The Baldwin Insurance Group, Inc. (BWIN) Q3 2019 Earnings Report, Transcript and Summary

Greetings. Welcome to the BRP Group, Inc. Third Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note, today's conference is being recorded. I will now turn the conference over to your host, Brad Hale, Chief Accounting Officer. Mr. Hale, you may begin.

Thank you, operator, and good afternoon. By now, everyone should have access to our earnings announcement and slide presentation, which was released prior to this call, and which may also be found on the Investor Relations portion of our website at baldwinriskpartners.com. Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements, which are based on the expectations, estimates and projections of management as of today. The forward-looking statements in our discussion are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance and therefore, undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of BRP Group. We disclaim any intentions or obligations to update or revise any forward-looking statements, except to the extent required by applicable law. Also, our discussion today may include references to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure can be found within our earnings announcement and slide presentation, both posted on our website at ir.baldwinriskpartners.com. In addition, this call is being webcast and an archived version will be available after the call on the Investor Relations portion of our website. I would now like to introduce Trevor Baldwin, Chief Executive Officer of BRP Group.

Thank you, Brad, and good afternoon, everyone. Welcome to our inaugural call as a public company. We appreciate your taking the time to join us to discuss our third quarter results and your interest in BRP Group. During today's call, I'll provide an overview of BRP Group, review how we are uniquely positioned to execute on our long-term strategy to become a top 10 broker within 10 years, followed by some brief highlights from our third quarter. Our CFO, Kris Wiebeck; and Chief Accounting Officer, Brad Hale, will then present our third quarter and year-to-date financial results. And finally, we'll open the line for questions. Let me start by introducing BRP Group and our distinct operating groups. Our hybrid growth model is highlighted by our focus on both organic and partnership growth, with the latter term of partnership being our preferred nomenclature for acquisitions. This approach primes us to continue building on our previous success, which has proven to create significant value for our 5 key stakeholders that we define as our clients, colleagues, insurance company partners, communities and our shareholders. In short, we are a rapidly growing insurance distribution platform, operating a commission-based [ into a ] fee-based revenue model. Most importantly, we do not take underwriting risk. We aim to take a holistic and tailored approach to delivering a suite of insurance solutions to our clients across their life cycle, which differentiates us from our competition and provides our clients the peace of mind to pursue their purpose, passion and dreams. We were founded in 2011 and have rapidly ramped up our operations through organic growth at rates well in excess of industry average and through partnerships. Today, we have over 500 colleagues, our preferred nomenclature for employees. Inclusive of over 160 risk advisers, which is our preferred nomenclature for producers and have over 40 offices in 4 states throughout the Southeast, all of which are equipped to provide our more than 400,000 clients across the globe with vanguard personal and commercial insurance solutions and services. The insurance brokerage industry is a predictable, durable business model characterized by reoccurring revenues resulting from a product set that has historically been in high demand, irrespective of economic cycles. Simply put, we believe that it's one of the best business models on the planet. BRP has historically generated double-digit organic growth, well ahead of many of our industry peers. We have, from the very beginning, built our organization to enable this outsized organic growth by taking an intentional approach to solving several structural challenges that are broadly faced by the industry. First, for many in the industry, the sales force is responsible for both selling and servicing clients. As a result, as their client base expands, they actually spend more time servicing existing clients and less time on winning new client relationships. They essentially capped their own growth over time. In contrast, we separate sales and service. Our risk advisers are fully empowered to cultivate new client relationships, while our service colleagues handle existing client needs. Additionally, the industry has struggled to meaningfully reinvest in developing new talent as evidenced by the current average producer age of 54. With our commitment to recruiting and developing new industry talent, combined with our recognition as a destination employer, our risk advisers' average age is 47. Third, many of our competitors go to market with a fairly undifferentiated [ siloed ] and generalist approach to winning new business. The BRP Group, through our tailored client engagement models, we deliver a more holistic and client-centric approach, which drives our strong new business results. This intentionally designed strategy that is focused on overcoming traditional challenges has enabled us to generate organic growth that meaningfully outpaces the average of our public peers. Beyond organic growth, we also have positioned ourselves to be the destination of choice for our partnerships to onboard and utilize our platform to thrive. In the insurance brokerage industry, there's been massive consolidation. Over 2,500 M&A transactions since 2014 alone, much of this has been driven by private equity-backed consolidators. While they have been very successful, their strategy is markedly different and more short-term focused. At BRP Group, our approach is highly differentiated, marked by a very long-term view. We seek to source the highest quality partners. We focus on entrepreneurial management teams that want to buy-in, not sell-out. And once our partners are on board, we set about integrating them into our platform, adopting a best [ of both ] approach to maximize growth. This hybrid growth strategy has fueled our performance. Even more exciting, we are just getting started. And our ultimate goal is to build a top 10 national insurance broker in the next 10 years. We operate our firm with 4 operating groups, all of which are experiencing strong organic growth, and which enable us to effectively serve our clients across their life cycle. Our Middle Market group is our traditional multi-line insurance brokerage and consulting operation, which serves midsize to large businesses as well as high net worth individuals and families. Our Main Street operating group is our personal loans business, what we've characterized as the independent agency alternative to the large industry incumbents, such as State Farm and Allstate, where we serve everyday Americans and small business entrepreneurs. Our Medicare operating group consists of over 1,000, 1099 agents providing advice and consultation to seniors around the most complex health care decisions they will be making at that time in their lives. And our fourth operating group is our Specialty operating group, which encompasses our co-brokerage wholesale business, specializing in industries with uniquely complex risk issues. Also within our Specialty group is our managing general agent or MGA of the Future platform, with which we partnered in the second quarter of this year. This platform is where we are developing proprietary insurance solutions to distribute through our sheltered distribution networks [ and ] owned retail and wholesale distribution channels. I'll touch upon this more in a moment, but suffice it to say that we are very excited about our MGA of the Future and its ultimate potential. Our depth of experience in the insurance industry has given us great insight in the insurance sales process. With over 37,000 competitors, the industry is highly fragmented. As critical as it is to have the right strategies in place to drive our growth and win new business, it's equally imperative that we continue to invest in our back office and shared services support in order to maintain a leading client retention. We are committed to building a forever business, and that requires investing in the support functions that position us to fully integrate new partners efficiently and effectively. This strategy allows our partners to expand their capabilities and ultimately enhance their productivity. Beyond our ongoing investments in technology, which will continue to drive meaningful change in this industry over the coming years. At the heart of this business is people, and that will not change. As a result, a significant long-term competitive advantage we have been able to cultivate is our ability to attract and retain the best and brightest talent. Our stakeholder-centric culture is defined by the Azimuth, which is our corporate constitution where we assert our core values, business basics and stakeholder promises. We also utilize a common language that helps bind our culture together. For example, we have clients, not customers, colleagues not employees, and we complete partnerships not acquisitions. We believe that while these are relatively small and nuanced differences, this goes far in reinforcing the level of professionalism, collegiality and collaboration that we are exhibiting in the marketplace. We also leverage that culture to attract top-tier talent and new partnerships. Looking to the future, we will continue to execute on our hybrid, organic and external growth strategy. We will expand our geographic reach in targeted industries that we expect will experience the fastest demographic and economic growth. We will also continue to innovate with new proprietary products through our MGA of the Future platform. We completed our partnership with MSI, which owned the MGA of the Future platform in April of 2019. Prior to joining BRP, they developed a platform with a technology stack to build a proprietary renters' insurance product. In just 4 short years, they've built from scratch a portfolio with over 350,000 policies [ enforced. ] Most importantly, the platform is incredibly efficient and highly scalable. The technology stack automates many of the operational tasks that are manual for our competitors. Quoting and binding of a new renter's policy can be completed in less than 3 minutes. This allows over 350,000 policies enforced today to be supported by less than 25 total colleagues within the MGA, a major competitive advantage when you consider insurance companies that typically have hundreds of colleagues to support the same amount of policies. And again, we take no underwriting risk on our balance sheet in this business. Importantly, as we grow our top and bottom lines, we're still generating strong profitability for our underwriting insurance company partners. With over 30 million apartment units in the U.S., along with growing multifamily construction, there remains a large opportunity to significantly expand our market share and we've only just started. Further, considering renters' insurance is a relatively complex product, we're eager to apply and leverage our MGA and technology capabilities to develop other products to be distributed to the broader BRP organization such as homeowners and private flood. We expect that proprietary products, using the power of our platform, distributed through a captive BRP sales force, present an incredibly formidable combination. We have a great experienced team in place to execute on our long-term strategy, and we are excited to be at the forefront of the next great national insurance brokerage. We are excited that our third quarter performance continue to validate our strategy, and I'll touch on a few highlights. We more than doubled revenue from the prior year period to $38.4 million. Year-over-year organic revenue growth accelerated from earlier in the year back to double digits at 12%. And we successfully completed 3 partnerships in the quarter that we had previously disclosed in our S-1. We are excited to bring them into the BRP family. Our MGA of the Future platform continue to make significant contributions to our top line, growing PIF count by over 41,000 policies in what is seasonally the largest quarter of the year for MSI. This was up from an approximate 20,000 -- 26,000 increase in PIF count for Q3 of last year. And as we entered the fourth quarter, we reached an important milestone of BRP's life cycle with the successful completion of our IPO. This allowed us to repay our $88 million in subordinated debt, while providing us with significant financial capacity for future partnerships and organic growth investments. To sum up, in just 8 years, we have built a high-growth business, positioned to drive outsized organic gains and to be the recognized partner of choice to high-quality businesses and the insurance distribution space. We've accomplished a lot already in building a sustainable framework for winning new business that we believe will provide us with long-term reoccurring organic growth. But we are just getting started, we made important strides in Q3 on the path toward our goal of becoming a top 10 insurance broker and creating long-term value for our shareholders. We appreciate your support. And with that, I'll now turn the call over to Kris and Brad who will walk through some additional third quarter financial highlights.

Thanks, Trevor, and good afternoon to everyone on the call. For the third quarter of 2019, we grew revenue, which is comprised of total commissions and fees by over 100% to $38.4 million compared to $18.5 million in the prior year period. This increase was driven by new partnerships and organic revenue growth of 12% from the prior year period. Given that partnerships are an important portion of our ongoing growth strategy in our regulatory filings, we also provide revenue metrics on an unaudited pro forma basis. This provides investors with a more apples-to-apples comparison as if our 2019 partnerships, including MSI, had been acquired on January 1, 2018. For the third quarter 2019, unaudited pro forma revenue was $38.8 million. Unaudited pro forma information should not be relied upon as being indicative of the historical results that would have been obtained if the partnerships had occurred on that date, nor [ other ] results that may be obtained in the future. Commissions, [ employee ] compensation and benefit expenses for the third quarter of 2019 were $26.8 million, an increase of $14.4 million compared to the third quarter of 2018, primarily due to the onboarding of new partners, which accounted for $12.3 million of the increase. The remainder of the increase was aligned with our year-over-year organic sales growth. Operating expenses for the third quarter were $6.3 million, an increase of $2.7 million from the third quarter of 2018, due primarily to expenses associated with our initial public offering and rent, professional and operating costs related to new partnerships in 2019. Amortization expense for the third quarter of 2019 was $3.1 million, an increase of $2.4 million from the prior year period, primarily due to intangible assets capitalized and purchased customer accounts capitalized in accordance with new partnerships during 2019. Third quarter 2019 interest expense was $3.8 million, an increase of $2.5 million compared to the third quarter of 2018. This increase is attributable to our higher total debt balances, which were a direct result of our new partnerships in 2019 and a higher interest rate on the subordinated debt, which had gone into effect earlier in 2019. With a portion of the proceeds of our initial public offering, we repaid the full outstanding debt and accrued interest on the subordinated debt and concurrently closed that agreement. As a result, our interest expense will be reduced in the fourth quarter of 2019. Adjusted EBITDA for the third quarter of 2019 rose 125% or $4.1 million to $7.4 million compared to the third quarter of 2018. Adjusted EBITDA margin increased to 19% for the third quarter of 2019 versus 18% in the third quarter of 2018. Brad will now provide a breakdown of revenue by group.

Thanks, Kris, and good afternoon to everyone on the call. Our Middle Market segment reported revenue of $12.8 million, an increase of $4.9 million or 61% compared to the third quarter of 2018. Our Specialty group generated revenue for the third quarter 2019 of $16.7 million, an increase of $13.2 million compared to the third quarter of 2018. Specialty's revenue growth was driven by our 2019 MSI partnership completed in April 2019, which accounted for $12.2 million in revenue. Policies in force on the MGA of the Future platform as of September 30, 2019, were over 350,000, an increase of over 41,000 from the prior quarter end. An important note, the policies in force growth is seasonally strongest in the third quarter. But as Trevor mentioned earlier, last year MSI saw an approximate 26,000 increase in policies in force in the same quarter. So this year represented meaningful growth. Moving to our MainStreet group. Third quarter 2019 revenue was $6.6 million, an increase of $1.6 million or 32% compared to the third quarter of 2018. Our Medicare segment generated third quarter 2019 revenue of $2.2 million, up $0.2 million from the third quarter of 2018. This was entirely due to organic business growth. I will now turn the call back over to Kris.

Thanks, Brad. We want to stress that we managed our business based on, first, hitting our long-term objective of becoming a top 10 broker in 10 years. Next, we focused on performance over the full year rather than on a quarter-to-quarter basis, particularly given that the timing of completed partnerships can shift. As such, we believe our year-to-date and pro forma results can provide important insight into how we are performing. During the quarter, we completed 3 partnerships for total cash consideration of $23.7 million. The success of the IPO has already been positive in generating additional interest from potential partners. For the 9-month period ended September 30, 2019, revenue rose 72% to $101.3 million compared to $59 million in the prior year period, attributable to our 2019 partnerships, organic growth and a full 9 months of contribution from our 2018 partnerships. For the same 9 months ended September 30, 2019, adjusted EBITDA rose 68% or $9.2 million over the prior year period to $22.6 million. For the same period, unaudited pro forma revenue, which assumes our 2019 partnerships have been acquired on January 1, 2018, was $116 million. Turning to our balance sheet. As of September 30, 2019, we had cash and cash equivalents of $11.1 million and long-term and related party debt of $193.4 million. Subsequent to the end of the quarter, we successfully completed our IPO offering, generating approximately $242 million of net proceeds, a portion of the proceeds was used to repay the subordinated debt of $88.4 million, and we concurrently closed the agreement. Additionally, last week, we repaid a $65 million portion of our revolving line of credit agreement and now have borrowing capacity of $85 million under that agreement. With that, I thank you for your time, and we'll now open up the call for Q&A. Operator?

[Operator Instructions] Our first question is from Elyse Greenspan, Wells Fargo.

My first question, I appreciate all the color on the segments. And I guess, maybe it's just as simple as backing out some of the deals you guys called out, but could you just give us the organic growth? I guess Medicare, it seems like there were no deals that flow through there. The organic growth that you saw in the segments in the quarter. And if there's anything one-off, I guess, in any other segments on the organic basis, or can we think about the 12% growth as kind of a good run rate for the fourth quarter?

Elyse, this is Kris. We're not going to provide guidance on a segment-by-segment basis as far as organic growth or separate that out. What I would note on organic growth is that 12% is the traditional organic growth number calculated for the business, and it doesn't include any of the MSI or the MGA of the Future business given that, that won't be until April of 2020 or really Q2 of next year. But we're obviously, as Trevor mentioned earlier, pleased that we returned to kind of overall 12% organic growth.

Okay. So you're not going to break out the segment organic, but I guess you'll going forward, but I guess you'll just kind of call off any one-off items. Is that how you guys expect to do it on a go-forward basis?

That's how we're thinking about it, yes.

Okay. And then in terms of the margin. I know some of this -- you do give some of the kind of pro forma -- if I'm looking at the pro forma numbers, and I guess we could do it either way, it looks like your EBITDA margin expanded by about 100 basis points in the third quarter and it was about 200 basis points in the first half of the year. Correct me if I'm thinking about this wrong, but was there anything, I guess, 100 basis points in the Q3, just that we could think about maybe the margin improvement you saw in the third quarter relative to what you guys had seen in the first half of the year because it was a little bit slower.

Sure. I think one -- and I think you'll see this in Q4 as well, obviously, with the IPO, we're trying to get to the right adjustments to give a guideline. But you're thinking about it correctly, kind of on a pro forma basis at 23% from a year-to-date standpoint. We do know that in the first half of the year we have some seasonality, right? And so you tend to have a little bit higher margin in those quarters given some of the seasonality that shows with higher revenue. And then Q3, while seasonally the strongest for the MGA of the Future business, is typically not as strong as the first half for some of the others. And then Q4 typically is our least kind of seasonally strong if you break it across quarters if you're just kind of thinking about it in the future. But overall, on margin, I think what we're trying to take a very focused point on is how do we achieve top 10 in 10? And first and foremost, we're thinking about organic growth. How do we make sure we're driving that at double digits? Then how we're making sure that we're finding the right partners for the firm that are ultimately going to be the future contributors as well as the current business on organic growth. Then we're kind of then looking at kind of, okay, what's the margin expansion opportunity? And I think we all know that these businesses, when mature, do tend to run at higher margin. But in the near term, we want to make sure that we focus on growth and what's going to be needed to execute on that top 10 in 10 plan.

Okay. And then one last question on -- you guys -- during the IPO process, I think there's talk of some kind of adjusted cash earnings number, which I don't see called out in the press release. Are you guys going to [ talk ] towards adjusted cash earnings number, I guess, in future periods? And do you want to just let us know the adjustments that we should think about when are going from net income to adjusted cash earnings?

Elyse, this is Brad. We're continuing to evaluate which KPIs and metrics are going to be most relevant to the investor base. Here we stayed consistent with the KPIs we used in the S-1 for this quarter, and we'll continue to evaluate with our Board and others what would be most relevant to the investor base in the future.

Our next question is from Christopher Campbell, KBW.

I guess like -- I guess, just on the sales pipeline, can you guys give us an update of post-IPO, where you're at in terms of potential opportunities? I'm thinking like revenues, where most of the opportunity is coming from segment-wise, adjusted EBITDA? And should we still be thinking $110 million of acquired revenues in 2020 is it still realistic?

Chris. So first, what I'd say is we're not planning to update partnership guidance on a kind of quarterly or annual basis. But what I can say about the partnership pipeline today is that it's as robust as it's ever been. So the opportunities we are seeing post-IPO has accelerated from any period we've experienced before. We're seeing really positive reception to our outreach efforts. And our overall story as a new and differentiated alternative to the traditional acquirers is being really well received. In addition, our risk advisers are out taking advantage of the brand awareness that the IPO has generated. And so that's kind of what we're seeing in the business today.

Okay. Great. That's helpful. And then I was just looking at kind of the operating income. It looks like the earn-out was a little bit higher, but MSI was actually down quarter-over-quarter. And just -- can you give us a color what's happening with those businesses driving that?

Yes, this is Brad. I wouldn't say that it was a meaningful or material move amongst any of the businesses, really, for the quarter if you look at the overall impact. And for the MSI earn-out, note that that's still 2.5 years out. So we didn't see a meaningful change in that business in relation to projections via the earn-out that would suggest underperformance, let's say. So I think it's -- I think we're still a ways from that earn-out, and we'll still continue to see volatility quarter-to-quarter in that line item.

Okay. Got it. And then just holistically, I mean, should we be -- like, I mean, I know that you guys didn't sound like you're still considering whether to do an adjusted cash EPS. But all right. So if I just look at the operating income. I mean should -- how should we be thinking about it? Like the revenue's more than doubled from like $18 million to $38 million. And then operating income is only up $150,000. So I guess, just how should we be thinking about the leverage that you guys are going to get from these acquisitions and how that's going to drive higher operating income over time?

Chris, it's Kris Wiebeck. I mean I think the biggest thing you're seeing is that it's amortization expense, which relates to how we've capitalized some cost related largely to the MGA of the Future business, which -- look, we thought it was a great quarter and saw acceleration from -- and PIF counts from where they were a year ago, and we're still super excited about that business and what they're going to do. So I think when you're looking at operating income, you got to be careful. Ultimately, again, we're trying to drive the business for revenue growth and to generate top 10 in 10, obviously, that's going to mean free cash flow. And that's why we're doing an adjusted EBITDA number on a pro forma basis because we think that's probably the -- a good metric for looking at kind of what would -- for future free cash flow be [ of the ] -- in forward years and what not. Does that help?

It does. Yes, that's very helpful. And then just one last one. What's a good interest rate [ expense ]? It sounds like you guys have paid down some debt. What's a good like interest rate we should be thinking about going forward?

Yes. I think -- look, right now, we're at [ L plus ] 350 in [ our ] senior facility. We're certainly going to be active in making sure we're getting the good [ deal ] if there's one that's out there. And I think we're paying it down. Again, it's a revolver. So for us that's kind of just a treasury management function of, we had a lot of excess cash on the balance sheet, let's pay it down, let's cut down interest expense. And then, obviously, we'll use that again for more partnerships in the future.

Okay. Got it. And then actually, I had one last one. Can you guys give us any color on what pricing trends you're seeing year-over-year in like your Middle Market, Specialty and MainStreet segments?

Yes. So the -- this is Trevor, Chris. We're certainly seeing rate beginning to tick up. And all lines with the absence of work comp, which we're continuing to see some softness. So I would say, overall, we're seeing kind of mid-single-digit rate action across the book, and that's being led by the commercial auto line of business, where it's low double digits to mid-teens and that's on accounts that really aren't loss impacted. In addition, in the property insurance marketplace, particularly around cat-exposed geographies or loss-impacted accounts we're seeing higher rate volatility but overall, the rate environment's certainly creating a tailwind, and we don't see that abating in the near term.

Our next question is from Greg Peters, Raymond James.

I had a couple of questions for you that haven't been asked yet. First of all, in your Q, I think you called out the Middle Market's business, higher commissions due in part to likes and fiduciary. I think you said it was $3.5 million. Was that onetime in nature or is that something that we have to include in our segment thinking going forward.

Greg, it's Kris. No, those are partnerships that were closed in 2019. So we would expect to have ongoing commission revenue from those businesses.

I think you were talking about -- it was commission expense, though, was a $3.5 million payment to likes and fiduciary. Was that a onetime payment or is that just part of -- is that just an ordinary commission payment in context of the revenue that they're generating?

That's just commissions in relation to the revenue they're generating, Greg.

Okay. So there wasn't any -- okay.

No onetime payment.

Yes. Then I know there was a great deal of expense put forward to get the company public. And I suppose, much of that was carried in the fourth quarter. Do you have any idea? Are you willing, at this point, to give us any sort of benchmark on what those expenses might look like for the fourth quarter?

Greg, I don't think we're going to give a specific number, but I would say, obviously, that you're correct. And we did incur a significant cost to get the company public and some of those definitely hit in Q4. And I think, again, we -- you've met with some of the folks here, we're building this for the long term. And certainly, having double-digit revenue growth organically, plus what we can do in the partnership side is going to help us scale into some of the infrastructure that you have as a new public company, and that's probably a long-term story that will play out over the next couple of years.

Right. Just a point of reference, I know some of your -- and I'm not sure you want to hear this, but some of your other publicly traded comps, who are much larger, they have a tendency to provide some guidance around amortization expense, not only for the current year, but for the go-forward years based on the current deals that are closed. So I know as you're contemplating what you disclosed in your Qs, you might think about the -- those disclosures because the amortization expense, obviously, while noncash, it's important to try and get that right from an analyst standpoint. The final question I have for you, just as -- in the Medicare market, there is a tremendous amount of rhetoric coming out about the outlook for that market that we're hearing across multiple channels. And obviously, you reported decent results in the third quarter. Can you give us a sense of how you're positioned to go? You're in the very important enrollment season right now. Can you give us a sense of how that business looks for the remainder of the year? Or maybe if you don't want to get too granular, give us a sense of the increased agent count you have or any sort of guidepost that we could use to sort of gauge your success relative to the others?

[ Chris ] , this is Trevor. Yes, so what I'd say is, while we're not going to provide specific quarterly guidance around the Medicare business, we remain very bullish on the overall macro trends and the trends we're seeing. We don't anticipate any material challenge or headwinds to the sustainability of this business going forward and are looking forward to continuing to execute through the balance of AEP, which wraps up December 7 and then also making -- taking advantage of the new OEP season that creates an extended selling season through first quarter of '20. So overall, we're super bullish there. What I would also want to point out, and I'll hand it over to Brad, is when you're looking at the financial results from our Medicare business, it's important to note how we recognize revenue here because it differs, we believe, somewhat materially from some of the other peer organizations that are also in the Medicare Advantage space. I'll pass it over to Brad to just provide that brief explanation.

Yes, Greg, just to touch on that quickly. When we look at our Medicare business, we essentially apply a constraint by GAAP terms to future renewals associated with the underlying written policies. So we're effectively recognizing, at this point, one year at a time that associated Medicare revenue or Medicare Commission for that policy underwritten, where some of our peers are recognizing up to 7 years of renewals at the underwriting date based on the construct of those agreements with the insurance company partners. So a reminder that we have not taken, I'll say, that forward a look based on some of our, I'll call it, lack of history that we believe [ would ] be predictable enough to provide that type of information for upfront booking. So just to note, as you look at our Medicare revenue, that's really the 1-year annual commissions associated with those policies.

Yes, that's a good point, Brad. I'm curious if you guys have walked through the math of what your numbers would look like if you assume the 3- or 4-year LTV. I imagine the revenue numbers will look materially better.

Yes, Greg, this is Kris. I think look, we're comfortable that our cash flow and our revenue line up pretty well there. And I don't think we're excited to get to a place where your cash flow from that revenue and your revenue [ or ] 20% of what [ one ] number is. So yes, we probably won't be publishing something like what it could look like. But we're just going to try to be explaining what we're doing.

Because that, Greg, I'll add there. That requires a revaluation as we continue to build history in the business. So that's our policy now. But to Kris' point, we'll update as that policy evolves, and we get adequate history and need to start making decisions about how many years or periods of renewal get worked into that number.

What would be useful for us is if you consider applying or providing some retention rates on a historical basis, after you get through enrollment season, just how your first year retention looks and your second year retention to give us some guidepost to compare with your peers, but I understand you got a lot of moving pieces. Listen, it's your first earnings call, you read your earnings call scripts flawlessly. So that should be a good indication that you guys are going to have great success in the future.

Thanks, Greg. We really appreciate that. And although I may have tripped over one number, we -- I eventually got it right.

Our next question is from Dan Fannon, Jefferies.

My question is on EBITDA. And just curious as it came in a bit light of what we were looking for. Why the margin declined in the third quarter versus the first half of the year? I think you talked about it a bit, but I didn't understand specifically what -- if there was any onetime in the third quarter that would have had the margin decline?

Sure. So again, on an adjusted basis, when you look at the pro forma adjustments that we did when you kind of bring back [ in the other ] partnerships, you'll see we're about 23% year-to-date. Obviously, [ on that same schedule ], the first half was 25%, Q3 was 19% and then '19 was up 100 bps over the prior year. But really what it is, it's how our revenue hits and how it's earned. So if Q1 and Q2 end up being our strongest revenue quarters, there's basically more revenue that offsets corporate expense and other things, and so that leads to higher margin. Also, it's the way contingents work. Some of our contingents, our loss basis, and so you don't accrue from throughout the year, but you kind of -- they fall on a cash basis. And so that ends up kind of driving additional margin in Q1 and Q2 that doesn't necessarily show up in the back end of the year. But again, we're trying to look at this on a year-to-date basis -- excuse me, on a yearly basis and a thought for kind of, hey, how do we hit 10 in 10? How do we drive growth? And again, margin is important. We understand it. But ultimately, can we drive revenue and generate a lot of free cash flow and what type of business do we have 3 years from now, 5 years from now and 10 years from now? And is that the right business for our stakeholders and the shareholders? And so that's our focus.

Understood. And I guess, is there -- as we think about 2020 or even 2021, are there any guideposts that we could hold you to or that you're shooting for as opposed to top 10 in 10, which is obviously a long ways away. So any interim kind of metrics that we could point to say that this is our goal before then so we can kind of hold you to something more accountable?

Dan, this is Trevor. As we continue to grow and execute on our plan to achieve top 10 in 10, we think double-digit organic growth in that 10% to 15% range is achievable. And we look forward to continuing to grow the business on top of that through partnerships with some of the industry's very best firms that want to join our platform and join us to build that top 10 in 10 business.

Got it. And then just lastly, on the 3 new partnerships in the quarter. Can you talk about the margin profile of those businesses before you acquired them?

Dan, so this is Trevor. We closed those 3 partnerships. So Foundation Insurance, as an example, is closed on August 1. And that's just a fantastic addition to our MainStreet Operating Group. Foundation is led by 4 partners that are much younger than the industry average and really didn't have a need or a mandate to sell the business. We've been focused on building a relationship with them for several years. And the timing really just finally made sense based on our ability to allow them to take some chips off the table, while taking advantage of our scale to enable doubling down on reinvestment in the business to expand their sales force. So we structured a revenue-based earn-out and worked with them to develop a plan on how we could double their sales force in just over a year. This is a business that historically grew high single digits to double digits every year. And we believe we'll be able to further accelerate their growth and the pace with which they enter new markets. It's truly exciting. And another example is Lykes, which was a large regional broker in the Florida market that we knew well, given both firms, both us and Lykes are headquartered here in Tampa. We were able to make some key advisers owners as part of that partnership. Traditionally, that business had been owned 100% by an outside family. And we really love the synergies and additional experience that they bring to our Florida business, particularly with their recognized expertise in the agricultural space. We believe Florida is one of, frankly, best insurance markets in the country for a broker, given the state's growth, some of the complexity of the risks that our clients face here. And so for a local firm to want to partner with us and that's just really a sign of our partnership model, even though our businesses had historically been competing. And I think that is really just a great sign of how we're being perceived in the marketplace and of the types of firms that are looking to join our platform as we continue to execute on our plan for 10 in 10.

Okay. I guess just one last one, sorry. Are you going to be giving adjusted EBITDA by segments?

No. We don't plan to be now. We plan to be kind of -- if you look at the sheet that we published to the website in the earnings supplement, we plan on rolling that forward kind of quarter-over-quarter, so that you all can kind of better track and model and have some transparency in some of those key things that we're looking at in the business. But right now, kind of, those are the things that we want to be focused on.

Our next question is from Jay Cohen, Bank of America Merrill Lynch.

Yes. On the organic growth, I know you're not breaking up by segment. Were there any segments that either outperformed or underperformed notably in the quarter, just to give us a sense of where the contribution came from?

Jay, this is Trevor. Yes, so I'd say Specialty rebounded from earlier in the year and now important to note that doesn't include the MSI results as they won't be incorporated into our organic growth numbers until the second quarter of '20. But generally speaking, all of the businesses performed well from an organic growth standpoint, and it was great to see the Specialty business rebound from the first half of the year.

And just on this -- your decision not to break down the organic growth by segment. There seems to be sort of out of consensus, meaning the other public companies generally do, do that. And I think given your relatively new size, it would be very helpful for us to see that. I'm not sure why you guys decided not to do that.

Jay, our sense is just kind of given the size that we are right now, it's -- the benefit of the information versus the noise, and we felt like that, at some point, creates more noise than information, right? We want to have people focused on 10 in 10, right? We know if we can build this business the right way in the long run, that's going to be a fantastic result for everyone involved. And we certainly want to provide transparency and data and allow people to do their jobs and be able to make decisions, but at some point, providing every detail that's possible in every segment, kind of gets in the way of the story and what we're trying to do here and we're investing for growth and being successful in partnerships and certainly, that may be something that when we start to have segments that are $500 million in revenue one day, if that's the case, hypothetically compared to some of our peers, then maybe we'll revisit that. But I think right now, where we are, we want to keep people focused on what we provided.

Got it. And then I guess, in the past, you've given us some indication of the number of deals you had signed some sort of letter of intent, as I believe. Can you give us a sense of what that looks like now?

Jay. So what we can say is we do have signed LOIs. We're not disclosing a specific number of signed LOIs, and we have not yet closed any partnerships in the fourth quarter. However, as I mentioned earlier, our partnership pipeline today is as robust as it has ever been, and the opportunities that we're seeing post-IPO have really, frankly, accelerated from any period we've experienced before. So the positive reception we're seeing in the marketplace is really fantastic.

Our next question is from Pablo Singzon, JPMorgan.

So my first question was basically on the business that you acquired, particularly in the middle market segments. [ So legacy BRP ] versus my numbers, you guys [ meet in ] the middle market, [ maybe Lykes ] has something to do with that. So my question is at least if you could give us some color on how your acquired partnerships are -- from an organic growth basis, are performing against, I guess, legacy BRP, right? So I think one great example that you guys had put forward in the past before was Montoya and how you're able to ramp up organic growth there. I think at this point, [ like it's ] probably a significant part of middle market. So I'm just curious to see or just curious to hear like what are you doing there and how organic growth is developing in that new partnership?

Pablo, this is Trevor. Thanks for the question. So yes, in the middle market segment, what I would say is we believe we can continue to grow our business as well as the businesses we partner with at that kind of 10% to 15% organic growth range over the long term. And the partnerships we completed this year are performing in line with expectations. So we're pleased with the performance and looking forward to continue to execute on our top 10 in 10 plan.

Okay. Would it be [ fair to say that, ] Trevor, that Lykes, in particular, [ is not in the scene yet ], but it seems like you're on track to hit that trajectory longer term. Is that a fair comment?

So Lykes is [ seeing as they are ] a partnership that we have not yet owned for 12 months. They're not incorporated into the organic growth results yet.

Okay. And then just to follow-up on your comment on technology spending. Is there a way to think about that, whether it's, I guess, a fixed dollar amount or a percentage of revenues over time?

Sure. So tech investments are -- it's a cost in our business. I mean obviously, we're continuing to reinvest in the MGA of the Future business, roll out specific tools, new products. And so I think you'll see us do that, and you'll see that show up in the Specialty segment. But really, that's on an opportunistic basis, right? We're not thinking about a certain dollar that we're putting into the tech, we're thinking about what are the opportunities for the business and what chance is there for market share? What do our clients need? What types of solutions are being delivered that will help them and that we can deliver? So I think we view it from that lens. And then obviously as we scale the business, we're continuing to move new partners onto our kind of main version of an ERP system internally. And I think that should help. But again, I think you see that show up a little bit through operating expense. But still predominantly, this is a people business that people drive the most of our costs, and they're the ones that are executing clients or developing that technology.

Got it. And then my last question. I know you guys won't be giving guidance on the M&A pipeline. But I was wondering if you could speak to, I guess, a more generic description of it, whether in terms of what business segments you're targeting partnerships in or maybe even the size of partnerships you're looking at. And if we focus on size for a minute here, and I think most of your efforts [ in M&A ] will be sort of more on the middle market segment. But if you could speak to the deals that you had to do there? And I guess, how they compare to the deals that you've historically done in that segment before?

Pablo, this is Trevor, again. So what I can say is our pipeline's never been stronger. We're actively pursuing in dialogues with partnership opportunities in all 4 of our reporting segments. And we'll continue to pursue these opportunities with the very best businesses so that we can continue to grow and execute on that top 10 in 10 plan.

We have reached the end of the question-and-answer session. And I will now turn the call back over to Trevor Baldwin for closing remarks.

Thank you, and I really appreciate everybody dialing in for our inaugural call as a public company. We appreciate your interest and look forward to speaking with everyone again when we release our fourth quarter earnings.

Take care.

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