in a challenged environment to seek homeowners' capacity. So we're seeing a real uptick in results as a result of our scale and market access that enables us to uniquely be a provider of solutions to homeowners' clients. And then more broadly, we've been making significant investments into the Main Street business to expand that business nationally. We've hired now over 100 new risk advisors into that business this year. And while it's still early days, we are very pleased with the early signs of success we're seeing with that national expansion. Got it.
spk02: And the last one for me, I was hoping to get more perspective on the homeowners MGA product. I guess the first question, and it's a couple of questions, but the first one is, When do you expect to be fully rolled out? And I guess in the states that you're in now, I think you managed 14. Are you concentrated in a couple, say Florida, and who are sort of the distribution partners you're tapping to sell the product, right? So obviously you have your own main agents, but are you expanding beyond that to sell this MGA product? Thank you.
spk09: Yeah. So a lot in there. Let me just try and unpack that real fast, Pablo. So a few things. One, Um, we expect to be fully rolled out with kind of our national suite of products, uh, over about an 18 month time period, uh, from now. So, um, you know, still a good bit of work to continue to build out and launch product. Um, two, as we look at how we're distributing in the relative concentration, the majority of the distribution of that product is, uh, internal with our main street businesses, as well as, uh, the Westwood platform. And then we also have some external distribution as well. When you look at the concentration, Florida represents less than 10% of the premium on the books to date, which is approximately $75 million of premium that we've bound. And that's inclusive of the QBE book that we began managing effective in May. And so we're Very pleased with the balanced portfolio that we're building. I would characterize the type of business that we're writing as super preferred. And we're off to an exceptional start, albeit still early days. Overall, performance-wise, loss ratios have ticked down across the MGA modestly year over year. And so we continue to see not only terrific growth performance, but exceptional profitability for our risk-bearing partners across the portfolio of products and programs that we're managing.
spk04: Thank you.
spk09: Thank you, Pablo. Next question.
spk03: Thank you. Our next question is from the line of Michael Phillips from Morgan Stanley. Please go ahead.
spk06: Hey, thanks. A real quick follow-up on that last comment, Trevor. When you defined it as, I think you said, super preferred, can you give dollar amounts of the size of what you're talking about in terms of limits there?
spk09: Yeah. In general, we're targeting homes with a Schedule A replacement cost value between $250,000 and $3 million. And I'd say that sweet spot's really in that call at $300,000 to $750,000 today. Okay. Thank you.
spk06: And then I'm just curious, I guess, given all the backdrop of fears of GDP and recession, anything you're hearing from your clients and how they feel about their own businesses, confidence in that as we kind of go forward from here? Thanks.
spk09: Yeah, it's really very much industry specific, Mike. So, you know, if I look in our innovation practice, which serves life sciences, technology, Web 3.0 and crypto type companies specifically, it's a pretty tough environment. Those businesses are struggling to raise capital anywhere near the rate that they were 12 months ago. Valuations have come way down, employment's down, and so there's a real recession happening in that industry subsector. Alternatively, when I look at other classes of business, like our construction practice as an example, our clients have never been busier. And so it's very much both in client industry sector and geography specific. In the whole, I would say, you know, we're not seeing dramatic pullbacks and exposures relative to payrolls, revenues, and inventories. But we are hearing from our clients about a challenged operating environment, the impact of inflation, not only on input costs but also wages. as well as just the ability to attract talent are all creating significant pressures. In addition to that, the complexity and uncertainty of the environment that our clients are operating in has, frankly, creates more of a demand for the advice and solutions that we can bring to bear on their behalf. And so while ultimately we may see pockets of economic weakness in As a result of the kind of external factors that are driving that and the increased risks, both kind of man-made and natural, the demand for our services is increasing.
spk06: Okay. Thank you for that, Kelly. Is that one of the reasons why I guess maybe we could expect to see some of the line items within your second state middle markets, consulting and service fees? Could that continue to kind of move up?
spk04: Is that part of that? Yes. Okay. Perfect. Thank you. Thanks, Mike. Next question. Thank you. Our next question is from the line of Mayor Seals from KBW. Hey, Mayor. Hi. How are you doing?
spk05: Doing well. So, are there any
spk09: non-admitted E&S homeowner products live in 14 states and expect to have E&S homeowner's product live across the majority of all 50 of our states by the first quarter of next year.
spk05: Perfect. I was hoping for But more about M&A, and I understand that the outlook has been changed. Can you update us on the pipeline? And I'm asking the question, if you could magically solve some of the leverage that currently needs to be leveraging, how quickly could you jump back on the more aggressive M&A path?
spk09: Yeah, I mean, so here's what I would say, Mayer. the kind of flow of M&A opportunities that we're seeing remains relatively high. The underlying quality of those businesses seems to have kind of fallen off somewhat materially. And I think that's somewhat just a function of a lot of the really high-quality businesses that we're thinking about coming to market have done so over the course of the past 18 to 24 months as a result of kind of elevated overall valuation attributes. And so there are still quite a few very high-quality businesses out there that we know well that we stay in regular communication with, but we've definitely seen somewhat of a lull in the type of assets that we get really excited about from an M&A standpoint relative to underlying organic growth attributes depth and breadth of specialization and unique capabilities in the way in which they go to market.
spk04: Okay, great. Thank you. Thanks, Mayor. Next question.
spk03: Thank you. Our next question is from the line of Josh Shankar from Bank of America.
spk12: Please go ahead. Thank you. You know, at least try to ask my question. I know you guys don't like us separating the MG of the future growth out from the main street growth. And I appreciate your position there, but given 70% growth in the quarter, which is really quite high, can you maybe talk a little about how we should think not even now, but the margin profile of that business, obviously it requires a lot of investment and still in its early stages, but where are you in terms of your long-term goals around margin there, even if it's just a qualitative conversation and, and where does that go in the next year or two?
spk10: Hey, Josh. I would say the long-term margin profile of that business, as we've stated previously, it can operate at better margins than you're seeing throughout the rest of our business because of the tech capabilities. Right now, we are investing so deeply into that business that you aren't seeing that margin lift. I don't want to give specific guidance about sort of future margins in that business just to know that, you know, we're making the investments now because we see the growth opportunities and know that because of the technological capability we have in that business that, you know, the margin capabilities are even better than we see in the rest of the business.
spk09: Yeah, Josh, just to add a little bit more color there, of the $50 million above normal course reinvestment program we announced this year, $30 million of that roughly was earmarked for the MGA program. And so you can just get a sense of the level of magnitude of investment that we're making. Those people, and that's largely talent and tech, and those professionals that we've been adding into the business range from a development talent to product teams to distribution specialists. And so as we continue to scale into these new products, many of which are not generating any dollars of revenue yet, we will quickly begin absorbing that incremental cost that's been layered into the business to launch these new products. Just to give you a sense of the scale and quantity of opportunities that we're working on, we have over 45 new products in the pipeline that we're working on to launch over the course of the next 18 to 24 months.
spk12: And is there a risk that the MGA, the future business, is growing so fast and its short-term margin profile is so much different than the Main Street business that it actually becomes a headwind to margin for the near term because the fastest-growing business is the one that doesn't yet produce the margins?
spk09: To be clear, that business produces margins. And what I would tell you is, per the guidance that Brad provided earlier, despite all of the elevated level of investment we're making into the business to drive this growth, we still expect to improve margin for the overall business year over year.
spk12: And on the completely unrelated, what are your thoughts on fixed coupon debt versus variable coupon debt? given where markets are right now?
spk09: Yeah, you know, what I would say is it's all a function of what's the cost of the fixed versus what's the cost of the variable and how we think about the interest rate curve over time. So far, we've been able to manage our cost of capital and our debt costs very effectively. We had our variable debt hedged fairly fully until last quarter when we sold three-quarters of those hedges for basically pulling forward the protection that we had purchased and converting that into cash on our balance sheet. And when you think about even in kind of at today's rate levels, you know, we've got a fully loaded debt stack that's costing us, you know, call it around 5%, which compares quite favorably to what our similarly sized peers are borrowing at in the fixed rate market. I mean, I know one of our private equity peers hit the market fairly recently, and the fixed rate instrument that they were borrowing at was over 7%. So we're still well south of that and feel really good about being able to continue to manage the cost of that leverage effectively. Thank you for all the answers. Thanks, Josh. Next question.
spk03: Thank you. Our next question comes from the line of Yaron Tanar from Jefferies. Please go ahead.
spk11: Hi. Good afternoon. And I apologize in advance. I had some connectivity issues, so I apologize if I'm asking something that was already answered. I just want to go to Westwood for a second. How do you see the growth profile there, considering that we may see a bit of a slowdown in the housing market? On the one hand, on the other hand, you have inflation and higher rates, P&T rates with regards to housing. So any changes to your outlook for Westwood Revenues?
spk09: yeah so great question your own first the kind of short answer is no no change in outlook for growth and in Westwood we continue to expect strong growth out of that business as you look at kind of the puts and takes there 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 the improvement in capture rates that we're seeing in the business and the underlying rate and exposure expansion that we're getting on the overall book. And so, you know, and I'd say the other thing to remember is we do business with the largest new home builders across the country there. They tend to be a bit more insulated than kind of your average home builder. And so, I think in June we saw new home closings down 17% broadly. The builders we work with were down less than that. And our lead flow while down was more than overcome by the improvement in the capture rates that we saw in the business. So we're exceptionally pleased with the performance that we're seeing there. could not be more excited about having Westwood, Allen, and the entire team over there as part of the BRP family. And we're really excited about and have a lot of confidence in the results that they're going to continue to deliver, despite what is definitely going to be a more challenging home building environment.
spk11: Got it. And then, My second question is probably a broader one. I think in the past you said that you kind of see your platform as being one of the premier insurtech platforms in the industry. And just given the travails of the insurtech industry, what lessons learned have you had from that? And how do you see the company positioned as an insurtech platform? relative to what we're seeing from other insurtechs?
spk09: Yeah, so I think there's a couple of very important distinctions there, Jeroen. One, I'd say, I don't know that I would characterize us as an insurtech. I would more characterize us as a tech-enabled insurance brokerage and distribution platform. We're building the insurance broker of the future and leveraging deep investments in technology platforms and capabilities to innovate and enhance the way we interact with and deliver solutions and insights to our clients broadly. As I think about the challenges from the kind of insure tech community broadly, particularly those that have, you know, of the listed companies, there's a number of very important distinctions between how we do business and go to market and how many of them do. One, we take zero balance sheet risk. We are not an insurance company. We are an MGA, we're a broker, both retail and wholesale, but we don't take balance sheet risk. We build and manage proprietary product, we source risk capital to sit behind and ultimately support that product, but we don't take the balance sheet risk associated with it. Two, we have a fundamental viewpoint that when you're growing an insurance product business, you have to focus on all of your stakeholders, both the client or the policyholder and the risk capital provider. And there has to be a recognition that there needs to be some level of equilibrium there. Insurance is meant to make people whole at the time of unexpected loss. It is not meant to be a permanent arbitrage that people can leverage to transfer risk and loss costs permanently to a third party. That's just not the way it's meant to function. And so the way in which we approach building insurance product and distributing it broadly is rooted in sustainability and focused on building product that can be priced to persist because it's able to withstand paying the claims when they occur while still delivering, over time, an acceptable return to our risk capital partners.
spk11: And just to be clear, I recognize you guys don't take balance sheet work. I was thinking of comps like Policy Genius, for example, who are also more in the brokerage space.
spk09: Yeah. I'd say the way I think about our business model when compared to many of those distribution-oriented and call it quote-unquote insurtech businesses, we are not kind of a front-end, lead-by-driven growth model. We are powering the insurance transaction inside third-party ecosystems, enabling a more seamless, a more enjoyable, and a more convenient insurance purchasing experience for businesses those constituents uh and and so when you look at the inherent economics of our business model as a result of that uh the minute the second we bind a policy for a new client it's profitable on our platform we don't have to worry about what's the cac and the ltv and when's the payback period and how long do we need to hold on to them to break even like that it doesn't matter we're not we're not spending a ton of money on on lead flow and lead volume. We're embedding ourselves in an ecosystem at point of transaction. We're solving a pain point. We're delivering an innovative purpose-built proprietary insurance solution that's built for those specific ecosystems. And ultimately, that's enabling us to drive outsized and importantly, profitable growth.
spk11: Thanks for the answers.
spk09: Thanks, Jeroen. Next question.
spk03: Thank you. Our next question comes from the line of Pablo Singzong from JP Morgan. Please go ahead.
spk02: Hi, thanks for accommodating the follow-up. This one will be quick. I was hoping if you could provide some perspective where interest expense might go in the next couple of quarters, I guess, just given the exposure to floating rate. What quarterly level do you think you'll hit as a cap in, I guess? Any thoughts on how you manage it down? Thank you.
spk10: Yes, I'd say the best way to think about it, Pablo, is every 100 basis point increase in one of the floating rates is basically costing us $900,000 per month. And as Trevor mentioned, we continue to evaluate our cost of capital to be as efficient and effective as possible, and we'll continue to look at caps, swaps, other hedging instruments, or the fixed rate market for the best cost of capital leverage into the future.
spk08: Pablo, I'd just add on there. When we did sell the caps, we did retain the 1.5% cap. So where the Fed funds is today, the one we capped is actually the only one that would actually still be paying us. The other ones would be even or still slightly out of the money. And as Trevor pointed out, we were able to put about $19 million of cash under our balance sheet. Brad mentioned that we've been fairly sober about the reality of rising interest rates going back 12 or 18 months ago. We watched this carefully. And the other thing to remember is with Brad's math on that is we also have the benefit, as we are running at a lower margin, every time we increase our margin by a point, we can more than offset a 1% increase in interest. So we have some other levers versus peers that may be running at more mature margins. that they wouldn't have.
spk02: That makes sense. Thank you.
spk04: Thanks, Pablo. Next question.
spk03: Thank you. Our next question comes from the line of Weston Bloomer from UBS. Please go ahead.
spk14: Hi. Thanks for taking my question. I was just wondering if you could disclose how much investment spend in dollar million, what you saw in the 2Q, kind of how much is baked into the the 3q and 4q because i'm trying to get to a view of the core margin x investments and what you view the the core margin profile is of the business kind of once the 50 million runs off my rough math is kind of in the mid 20s range curious on your thoughts on that and kind of the the timing to get there yeah that's about right west and i'm not going to get into quarter by quarter specifics but you can think about the investment program we're making
spk09: being about a 600 basis point drag on margin in the year. And so, you know, as we've shared in the past, those investments don't fully earn into mature margin in 12 months. It's going to take about three years, and we still expect for that to be the case.
spk14: Got it. And just to follow up to the revenue guidance you provide for 3Q, does that assume any plug for additional M&A from here? or is it just based off of what you've disclosed, based on organic growth and then the deal you guys did in August?
spk10: It's not a significant plug, Wes, and it just assumes the revenue from the deal we did in August.
spk04: Great. Thanks for taking my questions. Thank you.
spk03: Thank you. Ladies and gentlemen, if you wish to ask a question, please press star 1 on your telephone keypad.
spk04: Ladies and Chairman, if you wish to ask a question, please press star one.
spk09: All right, I think we can wrap up. I want to thank everybody for taking the time this evening to listen in on our key to earnings. I want to just 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.
spk03: Thank you, sir. The conference of BRP Group, Inc. has now concluded. Thank you for your participation. You may now disconnect your lines.
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