Baldwin Insurance Group, Inc. (BWIN) FY 2023 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in Item 1A. Risk Factors and included elsewhere in this Annual Report on Form 10-K.

EXECUTIVE SUMMARY OF 2023 FINANCIAL RESULTS

We are a rapidly growing independent insurance distribution firm delivering solutions that give our Clients the peace of mind to pursue their purpose, passion and dreams. The following is a summary of our 2023 financial results:

Revenues for the year ended December 31, 2023 were $1.2 billion, an increase of $237.8 million, or 24%, year over year. Core commissions and fees grew organically by $161.7 million as a result of new and renewal business from Clients across industry sectors and continued outperformance from our MGA of the Future platform. 2023 commissions and fees also grew $44.7 million from the impact of 2022 Partnerships for which there were no comparable revenues in the same period of 2022 and $25.5 million from profit-sharing and other revenue driven by improvements in performance on our profit-sharing arrangements. In addition, investment income grew $6.7 million due to an improved cash management strategy and growing yield on our invested cash.

Operating expenses for the year ended December 31, 2023 were $1.3 billion, an increase of $249.3 million, or 25%, year over year. The increase in operating expenses was primarily attributable to commissions, employee compensation and benefits, which grew in part due to the correlation of compensation to our revenue growth and as a result of investing in our future as we continue to launch new products in our MGA of the Future product suite and expand the distribution footprint of our national mortgage and real estate channel. Change in fair value of contingent consideration increased due to positive changes in revenue growth trends of certain partners and accretion of the contingent earnout obligations approaching their respective measurement dates. Other operating expenses increased in part as a result of our continued investments in technology and new product development and expansion.

Interest expense, net, for the year ended December 31, 2023 was $119.5 million, an increase of $48.4 million, or 68%, year over year. Interest expense, net, increased as a result of the higher interest rate environment during 2023 and, to a lesser extent, higher average borrowings outstanding on our credit facility.

Other income (expense), net, for the year ended December 31, 2023 was $(0.7) million, a decrease of $26.9 million year over year. Other income (expense), net, decreased as a result of a fair value gain recognized on interest rate caps in 2022 in connection with rising interest rates and market estimates for future rate increases.

Net loss for the year ended December 31, 2023 was $164.0 million, an increase of $87.3 million compared to a net loss of $76.7 million in the same period of 2022.

Adjusted EBITDA for the year ended December 31, 2023 was $250.2 million, an increase of $53.7 million year over year. Adjusted EBITDA Margin was 21% for 2023 compared to 20% for 2022.

Organic Revenue for the year ended December 31, 2023 was $1.2 billion as compared to $700.1 million for the same period of 2022. Organic Revenue Growth was $187.2 million, or 19%, for 2023 compared to $132.6 million, or 23%, for 2022. Refer to the Non-GAAP Financial Measures section below for reconciliations of Adjusted EBITDA, Adjusted EBITDA Margin, Organic Revenue and Organic Revenue Growth to the most directly comparable GAAP financial measures.

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RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022

For a discussion of our 2021 financial results and a comparison of financial results for the years ended December 31, 2022 to 2021, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K filed with the SEC on February 28, 2023 and the Company's Current Report on Form 8-K (relating to the Company's reclassification of historical segment information) filed with the SEC on May 9, 2023.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements as of December 31, 2023 and 2022 and for the years ended December 31, 2023, 2022 and 2021 and the related notes and other financial information included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under Item 1A. Risk Factors.

The following is a discussion of our consolidated results of operations for the years ended December 31, 2023 and 2022.

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Seasonality

The insurance brokerage market is seasonal and our results of operations are somewhat affected by seasonal trends. Our Adjusted EBITDA and Adjusted EBITDA Margins are typically highest in the first quarter and lowest in the fourth quarter. This variation is primarily due to fluctuations in our revenues, while overhead remains consistent throughout the year. Our revenues are generally highest in the first quarter due to a higher degree of first quarter policy commencements and renewals in certain IAS and MIS lines of business such as employee benefits, commercial and Medicare. In addition, a higher proportion of our first quarter revenue is derived from our highest margin businesses.

Partnerships can significantly impact Adjusted EBITDA and Adjusted EBITDA Margins in a given year and may increase the amount of seasonality within the business, especially results attributable to Partnerships that have not been fully integrated into our business or owned by us for a full year.

Commissions and Fees

We earn commissions and fees by facilitating the arrangement between Insurance Company Partners and Clients for the carrier to provide insurance to the insured party. Our commissions and fees are usually a percentage of the premium paid by the insured and generally depend on the type of insurance, the particular Insurance Company Partner and the nature of the services provided. Under certain arrangements with Clients, we earn pre-negotiated service fees for insurance placement services. Additionally, we earn policy fees for acting in the capacity of an MGA and fulfilling certain administrative functions on behalf of Insurance Company Partners, including delivery of policy documents, processing payments and other administrative functions. We may also receive profit-sharing commissions, which represent variable consideration paid by Insurance Company Partners associated with the placement of coverage. Profit-sharing commissions are generally based primarily on underwriting results, but may also contain considerations for volume, growth or retention. Other revenue streams include other ancillary income, premium financing income and marketing income based on negotiated cost reimbursement for fulfilling specific targeted Medicare marketing campaigns.

Commissions and fees increased by $231.1 million, or 24%, year over year to $1.2 billion driven by organic growth in core commissions and fees of $161.7 million related to new and renewal business across Client industry sectors and continued outperformance from our MGA of the Future platform. Commissions and fees also increased $44.7 million from the impact of 2022 Partnerships for which there were no comparable revenues in the same period of 2022 and $25.5 million from profit-sharing and other revenue driven by improvements in performance on our profit-sharing arrangements.

Major Sources of Commissions and Fees

The following table sets forth our commissions and fees by major source for the years ended December 31, 2023 and 2022:

Commission revenue represents commissions earned from providing insurance placement services to Clients. Commission revenue increased by $180.8 million, or 23%, year over year. Commission revenue grew organically by $140.0 million as a result of new and renewal business across all industries. In addition, 2023 commission revenue grew $40.7 million from the impact of 2022 Partnerships for which there were no comparable revenues in the same period of 2022.

Profit-sharing revenue represents bonus-type revenue earned as a sales incentive provided by certain Insurance Company Partners. Profit-sharing revenue increased by $27.3 million, or 41%, year over year driven by improvements in performance against profit-sharing measures such as premium volumes and loss ratio-related parameters.

Consulting and service fee revenue represents negotiated fees earned for providing insurance placement services to Clients and specialty insurance consulting revenue. Consulting and service fee revenue increased by $13.4 million, or 22%, year over year, driven by growth in service fees earned by our legacy risk management and captive businesses.

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Policy fee and installment fee revenue represents revenue earned by our UCTS Operating Group for acting in the capacity of an MGA and providing payment processing services and other administrative functions on behalf of Insurance Company Partners. Policy fee and installment fee revenue increased by $10.0 million, or 18%, year over year driven by growth in our multi-family product.

Other income consists of other ancillary income, premium financing income and marketing income that is based on agreed upon cost reimbursement for fulfilling specific targeted Medicare marketing campaigns. Other income was relatively flat year over year.

Investment Income

Investment income is earned by investing assets held in trust. Investment income earned in 2023 was $6.7 million due to improvements in our cash management strategy and growing yield on our invested cash.

Commissions, Employee Compensation and Benefits

Commissions, employee compensation and benefits is our largest expense. It consists of (i) base compensation comprising salary, bonuses and benefits paid and payable to Colleagues, commissions paid to Colleagues and outside commissions paid to others; and (ii) equity-based compensation associated with the grants of restricted and unrestricted stock awards to senior management, Colleagues, Risk Advisors and directors. We expect to continue to experience a general rise in commissions, employee compensation and benefits expense commensurate with expected revenue growth as our compensation arrangements with our Colleagues and Risk Advisors contain significant bonus or commission components driven by the results of our operations. In addition, we operate in competitive markets for human capital and need to maintain competitive compensation levels as we expand geographically and create new products and services.

Commissions, employee compensation and benefits expense increased $191.9 million, or 27%, year over year, due in part to the correlation of compensation to our revenue growth and as a result of investing in our future as we continue to launch new products in our MGA of the Future product suite and expand the distribution footprint of our national mortgage and real estate channel. Colleague compensation and benefits increased $77.4 million, or 16%, from supporting the growth of our business. Outside commissions increased $49.1 million, or 31%, due to a change in business mix and overall growth in the business. The increase in commissions, employee compensation and benefits expense also includes $25.1 million attributable to the impact of 2022 Partnerships for which there was no comparable compensation expense in the same period of 2022. Other increases to commissions, employee compensation and benefits expense include severance of $17.3 million related to the retirement of two of our executive officers and Colleague terminations, and share-based compensation expense of $8.8 million.

Other Operating Expenses

Other operating expenses include travel, accounting, legal and other professional fees, placement fees, rent, office expenses and other costs associated with our operations. Our occupancy-related costs and professional services expenses, in particular, generally increase or decrease in relative proportion to the number of our Colleagues and the overall size and scale of our business operations.

Other operating expenses increased $16.6 million year over year driven by investments in technology to support our growth of $17.3 million, lead generation fees relating to the expansion of our national mortgage and real estate channel of $2.2 million, rent expense of $2.7 million and payment processing fees for our MGA business of $1.5 million. These increases were partially offset by lower costs for repairs and maintenance of $4.0 million and professional fees of $2.9 million.

Amortization Expense

Amortization expense increased by $11.0 million year over year driven in part by amortization of intangible assets recorded in connection with our Westwood Partnership.

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration was a $61.1 million loss for the year ended December 31, 2023 as compared to a $32.3 million loss for the same period of 2022. The fair value loss related to contingent consideration for 2023 was impacted by positive changes in revenue growth trends of certain partners and accretion of the contingent earnout obligations approaching their respective measurement dates.

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Interest Expense, Net

Interest expense, net, increased by $48.4 million year over year resulting primarily from the higher interest rate environment and, to a lesser extent, higher average borrowings outstanding on our credit facility. We expect interest expense to increase slightly in 2024 as interest rates are expected to remain high in the near-term.

Refer to Item 7A. Qualitative and Quantitative Disclosures About Market Risk for further discussion of the impact of rising interest rates on our results of operations, financial condition and cash flows.

Other Income (Expense), Net

Other income (expense), net, decreased by $26.9 million year over year driven by a $26.2 million gain recognized on interest rate caps for 2022 in connection with rising interest rates and market estimates for future rate increases. Comparatively, we recognized a $1.7 million loss on interest rate caps for 2023.

FINANCIAL CONDITION—COMPARISON OF CONSOLIDATED FINANCIAL CONDITION AT DECEMBER 31, 2023 TO DECEMBER 31, 2022.

Our total assets and total liabilities increased $39.8 million and $160.9 million, respectively, year over year. The most significant changes in assets and liabilities are described below.

Premiums, commissions and fees receivable, net increased $95.8 million and premiums payable to insurance companies increased $84.3 million. The increase in each can be attributed to our revenue growth and the timing of cash collections and payments.

Intangible assets, net decreased $82.6 million as a result of amortization expense of $92.7 million, offset in part by capitalized software development costs of $18.3 million related to infrastructure to support our business.

Accrued expenses and other current liabilities increased $27.2 million as a result of higher accrued compensation and benefits of $8.8 million and accrued expenses of $10.2 million related to bonus and severance expense. Accrued expenses and other current liabilities also include an earnout incentive bonus of $8.0 million related to a portion of a contingent earnout earned by one of our Partners, which is payable to certain Colleagues at the Partner's option.

Long term debt increased $160.1 million and our revolving line of credit decreased $164.0 million. During 2023, we increased our long-term debt borrowings with an incremental loan of $170.0 million and we used $165.0 million of the proceeds to partially repay outstanding amounts on the revolving line of credit, resulting in increased available borrowing capacity under the revolving line of credit to pay our future earnout obligations.

Contingent earnout liabilities increased $9.5 million resulting from an increase of $61.1 million related to fair value adjustments impacted by positive changes in revenue growth trends of certain Partners, offset in part by $52.3 million of settlements.

At December 31, 2023, assets and liabilities held for sale were $64.4 million and $43.9 million, respectively, as a result of our intention to sell our specialty wholesale broker business as describe in Note 3 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Assets held for sale are primarily comprised of premiums, commissions and fees receivable, net, intangible assets, net and goodwill, which reclassified $36.5 million, $11.7 million and $9.5 million from each of the respective financial statement captions. Liabilities held for sale are primarily comprised of premiums payable to insurance companies of $42.3 million.

NON-GAAP FINANCIAL MEASURES

Adjusted EBITDA, Adjusted EBITDA Margin, Organic Revenue, Organic Revenue Growth, Adjusted Net Income and Adjusted Diluted Earnings Per Share (“EPS”), are not measures of financial performance under GAAP and should not be considered substitutes for GAAP measures, including commissions and fees (for Organic Revenue and Organic Revenue Growth), net income (loss) (for Adjusted EBITDA and Adjusted EBITDA Margin), net income (loss) attributable to BRP Group (for Adjusted Net Income) or diluted earnings (loss) per share (for Adjusted Diluted EPS), which we consider to be the most directly comparable GAAP measures. These non-GAAP financial measures have limitations as analytical tools, and when assessing our operating performance, you should not consider these non-GAAP financial measures in isolation or as substitutes for commissions and fees, net income (loss), net income (loss) attributable to BRP Group, diluted earnings (loss) per share or other consolidated income statement data prepared in accordance with GAAP. Other companies in our industry may define or calculate these non-GAAP financial measures differently than we do, and accordingly, these measures may not be comparable to similarly titled measures used by other companies.

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We define Adjusted EBITDA as net income (loss) before interest, taxes, depreciation, amortization, change in fair value of contingent consideration and certain items of income and expense, including share-based compensation expense, transaction-related Partnership and integration expenses, severance, and certain non-recurring items, including those related to raising capital. We believe that Adjusted EBITDA is an appropriate measure of operating performance because it eliminates the impact of income and expenses that do not relate to business performance, and that the presentation of this measure enhances an investor’s understanding of our financial performance.

Adjusted EBITDA Margin is Adjusted EBITDA divided by total revenues. Adjusted EBITDA Margin is a key metric used by management and our board of directors to assess our financial performance. We believe that Adjusted EBITDA Margin is an appropriate measure of operating performance because it eliminates the impact of income and expenses that do not relate to business performance, and that the presentation of this measure enhances an investor’s understanding of our financial performance. We believe that Adjusted EBITDA Margin is helpful in measuring profitability of operations on a consolidated level.

Adjusted EBITDA and Adjusted EBITDA Margin have important limitations as analytical tools. For example, Adjusted EBITDA and Adjusted EBITDA Margin:

•do not reflect any cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future;

•do not reflect changes in, or cash requirements for, our working capital needs;

•do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations;

•do not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt;

•do not reflect share-based compensation expense and other non-cash charges; and

•exclude certain tax payments that may represent a reduction in cash available to us.

We calculate Organic Revenue based on commissions and fees for the relevant period by excluding the first twelve months of commissions and fees generated from new Partners. Organic Revenue Growth is the change in Organic Revenue period-to-period, with prior period results adjusted to include commissions and fees that were excluded from Organic Revenue in the prior period because the relevant Partners had not yet reached the twelve-month owned mark, but which have reached the twelve-month owned mark in the current period. For example, revenues from a Partner acquired on June 1, 2022 are excluded from Organic Revenue for 2022. However, after June 1, 2023, results from June 1, 2022 to December 31, 2022 for such Partners are compared to results from June 1, 2023 to December 31, 2023 for purposes of calculating Organic Revenue Growth in 2023. Organic Revenue Growth is a key metric used by management and our board of directors to assess our financial performance. We believe that Organic Revenue and Organic Revenue Growth are appropriate measures of operating performance as they allow investors to measure, analyze and compare growth in a meaningful and consistent manner.

We define Adjusted Net Income as net income (loss) attributable to BRP Group adjusted for depreciation, amortization, change in fair value of contingent consideration and certain items of income and expense, including share-based compensation expense, transaction-related Partnership and integration expenses, severance, and certain non-recurring costs that, in the opinion of management, significantly affect the period-over-period assessment of operating results, and the related tax effect of those adjustments. We believe that Adjusted Net Income is an appropriate measure of operating performance because it eliminates the impact of income and expenses that do not relate to business performance.

Adjusted Diluted EPS measures our per share earnings excluding certain expenses as discussed above and assuming all shares of Class B common stock were exchanged for Class A common stock on a one-for-one basis. Adjusted Diluted EPS is calculated as Adjusted Net Income divided by adjusted diluted weighted-average shares outstanding. We believe Adjusted Diluted EPS is useful to investors because it enables them to better evaluate per share operating performance across reporting periods.

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Adjusted EBITDA and Adjusted EBITDA Margin

The following table reconciles Adjusted EBITDA and Adjusted EBITDA Margin to net loss, which we consider to be the most directly comparable GAAP financial measure:

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(1)    Other addbacks to Adjusted EBITDA include certain income and expenses that are considered to be non-recurring or non-operational, including certain recruiting costs, professional fees, litigation costs and bonuses. In 2022, these addbacks also included certain expenses related to remediation efforts.

Organic Revenue and Organic Revenue Growth

The following table reconciles Organic Revenue and Organic Revenue Growth to commissions and fees, which we consider to be the most directly comparable GAAP financial measure:

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(1)    Includes the first twelve months of such commissions and fees generated from newly acquired Partners.

(2)    Organic Revenue for the year ended December 31, 2022 used to calculate Organic Revenue Growth for the year ended December 31, 2023 was $979.9 million, which is adjusted to reflect revenues from Partnerships that reached the twelve-month owned mark during the year ended December 31, 2023.

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Adjusted Net Income and Adjusted Diluted EPS

The following table reconciles Adjusted Net Income to net loss attributable to BRP Group and reconciles Adjusted Diluted EPS to diluted loss per share, which we consider to be the most directly comparable GAAP financial measures:

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(1)    Other addbacks to Adjusted Net Income include certain income and expenses that are considered to be non-recurring or non-operational, including certain recruiting costs, professional fees, litigation costs and bonuses. In 2022, these addbacks also included certain expenses related to remediation efforts.

(2)    Represents corporate income taxes at assumed effective tax rate of 9.9% applied to adjusted pre-tax income.

(3)    Assumes the full exchange of Class B common stock for Class A common stock pursuant to the Amended LLC Agreement.

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INSURANCE ADVISORY SOLUTIONS OPERATING GROUP RESULTS

The Insurance Advisory Solutions Operating Group (“IAS”) provides expertly-designed commercial risk management, employee benefits and private risk management solutions for businesses and high-net-worth individuals, as well as their families, through our national footprint which has assimilated some of the highest quality independent insurance brokers in the country with vast and varied strategic capabilities and expertise.

Commissions and Fees

IAS generates commissions for placing insurance policies on behalf of its Insurance Company Partners. IAS generates profit-sharing income based on either the underlying book of business or performance, such as loss ratios. IAS also generates fees from consulting and service fee arrangements, which are in place with certain Clients for a negotiated fee.

IAS commissions and fees increased $68.1 million, or 12%, year over year to $626.8 million. Core commissions and fees grew organically by $58.9 million, which was driven by 17% sales velocity (new business as a percentage of prior year commissions and fees) and resultant net new business across Client industry sectors, as well as by growth arising from rate and exposure of 3%. Certain industries, such as construction, were impacted by a difficult financing environment, which caused a slowdown in job starts. Renewal business was impacted by rate increases across many property-related policies, partially offset by premium rate reductions in lines such as Directors and Officers Liability. IAS commissions and fees also increased from profit-sharing and other revenue of $9.3 million driven by improvements in performance against profit-sharing measures such as premium volumes and loss ratio-related parameters.

Commissions, Employee Compensation and Benefits

Commissions, employee compensation and benefits expense for IAS increased $48.1 million, or 12%, year over year. Colleague compensation, and benefits increased $33.7 million, or 9%, in correlation with our revenue growth. IAS commissions, employee compensation and benefits expense for 2023 also included $8.5 million related to contingent earnout liabilities that were reclassified, at the Partner's option, to an earnout incentive bonus that will be paid out to Colleagues.

Other Operating Expenses

Other operating expenses for IAS increased $5.5 million year over year, driven by our investment in technology to support our growth and integration activity of $6.2 million and travel and entertainment costs of $2.9 million. These increases were partially offset by lower costs for professional fees of $1.5 million, software and internet expenses of $1.3 million and consulting fees of $1.1 million.

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Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration for IAS was a $41.5 million loss for the year ended December 31, 2023 as compared to a $26.4 million loss for the same period of 2022. The fair value loss related to contingent consideration for 2023 was impacted by positive changes in revenue growth trends of certain Partners and accretion of the contingent earnout obligations approaching their respective measurement dates.

UNDERWRITING, CAPACITY & TECHNOLOGY SOLUTIONS OPERATING GROUP RESULTS

The Underwriting, Capacity & Technology Solutions Operating Group (“UCTS”) consists of three distinct businesses. Through our MGA of the Future platform, we manufacture proprietary, technology-enabled insurance products with a focus on sheltered channels where our products deliver speed, ease of use and certainty of execution, an example of which is our national embedded renters insurance product sold at point of lease via integrations with property management software providers. Our MGA of the Future product suite is now comprised of more than 12 products across personal, commercial and specialty lines. Our specialty wholesale broker business delivers professionals, individuals and niche industry businesses expanded access to exclusive specialty markets, capabilities and programs requiring complex underwriting and placement. And in the third quarter of 2023, we launched our reinsurance brokerage business, Juniper Re.

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n/m    not meaningful

Commissions and Fees

UCTS generates commissions for underwriting and placing insurance policies on behalf of its Insurance Company Partners. In addition, UCTS generates policy fee and installment fee revenue for acting in the capacity of an MGA and fulfilling certain administrative functions on behalf of Insurance Company Partners, including delivery of policy documents, processing payments and other administrative functions. UCTS also generates profit-sharing income, generally based on the profitability on the underlying book of business of the policies it generates on behalf of its Insurance Company Partners. Furthermore, UCTS generates fees from service fee arrangements, which are in place with certain customers for a negotiated fee.

UCTS commissions and fees increased $110.3 million, or 36%, year over year to $418.0 million. The increase is primarily attributable to higher core commissions and fees of $99.0 million, which was driven by continued outperformance in our multi-family business (accounting for $28 million of the year-over-year increase in core commissions and fees) and momentum in our homeowners and commercial umbrella products (accounting for $33 million and $17 million, respectively, of the year-over-year increase in core commissions and fees), with the remaining contribution attributable to new business across our other product lines. Profit-sharing and other revenue increased by $11.3 million driven by strong underwriting performance in our multi-family and homeowners product suite.

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Commissions, Employee Compensation and Benefits

Commissions, employee compensation and benefits expense for UCTS includes both outside commissions paid to partners that distribute UCTS' MGA products and compensation paid primarily to Colleagues, and to a small extent, outside contractors. Commissions, employee compensation and benefits expense for UCTS increased $92.8 million year over year as a result of increases in outside commissions and other compensation. Outside commissions increased $55.8 million, or 36%, in line with the growth in UCTS commissions and fees. Colleague compensation, and benefits increased $27.9 million, or 45%, driven by continued investments in headcount to support the growth of existing and new products.

Other Operating Expenses

Other operating expenses for UCTS increased $13.4 million year over year, driven by continued investments in infrastructure to support the growth of the business of $10.1 million and payment processing fees for our MGA business of $1.5 million.

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration for UCTS was a $17.8 million loss for the year ended December 31, 2023 as compared to a $5.4 million loss for the same period of 2022. The fair value loss related to contingent consideration for 2023 was impacted by positive changes in revenue growth trends of certain partners and accretion of the contingent earnout obligations approaching their respective measurement dates.

MAINSTREET INSURANCE SOLUTIONS OPERATING GROUP RESULTS

The Mainstreet Insurance Solutions Operating Group (“MIS”) offers personal insurance, commercial insurance, and life and health solutions to individuals and businesses in their communities, with a focus on accessing clients via sheltered distribution channels, which include, but are not limited to, new home builders, realtors, mortgage originators/lenders, master planned communities, and various other community centers of influence. MIS also offers consultation for government assistance programs and solutions, including traditional Medicare, Medicare Advantage and Affordable Care Act, to seniors and eligible individuals through a network of primarily independent contractor agents.

Commissions and Fees

MIS generates commissions for placing insurance policies on behalf of its Insurance Company Partners. In addition, MIS generates profit-sharing income based on either the underlying book of business or performance, such as loss ratios. MIS also generates commissions and fees in the form of marketing income, which is earned through co-branded marketing campaigns with our Insurance Company Partners.

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MIS commissions and fees increased $77.7 million, or 49%, year over year to $234.7 million. MIS core commissions and fees grew organically by $30.8 million driven by our legacy Mainstreet business (accounting for $8.6 million of the year-over-year increase in core commissions and fees), the national mortgage and real estate channel (accounting for $6.3 million of the year-over-year increase in core commissions and fees), and our Westwood Partner (accounting for $15.9 million of the year-over-year increase in core commissions and fees subsequent to reaching the twelve-month owned mark). MIS commissions and fees also grew $42.2 million from the impact of 2022 Partnerships for which there were no comparable revenues in the same period of 2022. In addition, MIS profit-sharing and other revenue increased by $4.8 million primarily resulting from improvements in loss ratios and the number of policies sold.

Commissions, Employee Compensation and Benefits

Commissions, employee compensation and benefits expense for MIS increased $50.5 million. or 52%, year over year, due in part to the correlation of compensation to our revenue growth and as a result of investing in our future as we continue to expand the distribution footprint of our national mortgage and real estate channel. Significant drivers of commissions, employee compensation and benefits expense include Colleague compensation and benefits, which increased $12.2 million, or 21%, and outside commissions, which increased $9.4 million, or 25%. The increase in commissions, employee compensation and benefits expense also includes $24.5 million attributable to the impact of 2022 Partnerships for which there was no comparable compensation expense in the same period of 2022.

Other Operating Expenses

Other operating expenses in MIS increased $6.0 million year over year, driven by higher lead generation fees relating to the expansion of our national mortgage and real estate channel of $4.3 million, investment in technology to support our growth of $2.5 million and travel and entertainment of $1.1 million. These increases were partially offset by lower costs for professional fees of $1.7 million.

Amortization Expense

Amortization expense in MIS increased $8.3 million year over year, primarily driven by the amortization of intangible assets recorded in connection with our Westwood Partnership.

Change in Fair Value of Contingent Consideration

The fair value loss related to contingent consideration for MIS of $1.8 million in 2023 was primarily related to our Westwood Partnership, which outperformed on our platform since the date of Partnership.

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CORPORATE AND OTHER RESULTS

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n/m    not meaningful

Commissions and Fees

The Corporate and Other non-reportable segment records the elimination of intercompany revenue from the Operating Groups. During 2023, UCTS recorded intercompany commissions and fees of $65.9 million related to the QBE Program Administrator Agreement and agency bill arrangements, and MIS recorded intercompany commissions of $1.8 million under agency bill and direct bill arrangements.

The substantial increase in intercompany commissions and fees year over year is related to the QBE Program Administrator Agreement, which was effective May 1, 2022. We expect revenue recognized from this agreement to continue to grow as we serve as the MGA on more intersegment revenue such as homeowners insurance sold through MIS.

Commissions, Employee Compensation and Benefits

The Corporate and Other non-reportable segment records the elimination of intercompany commissions, employee compensation and benefits expense from the Operating Groups. Corporate and Other commissions, employee compensation and benefits decreased from higher intercompany commissions expense elimination of $24.9 million, which was offset by higher severance expense of $13.0 million related to the retirement of two of our executive officers and Colleague terminations, and higher advisor commissions expense of $13.1 million.

A significant portion of the intercompany commissions, employee compensation and benefits expense recorded to Corporate and Other is related to the QBE Program Administrator Agreement. We expect commissions, employee compensation and benefits expense related to this agreement to continue to grow as we serve as the MGA on more intersegment revenue such as homeowners insurance sold through the MIS.

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Other Operating Expenses

Other operating expenses in Corporate and Other decreased $8.2 million year over year driven by lower costs for travel and entertainment of $3.2 million, repairs and maintenance of $2.1 million, licenses and taxes of $1.6 million, advertising and marketing of $1.3 million and consulting fees of $1.1 million. These decreases were partially offset by higher costs for rent expense of $1.9 million.

Interest Expense, Net

Interest expense, net, increased by $48.3 million year over year resulting primarily from the higher interest rate environment and, to a lesser extent, higher average borrowings outstanding on our credit facility. We expect interest expense to increase slightly in 2024 as interest rates are expected to remain high in the near-term.

Other Income (Expense), Net

Other income (expense), net, decreased by $27.8 million year over year driven by a $26.2 million gain recognized on interest rate caps for 2022 in connection with rising interest rates and market estimates for future rate increases. Comparatively, we recognized a $1.7 million loss on interest rate caps for 2023.

LIQUIDITY AND CAPITAL RESOURCES

Our primary liquidity needs for the foreseeable future will include cash to (i) provide capital to facilitate the organic growth of our business and to fund future Partnerships, (ii) pay operating expenses, including cash compensation to our Colleagues and expenses related to being a public company, (iii) make payments under the Tax Receivable Agreement, (iv) pay interest and principal due on borrowings under the JPM Credit Agreement, (v) pay contingent earnout liabilities, (vi) pay income taxes, and (vii) fund potential investments in third party businesses that support the growth of our business, which may include the sponsorship of, and a minority, non-controlling interest in, an investment fund, the purpose of which may include facilitating the establishment of additional and alternative capacity that supports the growth of our MGA of the Future business.

We have historically financed our operations and funded our debt service through the sale of our insurance products and services, and we have financed significant cash needs to fund growth through the acquisition of Partners through debt and equity financing.

In the near term, we intend to fund our earnout obligations with cash and cash equivalents, cash flow from operations and available borrowings. During 2023, we increased our borrowings under the Term Loan B by $170.0 million and we used $165.0 million of the proceeds to partially repay outstanding amounts under the Revolving Facility, which increased our available borrowing capacity to pay our future earnout obligations. From time to time, we will consider raising additional debt or equity financing if and as necessary to support our growth, including in connection with the exploration of Partnership opportunities or to refinance existing obligations on an opportunistic basis.

As of December 31, 2023, our cash and cash equivalents were $116.2 million and we had $259.0 million of available borrowing capacity on the Revolving Facility under the JPM Credit Agreement. We believe that our cash and cash equivalents, cash flow from operations and available borrowings will be sufficient to fund our working capital and meet our commitments for the next twelve months and beyond.

See Item 1A. “Risk Factors—Risks Relating to our Business Operations and Industry—Partnerships have been, and may in the future continue to be, important to our growth. We may not be able to successfully identify and acquire Partners or integrate Partners into our company, and we may become subject to certain liabilities assumed or incurred in connection with our Partnerships that could harm our business, results of operations and financial condition.”

JPM Credit Agreement

As of December 31, 2023, our JPM Credit Agreement provides for senior secured credit facilities in an aggregate principal amount of $1.62 billion, which consists of (i) a term loan facility in the principal amount of $1.02 billion maturing in October 2027 (the “Term Loan B”) and (ii) a revolving credit facility with commitments in an aggregate principal amount of $600.0 million maturing in April 2027 (the “Revolving Facility”).

The Term Loan B accrues interest at term SOFR plus a credit spread adjustment between 11 bps and 43 bps based on the term SOFR rate plus an applicable margin of 350 bps, subject to a term SOFR floor of 50 bps. At December 31, 2023, the outstanding borrowings on the Term Loan B of $998.7 million had an applicable interest rate of 8.97%.

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Borrowings under the Revolving Facility accrue interest at SOFR plus 210 bps to SOFR plus 310 bps based on total net leverage ratio. BRP will pay a letter of credit fee equal to the margin then in effect with respect to SOFR loans under the Revolving Facility multiplied by the daily amount available to be drawn under any letter of credit, a fronting fee and any customary documentary and processing charges for any letter of credit issued under the JPM Credit Agreement. The outstanding borrowings on the Revolving Facility of $341.0 million had an applicable interest rate of 8.46% at December 31, 2023. The Revolving Facility is also subject to a commitment fee of 0.40% on the unused capacity at December 31, 2023.

We have entered into interest rate cap agreements to limit the potential impact of interest rate changes on cash flows. The interest rate caps limit the variability of the base rate to the amount of the cap. The interest rate cap agreements in place at December 31, 2023 mitigate the interest rate volatility on $300.0 million of debt to a maximum base rate of 1.50% through March 2024 and mitigate the interest rate volatility on $1.2 billion of debt to a maximum base rate of 7.00% through November 2025.

The Revolving Facility and the Term Loan B are collateralized by a first priority lien on substantially all the assets of BRP, including a pledge of all equity securities of certain of its subsidiaries. The JPM Credit Agreement contains covenants that, among other things, restrict our ability to make certain restricted payments, incur additional debt, engage in certain asset sales, mergers, acquisitions or similar transactions, create liens on assets, engage in certain transactions with affiliates, change our business, make certain investments or restrict BRP’s ability to make dividends or other distributions to BRP Group. In addition, the JPM Credit Agreement contains financial covenants requiring us to maintain our Total First Lien Net Leverage Ratio (as defined in the JPM Credit Agreement) at or below 7.00 to 1.00.

Contractual Obligations and Commitments

The following table represents our contractual obligations and commitments, aggregated by type, at December 31, 2023:

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(1)    Represents noncancelable operating leases for our facilities, including operating leases classified as held for sale on the consolidated balance sheet at December 31, 2023. Operating lease expense was $23.2 million and $19.9 million for the years ended December 31, 2023 and 2022, respectively.

(2)    Represents scheduled debt obligation and interest payments under the JPM Credit Agreement.

(3)    Represents the total expected future payments to be made to Partners at December 31, 2023.

Our contractual obligations and commitments are comprised of operating lease obligations, principal and interest payments on our borrowings under the JPM Credit Agreement, potential payments of contingent earnout liabilities and our commitment to the University of South Florida (“USF”).

Our operating lease obligations represent noncancelable agreements for our corporate headquarters and office space for our insurance brokerage business. Our operating lease agreements expire through February 2031. These obligations do not include leases with an initial term of twelve months or less, which are expensed as incurred. We may extend, terminate or otherwise modify or sub-lease facilities as needed to best suit the needs of our business. The lease term is the non-cancelable period of the lease and includes options to extend or terminate the lease when it is reasonably certain that an option will be exercised.

Borrowings under our JPM Credit Agreement include $998.7 million under the Term Loan B and $341.0 million on the Revolving Facility. Interest payable on outstanding borrowings on the Term Loan B and Revolving Facility in the table above was calculated based on applicable interest rates at December 31, 2023 of 8.97% and 8.46%, respectively, through their respective maturity dates of October 2027 and April 2027.

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Substantially all of our Partnerships and certain acquisitions of select books of business that do not constitute a complete business enterprise include contractual earnout provisions. We record an estimation of the fair value of the contingent earnout obligations at the Partnership date as a component of the consideration paid. Our contingent earnout obligations are measured at fair value each reporting period based on the present value of the expected future payments to be made to Partners in accordance with the provisions outlined in the respective purchase agreements. The recorded obligations are based on estimates of the Partners’ future performance using financial projections for the earnout measurement period. The aggregate estimated contingent earnout liabilities included on our consolidated balance sheet at December 31, 2023 was $276.5 million, of which $10.8 million must be settled in cash and the remaining $265.7 million can be settled in cash or stock at our option. The undiscounted estimated contingent earnout obligation presented in the table above represents the total expected future payments to be made to the Partners. The undiscounted estimated contingent earnout obligation at December 31, 2023 was $309.0 million, of which $11.9 million must be settled in cash and the remaining $297.1 million can be settled in cash or stock at our option. The maximum estimated exposure to the contingent earnout liabilities was $607.4 million at December 31, 2023.

As of December 31, 2023, we have a remaining commitment to USF to donate $4.2 million through October 2028. The gift will provide support for the School of Risk Management and Insurance in the USF Muma College of Business. It is currently anticipated that Lowry Baldwin, the Company's Chairman, will fund half of this commitment.

Effects of Inflation

Certain of our lease agreements feature annual rent escalations either fixed or based on a consumer price index or other index, which, historically, have not had a material impact on our results of operations, including our results of operations for the years ended December 31, 2023, 2022 and 2021. Given the recent rise in inflation, we anticipate the inflation rate increase for the upcoming year to be higher than those of past years. Despite this anticipated increase, we do not anticipate the inflation rate increase for 2024 to have a material impact on our results of operations. We have monitored and will continue to monitor the components of compensation costs and operating expenses for the potential impact of inflation.

Off-Balance Sheet Arrangements

We do not invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support, or engage in any activities that expose us to any liability that is not reflected in our consolidated financial statements except for those described under this Liquidity and Capital Resources section.

Dividend Policy

Assuming BRP makes distributions to its members in any given year, the determination to pay dividends, if any, to our Class A common stockholders out of the portion, if any, of such distributions remaining after our payment of taxes, Tax Receivable Agreement payments and expenses (any such portion, an “excess distribution”) will be made at the sole discretion of our board of directors. Our board of directors may change our dividend policy at any time. Refer to Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Dividend Policy for additional information.

Tax Receivable Agreement

BRP Group is a party to the Tax Receivable Agreement with BRP’s LLC Members that provides for the payment by BRP Group to BRP’s LLC Members of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that BRP Group actually realizes as a result of (i) any increase in tax basis in BRP assets resulting from (a) previous acquisitions by BRP Group of LLC Units from BRP’s LLC Members, (b) the acquisition of LLC Units from BRP’s LLC Members using the net proceeds from any future offering, (c) redemptions or exchanges by BRP’s LLC Members of LLC Units and the corresponding number of shares of Class B common stock for shares of Class A common stock or cash or (d) payments under the Tax Receivable Agreement, and (ii) tax benefits related to imputed interest resulting from payments made under the Tax Receivable Agreement.

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Holders of LLC Units (other than BRP Group) may, subject to certain conditions and transfer restrictions described above, redeem or exchange their LLC Units for shares of Class A common stock of BRP Group on a one-for-one basis. BRP intends to make an election under Section 754 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (the “Code”) effective for each taxable year in which a redemption or exchange of LLC Units for shares of Class A common stock occurs, which is expected to result in increases to the tax basis of the assets of BRP at the time of a redemption or exchange of LLC Units. The redemptions or exchanges are expected to result in increases in the tax basis of the tangible and intangible assets of BRP. These increases in tax basis may reduce the amount of tax that BRP Group would otherwise be required to pay in the future. The Tax Receivable Agreement with BRP’s LLC Members provides for the payment by us to BRP’s LLC Members of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that BRP Group actually realizes as a result of the transactions listed in the preceding paragraph. This payment obligation is an obligation of BRP Group and not of BRP. For purposes of the Tax Receivable Agreement, the cash tax savings in income tax will be computed by comparing the actual income tax liability of BRP Group (calculated with certain assumptions) to the amount of such taxes that BRP Group would have been required to pay had there been no increase to the tax basis of the assets of BRP as a result of the redemptions or exchanges and had BRP Group not entered into the Tax Receivable Agreement. Estimating the amount of payments that may be made under the Tax Receivable Agreement is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. The actual increase in tax basis, as well as the amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of redemptions or exchanges, the price of shares of our Class A common stock at the time of the redemption or exchange, the extent to which such redemptions or exchanges are taxable, the amount and timing of our income, the tax rates then applicable and the portion of our payments under the Tax Receivable Agreement constituting imputed interest. We account for the effects of these increases in tax basis and associated payments under the Tax Receivable Agreement arising from future redemptions or exchanges as follows:

•we record an increase in deferred tax assets for the estimated income tax effects of the increases in tax basis based on enacted federal and state tax rates at the date of the redemption or exchange;

•to the extent we estimate that we will not realize the full benefit represented by the deferred tax asset, based on an analysis that will consider, among other things, our expectation of future earnings, we reduce the deferred tax asset with a valuation allowance; and

•we record 85% of the estimated realizable tax benefit (which is the recorded deferred tax asset less any recorded valuation allowance) as an increase to the liability due under the Tax Receivable Agreement and the remaining 15% of the estimated realizable tax benefit as an increase to additional paid-in capital.

All of the effects of changes in any of our estimates after the date of the redemption or exchange will be included in net income. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income.

During 2023, we exchanged 2,082,424 LLC Units of BRP on a one-for-one basis for shares of BRP Group's Class A common stock and cancelled the corresponding shares of BRP Group's Class B common stock. We receive an increase in our share of the tax basis in the net assets of BRP due to the interests being redeemed. We have assessed the realizability of the net deferred tax assets and in that analysis have considered the relevant positive and negative evidence available to determine whether it is more likely than not that some portion or all of the deferred tax assets will be realized. We have recorded a full valuation allowance against the deferred tax assets at BRP Group as of December 31, 2023, which will be maintained until there is sufficient evidence to support the reversal of all or some portion of these allowances.

Deferred Tax Assets

To determine the realizability of our deferred tax assets, we analyzed if the Company was in a cumulative pre-tax income or loss position over a three-year period (2021, 2022 and 2023). Based on the analysis, the Company is in a pre-tax book loss position, and therefore we have determined that its deferred tax assets are not more likely than not to be realized. Accordingly, we maintain a full valuation allowance against our deferred tax assets. As the Company emerges from its cumulative loss position, we will reassess the realizability of our deferred tax assets and the necessity for a full valuation allowance.

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Sources and Uses of Cash

The following table summarizes our cash flows from operating, investing and financing activities for the periods indicated:

Operating Activities

The primary sources and uses of cash for operating activities are net income (loss) adjusted for non-cash items and changes in assets and liabilities, or operating working capital, and payment of contingent earnout consideration. Net cash provided by operating activities increased $47.1 million year over year, driven by an increase in cash related to lower contingent earnout consideration payments in excess of the liability recognized at the acquisition date of $25.6 million and better operating leverage year over year.

Investing Activities

The primary sources and uses of cash for investing activities relate to cash consideration paid to fund Partnerships and other investments to grow our business. Net cash used in investing activities decreased $392.4 million year over year, driven by a decrease in cash consideration paid for Partnership activity of $389.2 million as a result of an overall decrease in Partnership activity during 2023.

Financing Activities

The primary sources and uses of cash for financing activities relate to the issuance of our Class A common stock; debt servicing costs in connection with the JPM Credit Agreement, as well as purchases, sales and settlements of interest rate caps to mitigate interest rate volatility on that debt; payment of contingent earnout consideration; and other equity transactions. Net cash provided by financing activities decreased $445.8 million year over year to net cash used in financing activities of $26.2 million, driven by a decrease in net proceeds from borrowings on our credit facilities of $464.9 million, offset in part by an increase in cash from fewer payments of contingent earnout consideration up to the amount of purchase price accrual of $20.4 million.

RECENT ACCOUNTING PRONOUNCEMENTS

Please refer to Note 1 to our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for a discussion of recent accounting pronouncements that may impact us.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements are prepared in accordance with GAAP, which requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated based on historical experience, known or expected trends, independent valuations and other factors we believe to be reasonable under the circumstances. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Our most critical accounting policies and estimates, as discussed below, govern the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Critical Accounting Policies

Revenue Recognition

Commission revenue is earned at a point in time upon the effective date of bound insurance coverage, as no performance obligation exists after coverage is bound. The Company makes its best estimate of direct bill commissions at the policy effective date, particularly in employee benefits within IAS, which is subject to change based on enrollment and other factors over the policy period.

Commission revenue is recorded net of an allowance for estimated policy cancellations. The allowance for estimated policy cancellations is determined based on an evaluation of historical and current cancellation data.

Medicare contracts in the Mainstreet Insurance Solutions Operating Group are multi-year arrangements in which we are entitled to renewal commissions. However, we have applied a constraint to renewal commissions that limits revenue recognized when a risk of significant reversals exists based on: (i) historical renewal patterns; and (ii) the influence of external factors outside of our control, including policyholder discretion over plans and Insurance Company Partner relationship, political influence, and a contractual provision, which limits our right to receive renewal commissions to ongoing compliance and regulatory approval of the relevant Insurance Company Partner and compliance with the Centers for Medicare and Medicaid Services.

Profit-sharing commissions represent a form of variable consideration, which includes additional commissions over base commissions received from Insurance Company Partners. A constraint of variable consideration is necessary when commissions and fees are subject to significant reversal. Profit-sharing commissions associated with loss performance are uncertain, and therefore, are subject to significant reversal as loss data remains subject to material change. Management estimates profit-sharing commissions using historical outcomes and known trends impacting premium volume or loss ratios, subject to a constraint. The constraint is relieved when management estimates commissions and fees that are not subject to significant reversal, which often coincides with the earlier of written notification from the Insurance Company Partner that the target has been achieved or cash collection. Year-end amounts incorporate estimates subject to a constraint or where applicable, are based on confirmation from Insurance Company Partners after calculation of premium volume or loss ratios that are impacted by catastrophic losses.

Costs to obtain contracts includes compensation in the form of producer commissions paid on new business. These incremental costs are capitalized as deferred commission expense and amortized over five years, which represents management’s estimate of the average period over which a Client maintains its initial coverage relationship with the original Insurance Company Partner.

The nature of estimates used in recognizing commissions and fees revenue do not involve a significant level of subjectivity, judgment, or estimation uncertainty that could have a material impact on the Company's results of operations.

Critical Accounting Estimates

We have determined that there are significant judgments and uncertainties included in the application of guidance for impairment of intangible assets and goodwill; valuation of contingent consideration; and valuation allowance for deferred tax assets. The nature of the estimates and assumptions used and the impact the estimates and assumptions could have on our actual results are discussed in the tables below.

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