BRP Group, Inc.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 4/5

BRP Group is a rapidly growing insurance brokerage and consulting firm, offering a range of solutions, including commercial and retail insurance, employee benefits, and risk management services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview and Competitive Landscape

BRP Group operates as a middleman in the complex world of insurance, connecting clients with insurance carriers and providing advisory services. The company operates through two primary segments: Insurance Advisory Solutions (IAS) and Mainstreet Insurance Solutions (MIS), with a focus on acquiring and integrating regional and niche insurance brokers and consultants.

The core business of BRP is to act as an intermediary between insurance carriers and clients, and providing advisory services. BRP’s acquisitions focus mainly on expanding into new states, services and specialties of the business, all while looking for higher growth margins in all areas of its business.

Key aspects of BRP’s operations include:

  • Revenue Streams: BRP generates revenue primarily through commissions and fees earned from brokering insurance policies and providing consulting services. These revenues are directly related to the premium volume they handle and the specific service provided.
  • Industry Dynamics: The insurance brokerage industry is fragmented and competitive, with many regional and national players. The industry is generally stable, yet it is not always easy to find and retain talent as they have to be specialized to a degree. It is undergoing technological modernization that pushes companies to adapt quickly.
  • Competitive Advantage: BRP’s strategy of acquiring high-performing local brokers, while also providing them the technological capabilities, has helped it grow fast, as well as expand its offerings, and add to the margins. The challenge is to maintain a consistent performance standard of all companies, as some businesses are better than others.
  • Differentiation: BRP is attempting to differentiate itself through its scale, as well as the specialization offered in each region and local area by the brokers it owns.

Financial Analysis

BRP has consistently shown good growth through its revenue and acquisitions, but is still on a quest for profitability.

  • Revenue Distribution: BRP Group’s revenues are split almost evenly, with 52% from Insurance Advisory Solutions and 48% from Mainstreet Insurance Solutions in the year ended 2022.

  • Revenue Growth: Total Revenue has increased rapidly over the past 5 years at a CAGR of 38%, reflecting the growth through acquisitions. Revenue growth is expected to continue in the next years, but the growth rate should drop.
  • Profitability: Adjusted EBITDA for 2022 was $247M and Adjusted EBITDA Margin was 14.9%. Net income has been declining, from $89M in 2020 to a -$35.5M in 2022 due to high interest rates and the amortization of intangibles that have grown rapidly from acquisitions.
  • Operating Expenses: BRP’s operating expenses, are variable based on revenue and are composed of Employee Compensation, Operating Expenses and Depreciation, while also maintaining a high focus on acquisitions and their related expenses. A lot of the expenses are one-time charges related to these aquisitions.
  • Assets: Most of BRP’s assets are intangible assets, due to acquisitions. They amounted to a combined $2.86 billion in 2022, including $2.13 billion in goodwill. In general this is standard for insurance broker companies, and a good strategy to create a good business.
  • Liquidity and Capital Resources: BRP uses a mix of cash from operations and debt financing for acquisitions. Their liquidity position seems adequate to support their operations and further acquisitions, with a combined 4.6 billion in assets. They have a revolving credit facility of $1.1B.

Moat Assessment: 2/5

BRP possesses some elements that give it some competitive edge, however, it is not very difficult to replicate. Therefore, it has a narrow moat.

  • Switching Costs: There are a few switching costs for their clients as they are very tightly integrated into the operations of their clients.

    • Strength: In their insurance businesses, they have clients that have been doing business with them for many years. There is a level of trust built over the years, and those clients are less likely to jump ship to a new competitor.

  • Economies of Scale: BRP also has scale advantages, and is able to offer services that smaller competitors cannot.

    • Strength: They are able to obtain contracts that smaller competitors simply cannot handle. This scale advantage does not produce significant cost advantages, as it primarily applies to the large contracts they acquire, rather than a reduction in cost per client.
  • Network Effects: Network effects are only present in their employee benefit services, for example. But since the industry they operate in is not characterized by strong network effects, the advantage cannot be translated to other parts of the business.
  • Intangible Assets: BRP has intangible assets in the form of recognized brand names, long-term customer relationships, and industry expertise. While some of these intangibles may be hard to duplicate, they are not necessarily a sustainable source of competitive advantage for the long term.
  • Cost advantages: This source of competitive advantages is mainly missing.

Risks to the Moat and Business Resilience

Despite its growth and presence in various markets, BRP is still exposed to a variety of risks that can affect the business, and its moat.

  • Integration Risks: A big part of the business strategy of BRP depends on acquiring and integrating a lot of small insurance brokerages and consulting firms. This presents risks of integrating multiple business cultures, while also maintaining performance. It should be noted that even though they have had 107 acquisitions, they have only a small team dedicated to the onboarding and integration of these new businesses.
  • Market Competition: The industry has been undergoing a period of consolidation. There are many competitors that operate on the same level or on a more global scale that can put their earnings under pressure.
  • Economic and Interest Rate Sensitivity: Their business results are linked to both insurance premium and the health of the market. For example higher interest rates will lower demand for borrowing, which lowers revenues.

  • Financial Risk: The company is also relying heavily on debt for acquisitions, and a prolonged time with no profitability can cause major problems for the company’s solvency.

    • Also the debt level might increase to the point where rating agencies downgrade the company’s bond ratings, creating more difficulties in debt financing.
  • Regulatory and Legal Risk: The regulatory and legal framework that insurance brokers operate under is often complex and can create issues for the company. For example, changing regulations or legal action may hinder the company’s ability to operate in a region or on certain segments.

Management Commentary

Management has outlined on many occasions that they see a large runway for growth, and that the company is just starting the process of organic and inorganic growth. They are focused on improving margins by using technology to increase efficiency and scale, and are looking for acquisitions that have low operational overlap. The management also mentions a focus to reduce leverage and debt in the company. They have mentioned that the current financial position is sustainable, even if the environment becomes less favorable.

Understandability: 4 / 5

While the company’s business model of acquiring and integrating insurance brokerages is easy to follow and understand, analyzing the complex financial statements with one time charges and all the accounting adjustments is a bit more difficult.

  • The business model is easy to understand: The business involves a simple concept of bringing together insurance buyers and sellers with an advisory component, which is easy to conceptualize, even for someone not in the insurance industry.
  • The financial statements are very complicated: Due to the number of acquisitions and their related expenses, there are lots of onetime charges, amortization, and goodwill figures in their reports. The business also operates as an insurance middleman and is not easily quantifiable for profitability in each individual segment.
  • The complexity of the industry is high: The industry is complex with laws that vary in every jurisdiction and state. The industry is also undergoing rapid technological advancements that are not always easy to comprehend.

Balance Sheet Health: 4 / 5

BRP has significant assets and a history of strong cash flows, but a higher debt burden is something that should be watched.

  • Liquidity: The company has a good amount of assets to cover short-term liabilities. The 0.7 debt to equity ratio is a bit high, but they are still far from overleveraged.
  • Leverage: The company takes on a lot of new debt to fund the acquisitions, which means they are constantly borrowing to keep the acquisition pipeline going. Debt levels should be monitored closely.
  • Solvency: Their ability to pay off obligations is decent for the moment, but if the company doesn’t improve profitability their solvency will decrease in the future.
  • Free Cash Flow: While net income is negative at the moment, the free cash flow is still positive.

Conclusion BRP Group is an interesting business in a stable industry, and has a good growth runway ahead, but comes with risks like market competition, integration of different cultures and companies, and higher debt burden. It’s a company where the value is to be made over the long term rather than for immediate profits.