The Baldwin Insurance Group, Inc. (BWIN) Q2 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, greetings, and welcome to the BRP Group, Inc. Second Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the conference over to Bonnie Bishop, Executive Director of Investor Relations. Please go ahead.

Thank you, operator. Welcome to the BRP Group second quarter 2022 earnings call. Today's call is being recorded. Second quarter financial results, supplemental information and Form 10-Q were issued earlier this afternoon and are available on the company's website at ir.baldwinriskpartners.com. Please note that remarks made today may include forward-looking statements subject to various assumptions, risks and uncertainties. The company's actual results may differ materially from those contemplated by such statements. For a more detailed discussion of these risk factors, please refer to the note regarding forward-looking statements in the company's earnings release for this quarter and to our most recent 10-K and subsequent periodic filings, including our most recent Form 10-Q, all of which are available on the BRP website. During the call today, the company may also discuss certain non-GAAP financial measures. For a reconciliation of these measures to the most closely comparable GAAP measures, please refer to the company's earnings announcement and supplemental information, both of which have been posted on the company's website at ir.baldwinriskpartners.com and can be found in the company's SEC filings. I will now turn the call over to Trevor Baldwin, Chief Executive Officer of BRP Group.

Thank you, Bonnie, and good afternoon, everyone, and thank you for joining us for our second quarter of 2022 earnings call. During the call, I will share a few brief remarks, followed by Brad, who will address select financial and business highlights in the quarter and then Brad, Kris, and I will take questions. In short, Q2 was an excellent quarter, highlighted by organic growth of 24% and double-digit organic growth across all 4 segments. This sustained level of outsized organic growth is being powered by some of the strongest internal underlying fundamental growth drivers we have seen since our IPO. The MGA of the Future posted its best quarter in our history as a public company with organic growth of 70%, and MainStreet recorded organic growth of 33% for the quarter. Both results show that the investment initiatives we've highlighted during the last several quarters are beginning to bear fruit. We remain particularly excited about the momentum building in the MGA. As of today, we have homeowners products live in 14 states, including 2 admitted AM Best A-rated products in Florida, 1 in Massachusetts, and E&S products live in 14 states including Florida, Texas, and California. In May, we also started managing a portion of the over $200 million premium builder-sourced admitted homeowners book from QBE, a new agreement we originally announced in March. As we previously signaled, the launch and ensuing momentum and the distribution of our proprietary homeowners' products had a material positive impact on our second quarter organic growth rate in the MGA and we expect that to continue to be a meaningful contributor to organic growth during the balance of the year and into 2023. In April, we completed the acquisition of Westwood, our largest partnership to date. As a reminder, Westwood is a personal lines-focused insurance distribution platform that is embedded with 14 of the top 20 new homebuilders in the U.S. to provide purpose-built homeowner solutions to new homebuyers. Importantly, May and June saw strong revenue growth in excess of 20% of Westwood, exceeding our initial expectations. The benefit of increased client retention, meaningful rate increases and a roughly 15% improvement in homebuyer capture rates significantly outweighed any impacts to new business from a slowing home sales environment. While we expect the backdrop for new home sales to be challenge for the balance of 2022, we remain confident that continued channel partner expansion, capture rate improvement, increasing retention and property rate tailwinds will continue to overcome any home sales headwinds and drive overall strong growth for Westwood. In closing, the outperformance in our results year-to-date, the strong underlying momentum and fundamentals across all of our segments and the durability of our business model leave us confident that our strong performance will continue for the remainder of the year. I want to thank our clients, our trading partners, and our outstanding colleagues who drive our continued outperformance as a result of our colleagues dedication and efforts, the business is in its best position in its history. With that, I'll now turn the call over to Brad.

Thanks, Trevor, and good afternoon to everyone joining us today. For the second quarter, we generated revenue growth of 94% to $232 million. Organic growth in the second quarter was 24% with all 4 segments hitting double-digit organic growth for the quarter. These are excellent results especially considering the extremely strong prior year. We recorded GAAP net income for the second quarter of $17 million or income of $0.14 per fully diluted share. Adjusted net income for the second quarter of 2022, which excludes share-based compensation, amortization and other one-time expenses was $26 million or $0.23 per fully diluted share. A table reconciling GAAP net income to adjusted net income can be found in our earnings release and our 10-K filed with the SEC. Adjusted EBITDA for the second quarter of 2022 rose a 112% to $42.5 million compared to $20 million in the prior year period. Adjusted EBITDA margin was 18% compared to 17% in the prior year period. I do want to point out that we had some meaningful earn-out payments this year, specifically the MGA of the Future earn-out in April, which because of GAAP rules in aggregate contributed to the $48 million running through our free cash flow from operations as a negative item. Adjusted for this earn-out payment and the change in AR and AP because of our carrying of fiduciary cash, free cash flow from operations improved compared to the same 6-month period in the prior year. A few items regarding expectations for Q3 and the full year 2022. First, for the third quarter of 2022, given the strong performance across our business, we expect to generate organic growth in the high-teens. Additionally, because of changes in the seasonality of our business as a result of 2021 partnership activity and the closing of Westwood, we will provide some additional color beyond what we normally provide for Q3 projections. Currently, we expect revenue for Q3 2022 to be roughly $230 million and for adjusted EBITDA margin to be in line with our 17% in Q3 2021. We are slightly increasing our expectation for organic growth for the full year to the high-teens. As Trevor mentioned, we are deploying the nearly $50 million investment we discussed on our Q1 earnings call, concentrated at our MGA of the Future and MainStreet businesses, primarily in key colleague additions and technology development, which as you saw in this quarter's results is already paying off. These investments should contribute to organic growth in Q3 and Q4 of 2022 and beyond. Despite this outsized investment in new teams and solutions throughout the year, we still expect an additional 50 to 100 basis points increase in the adjusted EBITDA margin for 2022, above last year's 20% consistent with the expectation we have given all year. In summary, we remain excited about the performance across all of our business and the momentum we have carried into the third quarter. With that, I thank you for your time and we will now open up the call for Q&A. Operator?

[Operator Instructions] Our first question comes from the line of Greg Peters from Raymond James.

And I suppose a good starting point for the questions and answers would be around the organic results. I mean, you're posting some, especially in specialty and MGA of the Future, some substantial rates of growth. And one of the questions we get from investors pretty consistently is about the sustainability of these really strong organic results going -- looking out beyond just this year. And perhaps you could give us some additional detail what's driving it and how we can gain some confidence when we think about '23 and '24?

Greg, this is Trevor. I appreciate the question. So one, I'm not going to get into providing specific guidance into '23 or '24. But I think maybe what could be worthwhile is just spending a little bit of time around kind of what's driving the overall results and why we believe kind of the outsized organic growth that you see from us is sustainable over time. So first, we talked about the fact that the launch of home was going to be a meaningful driver to organic growth in the year, we launched that product initially at the end of the first quarter. And as you can see, kind of the momentum there has really picked up and contributed meaningfully to what proved to be a record organic growth quarter for the MGA. Additionally, we're seeing broad-based strength and performance across all of our segments, which is evidence that the investment program that we made last year and further $50 million of investments that we're making into the business this year are really paying off and driving results. And so we are really pleased with the early signs of success we're seeing from the initiatives coming out of those investment programs. The momentum we have with the homeowners product launch and the rollout of that product across the country and expect the overall organic growth momentum will continue.

Okay. And then associated with revenue growth another important component is acquisitions. And I guess, when we look at -- I guess, you have, what, $75 million left on your revolver. Cash flow has been constrained because of payouts. What do we think -- how should we think about your M&A capacity going forward? I know previously it had some targets. Just wondering if those targets have shifted at all. What you're thinking about M&A?

Yes. So our outlook for M&A for the balance of the year hasn't changed from the last call. We continue to expect to be at the low-end of that $100 million to $150 million range for acquired revenue for the year. We're at $96 million announced M&A as of this call so far this year. We expect to be able to continue delevering the business as a result of growth in top and bottom line and margin expansion over time and that will create capacity to fuel incremental M&A. And so we're not going to get in the guidance for 2023 at this time, but we feel really good about the position we're in. The position of business is in and the reputation we have in the industry is being the premier home for the industry's premier businesses that drive outsized stakeholder value, bring unique incline industry sector and product line capabilities and have all the necessary attributes to continue delivering the double-digit organic growth that we expect of ourselves and our partners.

Embedded in your answer, Trevor, you mentioned deleveraging and that's -- I'm just looking for a clarification of where you are in that process and what your targets are? And that's my last question.

Greg, it’s Brad. So our net leverage is roughly 5.5x. As Trevor mentioned, we are committed to delevering the business over the next 12 to 18 months through continued outsized organic growth.

Our next question is from the line of Elyse Greenspan from Wells Fargo.

Maybe my first one would just be following up on the debt side. So is that 5.5x after the deal that you guys announced last week? And then, can you just remind us over time where you would like your leverage to be?

So the 5.5x I referenced was pre the deal we announced last week, but we paid less than 10x for that deal. So it was largely neutral to net leverage. In addition, we --. Sorry, I didn't hear the second half of the question. In addition, we've made no change to our long-term target of 3.5 to 4.5x. And as we said, we believe we can get back in that range over the next 12 to 18 months to be the growth in the business.

And then you guys said that you guided for the third quarter, right, organic growth in the high-teens. So when you think about -- I'm assuming, you expect another pretty strong quarter from the MGA of the Future business. But does that guide imply double-digit growth again in all of your segments or how do you see the third quarter relative to all of your businesses?

Yes, Elyse, we -- I'm not going to get into specific segment level organic growth forecast. And what I can tell you is, we expect continued strength and momentum across the entirety of our business. And in that guide is our characteristic conservatism as a result of all the uncertainty that exists across the world today.

But you haven't seen like, I guess, if you went through the second quarter, would you say as you went through the month of the quarter that growth was kind of consistent? I'm assuming you did know there is a slowdown towards the end of the quarter.

No, there is no slowdown, Elyse. In fact, as I mentioned in my prepared remarks, the underlying fundamentals of the drivers of the organic growth that we saw in the second quarter are as strong as they've ever been since our IPO. New business as a percentage of prior year commissions and fees was at an all-time high for us on a quarterly basis of roughly 30%. And so when you think about kind of the levers of organic growth that are internally controllable, which is both your new business and your attrition, it's never been stronger. We've seen an ebbing of the impact of rate and exposure. On a year-to-date basis, it's about a 2.5% tailwind to organic growth. In the quarter, it was relatively flat. And so we're exceptionally pleased with the strength and the momentum of the fundamentals and expect that that will continue through the back half of the year.

And then one final question. As we think about 2023, I know you guys mentioned that you're starting to see a benefit of the new hires, right, helping organic this year. But I think in the past, right, you had mentioned, right, there is a lag from hiring until they are fully operational. So I would assume there would be a greater tailwind in '23, right, on organic relative to what you end up seeing in '22 from those new hires?

We expect a tailwind from the hires both in ‘22 and into ‘23 and beyond. We hired about 475 new colleagues in the second quarter, bringing the year-to-date headcount growth from new hires in at about 850, which has continued really, really high rates of hiring. I expect that, that rate of hiring will begin to moderate and normalize as we get into the back half of the year and into 2023, but we expect that we’ll see continued momentum and results as a result of the breadth and depth of talent that’s come into our business. And all the incredible solutions, new product developments and overall innovation that is being driven as a result.

Our next question is from the line of Pablo Singzon from JPMorgan.

Last quarter when you provided your organic growth outlook for the year, you had assumed some kind of economic slowdown. Are you assuming sort of the same scenario for your higher outlook this quarter? And I guess, if you think about the balance of the year, where are you assuming potential softness in a pretty strong heightened organic growth outlook?

Yes. Great question, Pablo. So the past 2 quarters, we've delivered exceptional organic growth results despite contracting GDP and implicit in our guidance for continued elevated levels of organic growth as continued softness in the overall economic environment. And I think that just highlights, not only the resiliency of our industry broadly in this business model, but more specifically the balance and strength of revenue drivers that exist across the BRP business, and all the kind of unique contributions from our various segments.

Got it. And on that point, Trevor, so I know these are not your largest business, but the acceleration in organic growth in MainStreet and Medicare was pretty notable this quarter. Any color you can provide there, what's happening fundamentally? And I guess, what's happening on the ground that's driving that growth?

Yes. So, I mean, Medicare has been very strong, both in first and second quarter, and really, that reflects the business coming out of kind of a COVID operating environment. As you'll recall, our go-to-market strategy in that business is very much community-oriented doing business often cases face-to-face. And so the resumption of more normal kind of business operating environment has really enabled us to drive momentum there and we're very much bullish on that continuing. On the MainStreet business, a combination of things. One, our legacy operations across Florida are performing exceptionally well in a very challenging and turbulent market environment. And just doing exceptional work bringing unique solutions to our clients who are really in a challenged environment to seek homeowners capacity. So we're seeing a real uptick in results as a result of our scale and market access that enables us to uniquely be a provider of solutions to homeowners clients. And then more broadly, we've been making significant investments into the MainStreet business to expand that business nationally we've hired now over a 100 new risk advisers into that business this year. And while it's still early days, we are very pleased with the early signs of success we're seeing with that national expansion.

Got it. And then last one for me, I was hoping to get more perspective on the homeowners MGA product. I guess, the first question and there's a couple of questions, but the first one is, when do you expect to be fully rolled out? And I guess, in the states that you're in now I think you managed 14. Are you concentrated in a couple, say, Florida? And who are sort of the distribution partners you're tapping to sell the product, right? So, obviously, you have your own MainStreet agents, but are you expanding beyond that this MGA product?

Yes. So a lot in there. Let me just try and unpack that real fast, Pablo. So a few things. One, we expect to be fully rolled out with kind of our national suite of products over about an 18-month time period from now. So still a good bit of work to continue to build out and launch product. Two, as we look at how we’re distributing and the relative concentration, the majority of the distribution of that product is internal, but our MainStreet business as well as the Westwood platform, and then we also have some external distribution as well. When you look at the concentration, Florida represents less than 10% of the premium on the books today, which is approximately $75 million of premium that we’ve bound and that’s inclusive of the QBE book that we began managing effective in May. And so we’re very pleased with the balanced portfolio that we’re building. I would characterize the type of business that we’re writing is super preferred. And we’re off to an exceptional start albeit still early days. Overall performance-wise, loss ratios have ticked down across the MGA modestly year-over-year. And so we continue to see, not only terrific growth performance, but exceptional profitability for our risk-bearing partners across the portfolio of products and programs that we’re managing.

Our next question is from the line of Michael Phillips from Morgan Stanley.

Real quick follow-up on that last comment, Trevor. When you defined it as I think you said super preferred. Can you give like dollar amounts of kind of the size of the way you're talking about in terms of limits there?

Yes, in general, we're targeting homes with the Schedule A replacement cost value between USD250,000 and USD3 million. And I'd say that sweet spot is really in that, call it, $300,000 to $750,000 today.

Okay. And then I'm just curious, I guess, given all the backdrop of fears of GDP and recession. Anything you're hearing from your clients of how they feel about their own businesses confidence in that as we kind of go forward from there?

Yes, it's really very much industry-specific, Mike. So if I look at our innovation practice, which serves life sciences, technology, Web 3.0 and crypto-type companies, it's a pretty tough environment. Those businesses are struggling to raise capital anywhere near the rate that they were 12 months ago. Valuations have come way down, employments down. And so that -- there is a real recession happening in that industry sub-sector. Alternatively, when I look at other classes of business like our construction practice, as an example, our clients have never been busier. And so it's very much both in client industry sector and geography-specific. In the whole, I would say, we're not seeing dramatic pullbacks and exposures relative to payrolls, revenues and inventories. But we are hearing from our clients about a challenged operating environment. The impact of inflation, not only on input costs, but also wages, as well as just the ability to attract talent are all creating significant pressures. In addition to that, the complexity and uncertainty of the environment that our clients are operating in has, frankly, creates more of a demand for the advice and solutions that we can bring to bear on their behalf. And so while ultimately we may see pockets of economic weakness as a result of the kind of external factors that are driving that and the increased risks both kind of man-made and natural, the demand for our services is increasing.

Okay. Is that one of the reasons why, I guess, maybe could we expect to see some of the line items within your [indiscernible] Middle Markets consulting and service fees? Did that continue to kind of move up? Is that part of that?

Yes.

Our next question is from the line of Meyer Shields from KBW.

So are there any non-admitted or excess and surplus lines homeowners product available on the MGA? And is there a plan for that?

Yes, we have non-admitted E&S homeowners products live in 14 states and expect to have E&S homeowners product live across the majority of all 50 of our states by the first quarter of next year.

Perfect. I was hoping you could talk more about M&A. And I understand that the outlook hasn't changed. Can you update us on the pipeline? And not many questions, if you could magically solve some of the leverage that currently needs deleveraging. How quickly could you jump back on the more aggressive M&A path?

Yes, I mean – so here’s what I would say, Meyer. The kind of flow of M&A opportunities that we’re seeing remains relatively high. The underlying quality of those businesses seems to have kind of fallen off somewhat materially. And I think that’s somewhat just a function of a lot of the really high-quality businesses that we’re thinking about coming to market have done so over the course of the past 18 to 24 months as a result of kind of elevated overall valuation attributes. And so there are still quite a few very high-quality businesses out there that we know well that we stay in regular communication with, but we’ve definitely seen somewhat of a lull in the type of assets that we get really excited about from an M&A standpoint relative to underlying organic growth attributes, depth and breadth of specialization and unique capabilities in the way in which they go to market.

Our next question is from the line of Josh Shanker from Bank of America.

Elyse tried to ask my question, I know you guys don't like us separating the MGA of the Future growth out from the MainStreet growth. And I appreciate your position there. But given 70% growth in the quarter, which is really quite high, can you maybe talk a little about how we should think, not even now, but the margin profile of that business? Obviously, it requires lot of investing and still in its early stages. But where are you in terms of your long-term goals around margin there, even if it's just a qualitative conversation? And where does that go in the next year or 2?

Yes. Josh, I would say, the long-term margin profile of that business, as we've stated previously, it can operate at better margins than you're seeing throughout the rest of our business because of the tech capabilities. Right now, we are investing so deeply into that business that you aren't seeing that margin lift. I don't want to give specific guidance about sort of future margins in that business just to know that we're making the investments now because we see the growth opportunities and know that because of the technological capability we have in that business, the margin capabilities are even better than we see in the rest of the business.

Yes, Josh, just to add a little bit more color there. Of the $50 million above normal course reinvestment program we announced this year, $30 million of that roughly was earmarked for the MGA. And so you can just get a sense of the level of magnitude of investment that we're making. Those people -- and that's largely talent and tech and those professionals that we've been adding into the business range from a development talent to product teams to distribution specialists. And so as we continue to scale into these new products, many of which are not generating any dollars of revenue, yet, we will quickly begin absorbing that incremental cost that's been layered into the business to launch these new products. Just to give you a sense of the scale and quantity of opportunities that we're working on, we have over 45 new products in the pipeline that we're working on to launch over the course of the next 18 to 24 months.

And is there a risk that the MGA of the Future business is growing so fast? And its short term margin profile is so much different than the MainStreet business that actually becomes a headwind to margin for the near-term because of the fastest-growing business is the one that doesn't yet produce the margins?

To be clear, that business produces margin. And what I would tell you is, per the guidance that Brad provided earlier, despite all of the elevated level of investment we're making into the business to drive this growth, we still expect to improve margin for the overall business year-over-year.

And on the unrelated, what are your thoughts on fixed coupon debt versus variable coupon debt given where markets are right now?

Yes, what I would say is, it’s all a function of what’s the cost of the fixed versus what’s the cost of the variable and how we think about the interest rate curve over time. So far we’ve been able to manage our cost of capital and our debt costs very effectively. We had our variable debt hedged fairly fully until last quarter when we sold ¾ of those hedges for basically pulling forward the protection that we had purchased and converting that into cash on our balance sheet. And when you think about even in kind of at today’s rate levels, we’ve got a fully loaded debt stack that’s costing us, call it, around 5%, which compares quite favorably to what our similarly-sized peers are borrowing at in the fixed rate market. I mean, I know one of our private equity peers hit the market fairly recently and the fixed rate instrument that they were borrowing out was over 7%. So we’re still well south of that and feel really good about being able to continue to manage cost of that leverage effectively.

Our next question comes from the line of Yaron Kinar from Jefferies.

And I apologize in advance, I have some connectivity issues. So I apologize if I'm asking something that was already answered. Just wanted to go to Westwood for a second. How do you see the growth profile there, considering that we may see a bit of a slowdown in the housing market, on the one hand? On the other hand, you have inflation and higher rates, P&C rates with regards to housing. So any changes to your outlook for Westwood revenues?

Yes. So, great question, Yaron. First, the kind of short answer is no. No change in outlook for growth in Westwood. We continue to expect strong growth out of that business. As you look at kind of the puts and takes there, while we expect home sales activity to come in slightly in the back half of the year, we expect that to be more than overcome by the improvement in capture rates that we're seeing in the business and the underlying rate and exposure expansion that we're getting on the overall book. And so -- and I'd say the other thing to remember is, we do business with the largest new homebuilders across the country there. They tend to be a bit more insulated and kind of your average homebuilder. And so I think in June we saw new home closings down 17% broadly. The builders we work with were down less than that. And our lead flow while down was more than overcome by the improvement in the capture rates that we saw in the business. So we're exceptionally pleased with the performance that we're seeing there could not be more excited about having Westwood, Alan and the entire team over there is part of the BRP family. And we're really excited about and have a lot of confidence in the results that they're going to continue to deliver despite what is definitely going to be a more challenging homebuilding environment.

Got it. And then my second question is probably a broader one. I think in the past you said that you kind of see your platform is being one of the premier insurtech platforms in the industry. And just given the travails of the insurtech industry, what lessons learned have you had from that? And how do you see the company positioned as an insurtech relative to what we're seeing from other insurtechs?

Yes. So I think there is a couple of very important distinctions there, Yaron. One, I'd say, I don't know that I would characterize us as an insurtech. I would more characterize us as a tech-enabled insurance brokerage and distribution platform. We're building the insurance broker of the future and leveraging deep investments in technology platforms and capabilities to innovate and enhance the way we interact with and deliver solutions and insights to our clients broadly. I think about the challenges from the kind of insurtech community broadly, particularly those that have of the listed companies, there is a number of very important distinctions between how we do business in go-to-market and how many of them do one. We take 0 balance sheet risk. We are not an insurance company. We are an MGA. We're a broker, both retail and wholesale. But we don't take balance sheet risk. We build and manage proprietary product. We source risk capital to sit behind and ultimately support that product. But we don't take the balance sheet risk associated with it. Two, we have a fundamental viewpoint that when you're growing an insurance product business, you have to focus on all of your stakeholders, both the client or the policyholder, and the risk capital provider. And there has to be a recognition that there needs to be some level of equilibrium there. Insurance is meant to make people hold at the time of unexpected loss. It is not meant to be a permanent arbitrage that people can leverage to transfer risk and loss cost permanently to a third-party. That's just not the way it's meant to function. And so the way in which we approach building insurance product and distributing it broadly is rooted in sustainability and focused on building product that can be priced to persist because it's able to withstand paying the claims when they occur, while still delivering over time an acceptable return to our risk capital partners.

And just to be clear, I recognize you guys don't take balance sheet. I was thinking of comps like Policygenius as an example, [indiscernible] in the brokerage space?

Yes, I’d say, the way I think about our business model when compared to many of this distribution-oriented and call it “insurtech” businesses, we are not kind of a front-end lead by driven growth model. We are powering the insurance transaction inside third-party ecosystems enabling a more seamless, a more enjoyable and a more convenient insurance purchasing experience for those constituents. And so when you look at the inherent economics of our business model as a result of that, the minute, the second we bind a policy for a new client, it’s profitable on our platform. We don’t have to worry about what’s the CAC and the LTV and when is the payback period and how long do we need to hold on to them to breakeven. I bet it doesn’t matter. We’re not spending a ton of money on lead flow and lead volume. We’re embedding ourselves in an ecosystem, a point-of-transaction, we’re solving a pain point, we’re delivering an innovative purpose-built proprietary insurance solution that’s built for those specific ecosystems and ultimately that’s enabling us to drive outsized and importantly profitable growth.

Our next question comes from the line of Pablo Singzon from JPMorgan.

Thanks for accommodating the follow-up. This one will be quick. I was hoping if you could provide some perspective where cash or interest expense might go in the next couple of quarters, I guess, just given the exposure to floating rate. What quarterly level do you think you'll hit as a cap and I guess, any thoughts on sort of how you manage it down?

Yes. I'd say the best way to think about it, Pablo, is every 100 basis point increase in one of the floating rates is basically costing us $900,000 per month. And as Trevor mentioned, we continue to evaluate our cost of capital to be as efficient and effective as possible. And we'll continue to look at cap swaps, other hedging instruments or the fixed rate market for the best cost of capital leverage into the future.

Pablo, I’ll just add on there, when we did sell the caps, we did retain the 1.5% cap. So where the Fed funds is today, the one we capped is actually the only one that would actually still be paying us. The other ones would be even or still slightly out of the money. And as Trevor pointed out, we were able to put about $19 million of cash onto our balance sheet. Brad mentioned it, we’ve been fairly [silver] about the reality of rising interest rates going back 12 or 18 months ago. We watch this carefully. And the other thing to remember is, with Brad’s math on that is, we also have the benefit as we are running at a lower margin. Every time we increase our margin by a point, we can more than offset a 1% interest – increase in interest. So we have some other levers versus peers that may be running at more mature margins that they wouldn’t have.

Our next question comes from the line of Weston Bloomer from UBS.

I was just wondering if you could disclose how much investment spend in dollar million what you saw in the 2Q. Kind of how much is baked into the 3Q and 4Q? Because what I'm trying to get a view of the core margin ex investments and what you view the core margin profile is of the business, kind of once the $50 million runs off? My rough math is kind of in the mid-20s range. Curious on your thoughts and then kind of the timing to get there?

Yes, that's about right, Weston. I'm not going to get into quarter-by-quarter specifics, but you can think about the investment program we're making being about a 600 basis point drag on margin in the year. And so as we've shared in the past, those investments don't fully earn into mature margin in 12 months. It's going to take about 3 years and we still expect for that to be the case.

Got it. Just a follow-up to the revenue guidance you provided for 3Q. Does that assume any plug for additional M&A from here? Or is it just based off of what you've disclosed based off of organic growth and then the deal you guys did in August?

It’s not a significant plug, Weston. It just assumes the revenue from the deal we did in August.

[Operator Instructions]

All right. I think we can wrap up. I want to thank everybody for taking the time this evening to listen in on our Q2 earnings. I want to just thank all of our colleagues for their dedication to executing for our stakeholders. Our business would not be in an incredibly favorable position it is today without all their dedication and hard work. I look forward to talking with all of you next quarter. Take care.

Thank you, sir. The conference of BRP Group, Inc. has now concluded. Thank you for your participation. You may now disconnect your lines.