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BRP GROUP, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSEC onMarch 1, 2022 . In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in Part II, Item 1A. Risk Factors and Note Regarding Forward-Looking Statements included elsewhere in this Quarterly Report on Form 10-Q and under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K filed with theSEC onMarch 1, 2022 .
THE COMPANY
BRP Group, Inc. ("BRP Group ," the "Company," "we," "us" or "our") is an independent insurance distribution firm delivering tailored insurance and risk management insights and solutions that give our Clients the peace of mind to pursue their purpose, passion and dreams. We support our Clients, Colleagues,Insurance Company Partners and communities through the deployment of vanguard resources, technology and capital to drive organic and inorganic growth. When we consistently execute for these key stakeholders, we believe that the outcome is an increase in value for our fifth stakeholder, our shareholders. We are innovating the industry by taking a holistic and tailored approach to risk management, insurance and employee benefits. Our growth plan includes continuing to recruit, train and develop industry leading talent, continuing to add geographic representation, insurance product expertise and end-client industry expertise via our Partnership strategy, and the continued buildout of our MGA of the Future platform, which delivers proprietary, technology-enabled insurance solutions to our internalRisk Advisors as well as to a growing channel of external distribution partners. We are a destination employer supported by an award-winning culture, powered by exceptional people and fueled by industry-leading growth and innovation. We represent over 1,200,000 Clients acrossthe United States and internationally. Our more than 3,800 Colleagues include over 640Risk Advisors , who are fiercely independent, relentlessly competitive and "insurance geeks." We have approximately 125 offices in 23 states, all of which are equipped to provide diversified products and services to empower our Clients at every stage through our four Operating Groups. •Middle Market provides expertly-designed commercial risk management, employee benefits solutions and private risk management for mid-to-large-size businesses and high net worth individuals, as well as their families.
•MainStreet offers personal insurance, commercial insurance and life and health
solutions to individuals and businesses in their communities.
•Medicare offers consultation for government assistance programs and solutions, including traditional Medicare, Medicare Advantage and Affordable Care Act, to seniors and eligible individuals through a network of primarily independent contractor agents. In theMedicare Operating Group , we generate commissions and fees in the form of direct bill insurance placement and marketing income. Marketing income is earned through co-branded marketing campaigns with ourInsurance Company Partners . •Specialty consists of two distinct businesses with MGA of the Future representing approximately 86% of the revenue. Our specialty wholesale broker businesses deliver specialty insurers, professionals, individuals and niche industry businesses expanded access to exclusive specialty markets, capabilities and programs requiring complex underwriting and placement. Specialty also houses our MGA of the Future platform, in which we deliver proprietary, technology enabled insurance products that are then distributed (in many instances via technology and/or API integrations) internally via ourRisk Advisors in Middle Market and MainStreet and externally via select distribution partners, with a focus on sheltered channels where our products deliver speed, ease of use and certainty of execution, an example of which is our national embedded renter's insurance product sold at point of lease via integrations with property management software providers. In 2011, we adopted the "Azimuth" as our corporate constitution. Named after a historical navigation tool used to find "true north," the Azimuth asserts our core values, business basics and stakeholder promises. The ideals encompassed by the Azimuth support our mission to deliver indispensable, tailored insurance and risk management insights and solutions to our Clients. We strive to be regarded as the preeminent insurance advisory firm fueled by relationships, powered by people and exemplified by Client adoption and loyalty. This type of environment is upheld by the distinct vernacular we use to describe our services and culture. We are a firm, instead of an agency; we have Colleagues, instead of employees; we haveRisk Advisors , instead of producers/agents. We serve Clients instead of customers and we refer to our acquisitions as Partnerships. We refer to insurance brokerages that we have acquired, or in the case of asset acquisitions, the producers, as Partners.
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Seasonality
The insurance brokerage market is seasonal and our results of operations are somewhat affected by seasonal trends. Our Adjusted EBITDA and Adjusted EBITDA Margins are typically highest in the first quarter and lowest in the fourth quarter. This variation is primarily due to fluctuations in our revenues, while overhead remains consistent throughout the year. Our revenues are generally highest in the first quarter due to the impact of contingent payments received in the first quarter fromInsurance Company Partners that we cannot readily estimate before receipt without the risk of significant reversal and a higher degree of first quarter policy commencements and renewals in Medicare and certain Middle Market lines of business such as employee benefits and commercial. In addition, a higher proportion of our first quarter revenue is derived from our highest margin businesses. Partnerships can significantly impact Adjusted EBITDA and Adjusted EBITDA Margins in a given year and may increase the amount of seasonality within the business, especially results attributable to Partnerships that have not been fully integrated into our business or owned by us for a full year.
PARTNERSHIPS
We utilize strategic acquisitions, which we refer to as Partnerships, to complement and expand our business. We source Partnerships through proprietary deal flow, competitive auctions and cultivated industry relationships. We are currently considering Partnership opportunities in all of our Operating Groups, including businesses to complement or expand our MGA of the Future. The financial impact of Partnerships may affect the comparability of our results from period to period. Our acquisition strategy also entails certain risks, including the risks that we may not be able to successfully source, value, close, integrate and effectively manage businesses that we acquire. To mitigate that risk, we have a professional team focused on finding new Partners and integrating new Partnerships. Executing on Partnership opportunities is a key pillar in our long-term growth strategy over the next seven years. We completed three Partnerships for an aggregate purchase price of$415.4 million during the nine months endedSeptember 30, 2022 and ten Partnerships for an aggregate purchase price of$387.5 million during the nine months endedSeptember 30, 2021 . Partnerships completed during 2022 added a total of$4.4 million of premiums, commissions and fees receivable,$224.3 million of intangible assets and$188.7 million of goodwill to the condensed consolidated balance sheet on the Partnership date.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
2021
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements for the three and nine months endedSeptember 30, 2022 and the related notes and other financial information included elsewhere in this report. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K filed with theSEC onMarch 1, 2022 . 28
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The following is a discussion of our consolidated results of operations for the
three and nine months ended
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(in thousands) 2022 2021 Variance 2022 2021 Variance
Revenues:
Commissions and fees $ 259,368 $ 135,556
Operating expenses: Commissions, employee compensation and benefits 195,920 100,081 95,839 522,518 278,521 243,997 Other operating expenses 47,212 27,968 19,244 124,424 64,380 60,044 Amortization expense 23,180 12,596 10,584 59,912 33,875 26,037 Change in fair value of contingent consideration 21,695 11,341 10,354 (10,809) 23,163 (33,972) Depreciation expense 1,216 753 463 3,309 1,920 1,389 Total operating expenses 289,223 152,739 136,484 699,354 401,859 297,495 Operating income (loss) (29,855) (17,183) (12,672) 35,322 6,231 29,091 Other income (expense): Interest expense, net (20,766) (6,940) (13,826) (45,748) (18,431) (27,317) Other income (expense), net 3,914 (478) 4,392 25,151 (1,535) 26,686 Total other expense (16,852) (7,418) (9,434) (20,597) (19,966) (631) Net income (loss) (46,707) (24,601) (22,106) 14,725 (13,735) 28,460 Less: net income (loss) attributable to noncontrolling interests (21,914) (11,389) (10,525) 8,007 (5,736) 13,743 Net income (loss) attributable to BRP Group, Inc.$ (24,793) $ (13,212) $ (11,581) $ 6,718 $ (7,999) $ 14,717 Commissions and Fees We earn commissions and fees by facilitating the arrangement betweenInsurance Company Partners and individuals or businesses for the carrier to provide insurance to the insured party. Our commissions and fees are usually a percentage of the premium paid by the insured and generally depends on the type of insurance, the particular Insurance Company Partner and the nature of the services provided. Under certain arrangements with Clients, we earn pre-negotiated service fees in lieu of commissions. Additionally, we may also receive fromInsurance Company Partners a profit-sharing commission, or straight override, which represent forms of variable consideration associated with the placement of coverage and are based primarily on underwriting results, but may also contain considerations for volume, growth or retention. Commissions and fees increased$123.8 million and$326.6 million for the three and nine months endedSeptember 30, 2022 as compared to the same periods of 2021, respectively. The increase for the periods related to amounts attributable to Partners acquired during 2021 and 2022 prior to their having reached the twelve-month owned mark (such amounts, the "Partnership Contribution") and organic growth. The Partnership Contribution accounted for$85.8 million and$234.8 million of the increase to commissions and fees for the quarter and year-to-date periods, respectively, and organic growth accounted for$38.0 million and$91.8 million of the increase for the quarter and year-to-date periods, respectively.
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Major Sources of Commissions and Fees
The following table sets forth our commissions and fees by major source for the
periods indicated:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(in thousands) 2022 2021 Variance 2022 2021 Variance
Direct bill revenue $ 111,369 $ 58,582 $ 52,787 $ 336,563 $ 203,302 $ 133,261
Agency bill revenue 92,895 53,495 39,400 255,087 136,271 118,816
Profit-sharing revenue 15,044 8,105 6,939 49,422 26,572 22,850
Consulting and service fee revenue 17,572 7,893 9,679 44,097 22,470 21,627
Policy fee and installment fee
revenue 18,036 5,146 12,890 37,163 14,414 22,749
Other income 4,452 2,335 2,117 12,344 5,061 7,283
Total commissions and fees
Direct bill revenue represents commission revenue earned by providing insurance placement services to Clients, primarily for private risk management, commercial risk management, employee benefits and Medicare insurance types. Direct bill revenue increased by$52.8 million and$133.3 million for the three and nine months endedSeptember 30, 2022 as compared to the same periods of 2021, respectively. The Partnership Contribution accounted for$42.9 million and$105.2 million of the increase to direct bill revenue for the quarter and year-to-date periods, respectively. Organic growth for direct bill revenue was$9.9 million and$28.1 million for the quarter and year-to-date periods, respectively. Agency bill revenue primarily represents commission revenue earned by providing insurance placement services to clients wherein we act as an agent on behalf of the Client. Agency bill revenue increased$39.4 million and$118.8 million for the three and nine months endedSeptember 30, 2022 as compared to the same periods of 2021, respectively. The Partnership Contribution accounted for$29.7 million and$91.7 million of the increase to agency bill revenue for the quarter and year-to-date periods, respectively. Organic growth for agency bill revenue was$9.7 million and$27.1 million for the quarter and year-to-date periods, respectively. Profit-sharing revenue represents bonus-type or contingent revenue that is earned by us as a sales incentive provided by certainInsurance Company Partners . Profit-sharing revenue increased$6.9 million and$22.9 million for the three and nine months endedSeptember 30, 2022 as compared to the same periods of 2021, respectively, as a result of the Partnership Contribution of$3.8 million and$13.3 million , respectively, and organic growth of$3.1 million and$9.6 million , respectively. Profit-sharing revenue can be affected by higher loss ratios in our Middle Market and MainStreet Operating Groups, which is particularly acute in theFlorida homeowners marketplace. Consulting and service fee revenue represents fees received in lieu of a commission and specialty insurance consulting revenue. Consulting and service fee revenue increased$9.7 million and$21.6 million for the three and nine months endedSeptember 30, 2022 as compared to the same periods of 2021, respectively, as a result of the Partnership Contribution of$8.2 million and$17.8 million , respectively, and organic growth of$1.5 million and$3.8 million , respectively. Policy fee and installment fee revenue represents revenue earned for acting in the capacity of an MGA and providing payment processing and services and other administrative functions on behalf ofInsurance Company Partners . Policy fee and installment fee revenue increased$12.9 million and$22.7 million during the three and nine months endedSeptember 30, 2022 as compared to the same periods of 2021, respectively, primarily due to organic growth. These fees are generated by ourSpecialty Operating Group . Other income consists of Medicare marketing income that is based on agreed-upon cost reimbursement for fulfilling specific targeted marketing campaigns in addition to other ancillary income and premium financing income generated across all Operating Groups. Other income increased$2.1 million and$7.3 million for the three and nine months endedSeptember 30, 2022 as compared to the same periods of 2021, respectively. The increase in other income for the year-to-date period is primarily attributable to the Partnership Contribution for our Specialty and Middle Market Operating Groups.
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Commissions, Employee Compensation and Benefits
Commissions, employee compensation and benefits is our largest expense. It consists of (a) base compensation comprising salary, bonuses and benefits paid and payable to Colleagues, commissions paid to Colleagues and outside commissions paid to others; and (b) equity-based compensation associated with the grants of restricted and unrestricted stock awards to senior management, Colleagues,Risk Advisors and directors. We expect to continue to experience a general rise in commissions, employee compensation and benefits expense commensurate with expected growth in our revenue and headcount. We operate in competitive markets for human capital and need to maintain competitive compensation levels as we expand geographically and create new products and services. Our Colleague-related costs have risen as a result of the increasingly competitive market and the inflationary environment. Our compensation arrangements with our employees contain significant bonus or commission components driven by the results of our operations. Therefore, as we grow commissions and fees, we expect compensation costs to rise. Commissions, employee compensation and benefits expenses increased$95.8 million and$244.0 million for the three and nine months endedSeptember 30, 2022 as compared to the same periods of 2021, respectively. The Partnership Contribution accounted for$44.4 million and$126.7 million of the increase to commissions, employee compensation and benefits for the quarter and year-to-date periods, respectively. Share-based compensation expense increased$4.6 million and$14.1 million , respectively, as a result of equity grants awarded to all newly hired Colleagues, including those who joined us through Partnerships, and grants to reward Colleagues, including members of senior management. The remaining increase in commissions, employee compensation and benefits expense can be attributed to higher commissions expense relating to our organic growth, higher compensation and benefits related to hiring to support our growth, and the inflationary environment, which has resulted in significant increases in the cost of human capital. Other Operating Expenses Other operating expenses include travel, accounting, legal and other professional fees, placement fees, rent, office expenses and other costs associated with our operations. Our occupancy-related costs and professional services expenses, in particular, generally increase or decrease in relative proportion to the number of our employees and the overall size and scale of our business operations. Other operating expenses increased$19.2 million for the three months endedSeptember 30, 2022 as compared to the same period of 2021, which was primarily attributable to increases in dues and subscriptions of$5.1 million from our investment in technology to support our growth, travel and entertainment of$4.7 million relating to integration of our 2021 Partnerships and our leadership and Risk Advisor conference, advertising and marketing of$2.8 million , rent expense of$1.4 million relating to expansion of our operating locations, Colleague education and welfare of$1.2 million relating to investments in our Colleagues, and repairs and maintenance of$1.1 million . Other operating expenses increased$60.0 million for the nine months endedSeptember 30, 2022 as compared to the same period of 2021, which was primarily attributable to increases in dues and subscriptions of$12.0 million from our investment in technology to support our growth, travel and entertainment of$9.2 million relating to integration of our 2021 Partnerships and our leadership and Risk Advisor conference, rent expense of$7.2 million relating to expansion of our operating locations, Colleague education and welfare of$5.6 million relating to investments in our Colleagues, advertising and marketing of$5.4 million , professional fees of$3.8 million , licenses and taxes of$3.5 million relating to revenue growth, repairs and maintenance of$3.4 million , and recruiting expense of$2.4 million .
Amortization Expense
Amortization expense increased$10.6 million and$26.0 million for the three and nine months endedSeptember 30, 2022 as compared to the same periods of 2021, respectively, which was driven by amortization of intangible assets recorded in connection with Partnerships over the past twelve months.
Change in Fair Value of Contingent Consideration
Change in fair value of contingent consideration was a$21.7 million loss for the three months endedSeptember 30, 2022 as compared to a$11.3 million loss for the same period of 2021. The change in fair value of contingent consideration for the third quarter of 2022 was impacted by changes in growth trends of certain partners, offset in part by high market volatility and rising interest rates, which resulted in an overall higher contingent earnout consideration value.
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Change in fair value of contingent consideration was a$10.8 million gain for the nine months endedSeptember 30, 2022 as compared to a$23.2 million loss for the same period of 2021. The change in fair value of contingent consideration for the year-to-date period of 2022 was impacted by high market volatility and rising interest rates, offset in part by changes in growth trends of certain partners, which resulted in an overall lower contingent earnout consideration value. Depreciation Expense Depreciation expense increased$0.5 million and$1.4 million for the three and nine months endedSeptember 30, 2022 as compared to the same periods of 2021, respectively, which was driven by our growth.
Interest Expense, Net
Interest expense, net increased$13.8 million and$27.3 million for the three and nine months endedSeptember 30, 2022 as compared to the same periods of 2021, respectively, resulting from higher average borrowings outstanding and higher average interest rates related to increases in the benchmark rates for our variable rate debt.
Refer to Item 3. Qualitative and Quantitative Disclosures About Market Risk for
further discussion of the impact of rising interest rates on our results of
operations, financial condition and cash flows.
Other Income (Expense), Net
Other income (expense), net was$3.9 million and$25.2 million for the three and nine months endedSeptember 30, 2022 , primarily as a result of a gain on interest rate caps of$4.2 million and$25.4 million recorded during the quarter and year-to-date periods, respectively, in connection with rising interest rates and market estimates for future rate increases. The gain for the year-to-date period includes$13.5 million that was realized in connection with our sale of three interest rate caps during the second quarter.
NON-GAAP FINANCIAL MEASURES
Adjusted EBITDA, Adjusted EBITDA Margin, Organic Revenue, Organic Revenue
Growth, Adjusted Net Income and Adjusted Diluted Earnings Per Share ("EPS"), are
not measures of financial performance under GAAP and should not be considered
substitutes for GAAP measures, including commissions and fees (for Organic
Revenue and Organic Revenue Growth), net income (loss) (for Adjusted EBITDA and
Adjusted EBITDA Margin) net income (loss) attributable to BRP Group, Inc. (for
Adjusted Net Income) or diluted earnings (loss) per share (for Adjusted Diluted
EPS), which we consider to be the most directly comparable GAAP measures. These
non-GAAP financial measures have limitations as analytical tools, and when
assessing our operating performance, you should not consider these non-GAAP
financial measures in isolation or as substitutes for commissions and fees, net
income (loss), net income (loss) attributable to BRP Group, Inc. , diluted
earnings (loss) per share or other consolidated income statement data prepared
in accordance with GAAP. Other companies in our industry may define or calculate
these non-GAAP financial measures differently than we do, and accordingly these
measures may not be comparable to similarly titled measures used by other
companies.
We define Adjusted EBITDA as net income (loss) before interest, taxes,
depreciation, amortization, change in fair value of contingent consideration and
certain items of income and expense, including share-based compensation expense,
transaction-related expenses related to Partnerships, severance, and certain
non-recurring items, including those related to raising capital. We believe that
Adjusted EBITDA is an appropriate measure of operating performance because it
eliminates the impact of income and expenses that do not relate to business
performance, and that the presentation of this measure enhances an investor's
understanding of our financial performance.
Adjusted EBITDA Margin is Adjusted EBITDA divided by commissions and fees.
Adjusted EBITDA Margin is a key metric used by management and our board of
directors to assess our financial performance. We believe that Adjusted EBITDA
Margin is an appropriate measure of operating performance because it eliminates
the impact of income and expenses that do not relate to business performance,
and that the presentation of this measure enhances an investor's understanding
of our financial performance. We believe that Adjusted EBITDA Margin is helpful
in measuring profitability of operations on a consolidated level.
Adjusted EBITDA and Adjusted EBITDA Margin have important limitations as
analytical tools. For example, Adjusted EBITDA and Adjusted EBITDA Margin:
•do not reflect any cash capital expenditure requirements for the assets being
depreciated and amortized that may have to be replaced in the future;
•do not reflect changes in, or cash requirements for, our working capital needs;
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•do not reflect the impact of certain cash charges resulting from matters we
consider not to be indicative of our ongoing operations;
•do not reflect the interest expense or the cash requirements necessary to
service interest or principal payments on our debt;
•do not reflect share-based compensation expense and other non-cash charges; and
•exclude certain tax payments that may represent a reduction in cash available
to us.
We calculate Organic Revenue based on commissions and fees for the relevant period by excluding the first twelve months of commissions and fees generated from new Partners. Organic Revenue Growth is the change in Organic Revenue period-to-period, with prior period results adjusted to include commissions and fees that were excluded from Organic Revenue in the prior period because the relevant Partners had not yet reached the twelve-month owned mark, but which have reached the twelve-month owned mark in the current period. For example, revenues from a Partner acquired onJune 1, 2021 are excluded from Organic Revenue for 2021. However, afterJune 1, 2022 , results fromJune 1, 2021 toDecember 31, 2021 for such Partners are compared to results fromJune 1, 2022 toDecember 31, 2022 for purposes of calculating Organic Revenue Growth in 2022. Organic Revenue Growth is a key metric used by management and our board of directors to assess our financial performance. We believe that Organic Revenue and Organic Revenue Growth are appropriate measures of operating performance as they allow investors to measure, analyze and compare growth in a meaningful and consistent manner. Adjusted Net Income is presented for the purpose of calculating Adjusted Diluted EPS. We define Adjusted Net Income as net income (loss) attributable toBRP Group, Inc. adjusted for depreciation, amortization, change in fair value of contingent consideration and certain items of income and expense, including share-based compensation expense, transaction-related expenses related to Partnerships, severance, and certain non-recurring costs that, in the opinion of management, significantly affect the period-over-period assessment of operating results, and the related tax effect of those adjustments. We believe that Adjusted Net Income is an appropriate measure of operating performance because it eliminates the impact of expenses that do not relate to business performance. Adjusted Diluted EPS measures our per share earnings excluding certain expenses as discussed above and assuming all shares of Class B common stock were exchanged for Class A common stock. Adjusted Diluted EPS is calculated as Adjusted Net Income divided by adjusted dilutive weighted-average shares outstanding. We believe Adjusted Diluted EPS is useful to investors because it enables them to better evaluate per share operating performance across reporting periods. 33
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Adjusted EBITDA and Adjusted EBITDA Margin
The following table reconciles Adjusted EBITDA and Adjusted EBITDA Margin to net
income (loss), which we consider to be the most directly comparable GAAP
financial measure:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(in thousands, except percentages) 2022 2021 2022 2021
Commissions and fees $ 259,368 $ 135,556 $ 734,676 $ 408,090
Net income (loss) $ (46,707) $ (24,601) $ 14,725 $ (13,735)
Adjustments to net income (loss):
Amortization expense 23,180 12,596 59,912 33,875
Interest expense, net 20,766 6,940 45,748 18,431
Transaction-related Partnership and integration
expenses 12,128 5,556 29,552 11,226
Share-based compensation 8,388 3,834 26,065 11,921
(Gain) loss on interest rate caps (4,151) 334 (25,420) 1,159
Change in fair value of contingent
consideration 21,695 11,341 (10,809) 23,163
Depreciation expense 1,216 753 3,309 1,920
Severance 260 481 1,135 481
Other(1) 5,109 1,951 13,083 4,222
Adjusted EBITDA $ 41,884 $ 19,185 $ 157,300 $ 92,663
Adjusted EBITDA Margin 16 % 14 % 21 % 23 %
__________
(1) Other addbacks to Adjusted EBITDA include certain expenses that are
considered to be non-recurring or non-operational, including certain recruiting
costs, remediation efforts, professional fees and litigation costs, and bonuses.
Organic Revenue and Organic Revenue Growth
The following table reconciles Organic Revenue and Organic Revenue Growth to
commissions and fees, which we consider to be the most directly comparable GAAP
financial measure:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(in thousands, except percentages) 2022 2021 2022 2021
Commissions and fees $ 259,368 $ 135,556
Partnership commissions and fees(1) (85,638) (52,673)
(234,601) (195,781) Organic Revenue$ 173,730 $ 82,883 $ 500,075 $ 212,309 Organic Revenue Growth(2)$ 38,014 $ 16,978 $ 91,825 $ 40,907 Organic Revenue Growth %(2) 28 % 26 % 22 % 24 %
__________
(1) Includes the first twelve months of such commissions and fees generated from newly acquired Partners. (2) Organic Revenue for the three and nine months endedSeptember 30, 2021 used to calculate Organic Revenue Growth for the three and nine months endedSeptember 30, 2022 was$135.7 million and$408.3 million , respectively, which is adjusted to reflect revenues from Partnerships that reached the twelve-month owned mark during the three and nine months endedSeptember 30, 2022 .
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Adjusted Net Income and Adjusted Diluted EPS
The following table reconciles Adjusted Net Income to net income (loss) attributable toBRP Group, Inc. and reconciles Adjusted Diluted EPS to diluted earnings (loss) per share, which we consider to be the most directly comparable GAAP financial measures: For the Three Months For the Nine Months Ended September 30, Ended September 30, (in thousands, except per share data) 2022 2021(1) 2022 2021(1) Net income (loss) attributable to BRP Group, Inc.$ (24,793) $ (13,212) $ 6,718 $ (7,999) Net income (loss) attributable to noncontrolling interests (21,914) (11,389) 8,007 (5,736) Amortization expense 23,180 12,596 59,912 33,875Transaction-related Partnership and integration expenses 12,128 5,556 29,552 11,226 Share-based compensation 8,388 3,834 26,065 11,921 (Gain) loss on interest rate caps, net of cash settlements (3,602) 334 (24,871) 1,159 Change in fair value of contingent consideration 21,695 11,341 (10,809) 23,163 Amortization of deferred financing costs 1,420 858 3,894 2,301 Depreciation 1,216 753 3,309 1,920 Severance 260 481 1,135 481 Other(2) 5,109 1,951 13,083 4,222 Adjusted pre-tax income 23,087 13,103 115,995 76,533 Adjusted income taxes(3) 2,286 1,297 11,484 7,577 Adjusted Net Income$ 20,801 $ 11,806 $ 104,511 $ 68,956 Weighted-average shares of Class A common stock outstanding - diluted 57,282 46,446 59,895 45,132 Dilutive effect of unvested restricted shares of Class A common stock 3,675 1,818 - 1,737 Exchange of Class B shares(4) 55,151 52,148 55,743 50,521 Adjusted dilutive weighted-average shares outstanding 116,108 100,412 115,638 97,390 Adjusted Diluted EPS$ 0.18 $ 0.12 $ 0.90 $ 0.71 Diluted earnings (loss) per share$ (0.43) $ (0.28) $ 0.11 $ (0.18) Effect of exchange of Class B shares and net income (loss) attributable to noncontrolling interests per share 0.03 0.03 0.02 0.04 Other adjustments to earnings (loss) per share 0.60 0.38 0.87 0.93 Adjusted income taxes per share (0.02) (0.01) (0.10) (0.08) Adjusted Diluted EPS$ 0.18 $
0.12
___________
(1) Calculation was adjusted in the fourth quarter of 2021 to include
depreciation. Prior year amounts have been conformed to current year
presentation.
(2) Other addbacks to Adjusted Net Income include certain expenses that are
considered to be non-recurring or non-operational, including certain recruiting
costs, remediation efforts, professional fees and litigation costs, and bonuses.
(3) Represents corporate income taxes at assumed effective tax rate of 9.9%
applied to adjusted pre-tax income.
(4) Assumes the full exchange of Class B shares for Class A common stock
pursuant to the Amended LLC Agreement.
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OPERATING GROUP RESULTS
Commissions and Fees
In the Middle Market, MainStreet and Specialty Operating Groups, we generate commissions and fees from insurance placement under both agency bill and direct bill arrangements. In addition, we generate profit-sharing income in each of those segments based on either the underlying Book of Business or performance, such as loss ratios. In the Middle Market and Specialty Operating Groups, we generate fees from service fee and consulting arrangements. Service fee arrangements are in place with certain customers in lieu of commission arrangements. In theSpecialty Operating Group , we generate policy fee and installment fee revenue for acting in the capacity of an MGA and fulfilling certain services on behalf ofInsurance Company Partners . In theMedicare Operating Group , we generate commissions and fees in the form of direct bill insurance placement and marketing income. Marketing income is earned through co-branded marketing campaigns with ourInsurance Company Partners . The following table sets forth our commissions and fees byOperating Group and for Corporate and Other by amount and as a percentage of our commissions and fees: Commissions and
Fees by
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2022 2021 Variance 2022 2021 Variance
Percent of Percent of Percent of Percent of
Operating Group Amount Business Amount Business Amount % Amount Business Amount Business Amount %
Middle Market $ 130,216 50 % $ 80,087 60 % $ 50,129 63 % $ 433,151 59 % $ 266,751 65 % $ 166,400 62 %
Specialty 97,929 38 % 41,986 31 % 55,943 133 % 221,753 30 % 97,173 24 % 124,580 128 %
MainStreet 39,894 15 % 8,760 6 % 31,134 355 % 78,601 11 % 25,558 6 % 53,043 208 %
Medicare 7,890 3 % 5,665 4 % 2,225 39 % 28,166 4 % 20,269 5 % 7,897 39 %
Corporate and Other (16,561) (6) % (942) (1) % (15,619) n/m (26,995) (4) % (1,661) - % (25,334) n/m
$ 259,368 $ 135,556 $ 123,812 $ 734,676 $ 408,090 $ 326,586
__________
n/m not meaningful
Commissions and fees for our Middle Market Operating Group increased $50.1
million for the third quarter of 2022 as compared to the same period of 2021 as
a result of the Partnership Contribution of $36.5 million and organic growth of
$13.6 million . Organic growth included $12.0 million related to base commissions
and fees.
Commissions and fees for our Middle Market Operating Group increased $166.4
million for the first nine months of 2022 as compared to the same period of 2021
as a result of the Partnership Contribution of $130.4 million and organic growth
of $36.0 million . Organic growth included $30.7 million related to base
commissions and fees and $5.6 million related to contingent revenue.
Commissions and fees for our Specialty Operating Group increased $55.9 million
for the third quarter of 2022 as compared to the same period of 2021 as a result
of the Partnership Contribution of $18.1 million , organic growth of $22.0
million and intercompany revenue of $15.8 million . Organic growth included $19.9
million attributable to our renter's and homeowner's insurance products, of
which $10.4 million is related to the QBE Program Administrator Agreement, net
of intercompany, which was entered into in connection with the Westwood
Partnership , and $1.9 million related to contingent revenue.
Commissions and fees for our Specialty Operating Group increased $124.6 million
for the first nine months of 2022 as compared to the same period of 2021 as a
result of the Partnership Contribution of $54.4 million , organic growth of $45.7
million and intercompany revenue of $24.5 million . Organic growth included $42.2
million attributable to our renter's and homeowner's insurance products, of
which $17.9 million is related to the QBE Program Administrator Agreement, net
of intercompany, which was entered into in connection with the Westwood
Partnership , and $3.2 million related to contingent revenue.
Commissions and fees for our MainStreet Operating Group increased $31.1 million
for the third quarter of 2022 as compared to the same period of 2021 as a result
of the Partnership Contribution of $29.1 million and organic growth of $2.0
million , primarily related to base commissions and fees.
36
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Commissions and fees for ourMainStreet Operating Group increased$53.0 million for the first nine months of 2022 as compared to the same period of 2021 as a result of the Partnership Contribution of$47.1 million and organic growth of$5.9 million , primarily related to base commissions and fees. Commissions and fees for ourMedicare Operating Group increased$2.2 million for the third quarter of 2022 as compared to the same period of 2021 as a result of the Partnership Contribution of$1.6 million and organic growth of$0.6 million . Commissions and fees for ourMedicare Operating Group increased$7.9 million for the first nine months of 2022 as compared to the same period of 2021 as a result of organic growth of$4.3 million and the Partnership Contribution of$3.6 million . Revenue reported for Corporate and Other relates to the elimination of intercompany revenue. During the third quarter of 2022, theMiddle Market Operating Group recorded intercompany commissions and fees from activity with theSpecialty Operating Group of$0.4 million ; theSpecialty Operating Group recorded intercompany commissions and fees from activity with theMainStreet Operating Group and itself of$15.8 million ; theMainStreet Operating Group recorded intercompany commissions and fees from activity with the Middle Market and Specialty Operating Groups of$0.2 million ; and theMedicare Operating Group recorded intercompany commissions and fees from activity with itself of$0.2 million . These amounts were eliminated through Corporate and Other. During the first nine months of 2022, theMiddle Market Operating Group recorded intercompany commissions and fees from activity with theSpecialty Operating Group of$1.1 million ; theSpecialty Operating Group recorded intercompany commissions and fees from activity with theMainStreet Operating Group and itself of$24.5 million ; theMainStreet Operating Group recorded intercompany commissions and fees from activity with the Middle Market and Specialty Operating Groups of$0.4 million ; and theMedicare Operating Group recorded intercompany commissions and fees from activity with itself of$1.0 million . These amounts were eliminated through Corporate and Other. The substantial increase in intercompany commissions and fees for each of the quarter and year-to-date periods is related to the QBE Program Administrator Agreement, which was entered into in connection with theWestwood Partnership . We expect that revenue relating to this agreement will continue to grow as we serve as the MGA on more intersegment revenue such as homeowners' insurance sold through theMainStreet Operating Group .
Commissions, Employee Compensation and Benefits
The following table sets forth our commissions, employee compensation and
benefits by
percentage of our commissions, employee compensation and benefits:
Commissions, Employee Compensation and Benefits by Operating Group (in thousands, except percentages)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2022 2021 Variance 2022 2021 Variance
Percent of Percent of Percent of Percent of
Operating Group Amount Business Amount Business Amount % Amount Business Amount Business Amount %
Middle Market $ 97,417 50 % $ 56,690 56 % $ 40,727 72 % $ 284,605 55 % $ 164,412 59 % $ 120,193 73 %
Specialty 73,293 37 % 30,739 31 % 42,554 138 % 160,830 31 % 71,118 26 % 89,712 126 %
MainStreet 23,039 12 % 5,547 6 % 17,492 n/m 47,747 9 % 16,573 6 % 31,174 188 %
Medicare 5,645 3 % 3,843 4 % 1,802 47 % 17,791 3 % 12,196 4 % 5,595 46 %
Corporate and Other (3,474) (2) % 3,262 3 % (6,736) (206) % 11,545 2 % 14,222 5 % (2,677) (19) %
$ 195,920 $ 100,081 $ 95,839 $ 522,518 $ 278,521 $ 243,997
__________
n/m not meaningful
37
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Commissions, employee compensation and benefits expenses increased across all Operating Groups for each of the quarter and year-to-date periods of 2022 as compared to the same periods of 2021. The Partnership Contribution accounted for$19.7 million ,$9.5 million ,$14.1 million and$1.2 million of the increase to commissions, employee compensation and benefits expenses in the Middle Market, Specialty, MainStreet and Medicare Operating Groups, respectively, for the quarter. The Partnership Contribution accounted for$72.7 million ,$29.5 million ,$22.6 million and$1.9 million of the increase to commissions, employee compensation and benefits expenses in the Middle Market, Specialty, MainStreet and Medicare Operating Groups, respectively, for the year-to-date period. Commissions, employee compensation and benefits expenses also increased across all Operating Groups as a result of continued investments in hiring for our growth services team to support our growth, which costs are primarily allocated among the Operating Groups, and continued investment in sales and service talent. In addition, there have been significant increases in the cost of human capital in the current year as a result of the increasingly competitive market and the inflationary environment, which has impacted employee compensation and benefits costs for both the quarter and year-to-date periods. Commissions, employee compensation and benefits expenses for Corporate and Other decreased for both the quarter and year-to-date periods of 2022 as compared to the same period of 2021 as a result of the elimination of intercompany expense, offset in part by our continued investments in hiring to support our growth and additional share-based compensation expense. Commissions, employee compensation and benefits expenses for Corporate and Other includes elimination amounts of$16.6 million and$27.0 million for the quarter and year-to-date periods of 2022, respectively, as compared to$0.9 million and$1.7 million for the quarter and year-to-date periods of 2021, respectively. The substantial increase in intercompany commissions, employee compensation and benefits expense for each of the quarter and year-to-date periods is related to the QBE Program Administrator Agreement. We expect that commissions expense relating to this agreement will continue to grow as we serve as the MGA on more intersegment revenue such as homeowners' insurance sold through theMainStreet Operating Group . Other Operating Expenses The following table sets forth our other operating expenses byOperating Group and for Corporate and Other by amount and as a percentage of our other operating expenses: Other Operating
Expenses by
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2022 2021 Variance 2022 2021 Variance
Percent of Percent of Percent of Percent of
Operating Group Amount Business Amount Business Amount % Amount Business Amount Business Amount %
Middle Market $ 20,130 43 % $ 13,749 49 % $ 6,381 46 % $ 52,703 42 % $ 31,579 49 % $ 21,124 67 %
Specialty 8,031 17 % 4,343 16 % 3,688 85 % 21,184 17 % 8,386 13 % 12,798 153 %
MainStreet 4,422 9 % 1,169 4 % 3,253 278 % 11,969 10 % 3,464 5 % 8,505 246 %
Medicare 1,778 4 % 1,134 4 % 644 57 % 4,497 4 % 3,621 6 % 876 24 %
Corporate and Other 12,851 27 % 7,573 27 % 5,278 70 % 34,071 27 % 17,330 27 % 16,741 97 %
$ 47,212 $ 27,968 $ 19,244 $ 124,424 $ 64,380 $ 60,044
Other operating expenses for our Middle Market Operating Group increased $6.4
million for the third quarter of 2022 as compared to the same period of 2021
driven by higher costs for dues and subscriptions of $2.6 million from our
investment in technology to support our growth, travel and entertainment of $1.7
million relating to integration of our 2021 Partnerships, and rent expense of
$0.4 million relating to expansion of our operating locations. Other operating
expenses for our Specialty Operating Group increased $3.7 million for the third
quarter of 2022 as compared to the same period of 2021 driven by higher costs
for dues and subscriptions of $1.1 million from our investment in technology to
support our growth, travel and entertainment of $0.9 million relating to
integration of our 2021 Partnerships, bank charges of $0.3 million , and
consulting fees and recruiting expense of $0.2 million each. Other operating
expenses for our MainStreet Operating Group increased $3.3 million for the third
quarter of 2022 as compared to the same period of 2021 driven by higher
advertising and marketing of $1.6 million , rent expense of $0.6 million , dues
and subscriptions of $0.4 million from our investment in technology to support
our growth, travel and entertainment of $0.3 million and recruiting expense of
$0.2 million . Other operating expenses for our Medicare Operating Group
increased $0.6 million for the third quarter of 2022 as compared to the same
period of 2021 driven by higher dues and subscriptions from our investment in
technology to support our growth and advertising and marketing expenses of $0.2
million each.
38
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Other operating expenses for ourMiddle Market Operating Group increased$21.1 million for the first nine months of 2022 as compared to the same period of 2021 driven by higher costs for dues and subscriptions of$6.3 million from our investment in technology to support our growth, travel and entertainment of$4.4 million relating to integration of our 2021 Partnerships, rent expense of$4.3 million relating to expansion of our operating locations, Colleague education and welfare of$1.8 million relating to investments in our Colleagues, advertising and marketing of$1.2 million , licenses and taxes of$1.1 million and insurance expense of$1.0 million . Other operating expenses for ourSpecialty Operating Group increased$12.8 million for the first nine months of 2022 as compared to the same period of 2021 driven by higher costs for dues and subscriptions of$2.2 million from our investment in technology to support our growth, travel and entertainment of$1.6 million relating to integration of our 2021 Partnerships, rent expense of$0.8 million , Colleague education and welfare relating to investments in our Colleagues, bank charges and consulting fees of$0.7 million each, advertising and marketing, licenses and taxes and professional fees of$0.6 million each. Other operating expenses for ourMainStreet Operating Group increased$8.5 million for the first nine months of 2022 as compared to the same period of 2021 driven by higher advertising and marketing of$2.1 million , professional fees and rent expense relating to expansion of our operating locations of$1.7 million each, dues and subscriptions of$0.9 million from our investment in technology to support our growth, and recruiting expense of$0.7 million . Other operating expenses for ourMedicare Operating Group increased$0.9 million for the first nine months of 2022 as compared to the same period of 2021 driven by higher costs for advertising and marketing of$0.5 million and dues and subscriptions of$0.3 million . Other operating expenses in Corporate and Other increased$5.3 million for the third quarter of 2022 as compared to the same period of 2021 due to higher costs for travel and entertainment of$1.7 million relating to our leadership and Risk Advisor conference, professional fees of$1.2 million , Colleague education and welfare of$1.0 million relating to investments in our Colleagues, advertising and marketing and dues and subscriptions of$0.8 million each and repairs and maintenance of$0.6 million . Other operating expenses in Corporate and Other increased$16.7 million for the first nine months of 2022 as compared to the same period of 2021 due to higher costs for Colleague education and welfare of$2.9 million relating to investments in our Colleagues, travel and entertainment of$2.8 million relating to our leadership and Risk Advisor conference, dues and subscriptions of$2.4 million , professional fees of$2.3 million , repairs and maintenance of$2.0 million , licenses and taxes of$1.6 million and recruiting expense of$1.1 million .
Amortization Expense
The following table sets forth our amortization by
Corporate and Other by amount and as a percentage of our amortization:
Amortization
Expense by
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2022 2021 Variance 2022 2021 Variance
Percent of Percent of Percent of Percent of
Operating Group Amount Business Amount Business Amount % Amount Business Amount Business Amount %
Middle Market $ 12,576 55 % $ 8,811 70 % $ 3,765 43 % $ 37,660 63 % $ 23,722 69 % $ 13,938 59 %
Specialty 4,275 18 % 2,936 23 % 1,339 46 % 12,689 21 % 7,663 23 % 5,026 66 %
MainStreet 5,869 25 % 395 3 % 5,474 n/m 8,275 14 % 1,221 4 % 7,054 n/m
Medicare 459 2 % 452 4 % 7 2 % 1,284 2 % 1,266 4 % 18 1 %
Corporate and Other 1 - % 2 - % (1) - % 4 - % 3 - % 1 - %
$ 23,180 $ 12,596 $ 10,584 $ 59,912 $ 33,875 $ 26,037
__________
n/m not meaningful
Amortization expense increased for our Middle Market, Specialty and MainStreet
Operating Groups for each of the quarter and year-to-date periods of 2022 as
compared to the same periods of 2021 driven by amortization related to Partners
acquired over the past twelve months. Amortization expense for the Medicare
Operating Group was relatively flat.
39
--------------------------------------------------------------------------------
Change in Fair Value of Contingent Consideration
The following table sets forth our change in fair value of contingent
consideration by
fair value of contingent consideration:
Change in Fair Value of Contingent Consideration by Operating Group (in thousands, except percentages)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2022 2021 Variance 2022 2021 Variance
Percent of Percent of Percent of Percent of
Operating Group Amount Business Amount Business Amount % Amount Business Amount Business Amount %
Middle Market $ 24,897 115 % $ 7,737 68 % $ 17,160 222 % $ (6,115) 57 % $ 16,783 72 % $ (22,898) (136) %
Specialty (2,931) (14) % 3,002 26 % (5,933) (198) % (4,828) 45 % 5,485 24 % (10,313) (188) %
MainStreet (487) (2) % 420 4 % (907) (216) % (49) - % 594 3 % (643) (108) %
Medicare 216 1 % 182 2 % 34 19 % 183 (2) % 301 1 % (118) (39) %
$ 21,695 $ 11,341
$ 10,354 $ (10,809) $ 23,163 $ (33,972) The change in fair value of contingent consideration for the third quarter of 2022 was impacted by changes in growth trends of certain partners, offset in part by high market volatility and rising interest rates, which resulted in an overall higher contingent earnout consideration value. The change in fair value of contingent consideration for the year-to-date period of 2022 was impacted by high market volatility and rising interest rates, offset in part by changes in growth trends of certain partners, which resulted in an overall lower contingent earnout consideration value.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs for the next twelve months will include cash to (i) provide capital to facilitate the organic growth of our business and to fund future Partnerships, (ii) pay operating expenses, including cash compensation to our employees and expenses related to being a public company, (iii) make payments under the Tax Receivable Agreement, (iv) pay interest and principal due on borrowings under the JPM Credit Agreement, (v) pay contingent earnout liabilities and (vi) pay taxes.
We have historically financed our operations and funded our debt service through
the sale of our insurance products and services, and we have financed
significant cash needs to fund growth through the acquisition of Partners
through debt and equity financing.
AtSeptember 30, 2022 , our cash and cash equivalents were$158.6 million and we had$73.0 million of available borrowing capacity on the Revolving Facility under the JPM Credit Agreement. We believe that our cash and cash equivalents, cash flow from operations and available borrowings will be sufficient to fund our working capital and meet our commitments for the next twelve months and beyond. In connection with our continuous exploration of Partnership opportunities, we will consider raising additional debt or equity financing if and as necessary to support our growth.
JPM Credit Agreement
As ofDecember 31, 2021 , our JPM Credit Agreement provided for senior secured credit facilities in an aggregate principal amount of$1.325 billion , which consisted of (i) a term loan facility in the principal amount of$850.0 million maturing in 2027 (the "Term Loan B") and (ii) a revolving credit facility with commitments in an aggregate principal amount of$475.0 million maturing in 2025 (the "Revolving Facility"). OnMarch 28, 2022 , the Company entered into Amendment No. 5 to the JPM Credit Agreement, under which (i) the aggregate principal amount of the Revolving Facility was increased from$475.0 million to$600.0 million and (ii) the interest rate on the Revolving Facility changed to the SOFR, plus a credit spread adjustment of 10 bps, plus an amount between 200 bps and 300 bps based on the total net leverage ratio, (iii) the total net leverage ratio covenant increased to 7.0x consolidated EBITDA and (iv) the maturity of the Revolving Facility was extended toApril 1, 2027 . The other terms of the Revolving Facility and the terms of the Term Loan B remained unchanged.
40
--------------------------------------------------------------------------------
The Term Loan B bears interest at LIBOR plus 350 bps, subject to a LIBOR floor of 50 bps. The applicable interest rate on the Term Loan B atSeptember 30, 2022 was 6.26%. Borrowings under the Revolving Facility accrue interest at SOFR plus 210 bps to SOFR plus 310 bps based on total net leverage ratio. BRP will pay a letter of credit fee equal to the margin then in effect with respect to SOFR loans under the Revolving Facility multiplied by the daily amount available to be drawn under any letter of credit, a fronting fee and any customary documentary and processing charges for any letter of credit issued under the JPM Credit Agreement. The outstanding borrowings on the Revolving Facility of$527.0 million had an applicable interest rate of 6.07% atSeptember 30, 2022 . The Revolving Facility is also subject to a commitment fee of 0.40% on the unused capacity atSeptember 30, 2022 . The Revolving Facility and the Term Loan B are collateralized by a first priority lien on substantially all the assets of BRP, including a pledge of all equity securities of certain of its subsidiaries. The JPM Credit Agreement contains covenants that, among other things, restrict our ability to make certain restricted payments, incur additional debt, engage in certain asset sales, mergers, acquisitions or similar transactions, create liens on assets, engage in certain transactions with affiliates, change our business, make certain investments or restrict BRP's ability to make dividends or other distributions toBRP Group . In addition, the JPM Credit Agreement contains financial covenants requiring us to maintain our Total First Lien Net Leverage Ratio (as defined in the JPM Credit Agreement) at or below 7.00 to 1.00.
Contractual Obligations and Commitments
The following table represents our contractual obligations, aggregated by type, atSeptember 30, 2022 : Payments Due by Period Less than More than (in thousands) Total 1 year 1-3 years 3-5 years 5 years Operating leases(1)$ 120,554 $ 17,982
Debt obligations payable(2)
1,769,375 92,821 184,043 692,956 799,555 Maximum future contingent payment obligation(3) 980,505 150,802 819,703 10,000 - USF Grant 5,260 520 1,388 1,720 1,632 Total$ 2,875,694 $ 262,125 $ 1,041,944 $ 737,150 $ 834,475 __________ (1) Represents noncancelable operating leases for our facilities. Rent expense was$19.7 million and$12.5 million for the nine months endedSeptember 30, 2022 and 2021, respectively. (2) Represents scheduled debt obligations and estimated interest payments under the JPM Credit Agreement. (3) Includes$229.6 million of current and non-current estimated contingent earnout liabilities atSeptember 30, 2022 . Our contractual obligations and commitments are comprised of operating lease obligations, principal and interest payments on our borrowings under the JPM Credit Agreement, potential payments of contingent earnout liabilities and our commitment to theUniversity of South Florida ("USF"). Our operating lease obligations represent noncancelable agreements for our corporate headquarters and office space for our insurance brokerage business. Our operating lease agreements expire throughDecember 2030 . These obligations do not include leases with an initial term of 12 months or less, which are expensed as incurred. We may extend, terminate or otherwise modify or sub-lease facilities as needed to best suit the needs of our business. The lease term is the non-cancelable period of the lease and includes options to extend or terminate the lease when it is reasonably certain that an option will be exercised. Borrowings under our JPM Credit Agreement include$840.2 million under the Term Loan B and$527.0 million on the Revolving Facility. Interest payable on outstanding borrowings on the Term Loan B and Revolving Facility in the table above was calculated based on applicable interest rates atSeptember 30, 2022 of 6.26% and 6.07%, respectively, through their respective expiration dates ofOctober 2027 andApril 2027 .
41
--------------------------------------------------------------------------------
Substantially all of our Partnerships and certain acquisitions of select books of business that do not constitute a complete business enterprise include contractual earnout provisions. We record an estimation of the fair value of the contingent earnout obligations at the Partnership date as a component of the consideration paid. Our contingent earnout obligations are measured at fair value at each reporting period based on the present value of the expected future payments to be made to Partners in accordance with the provisions outlined in the respective purchase agreements. The recorded obligations are based on estimates of the Partners future performance using financial projections for the earnout period. The maximum future contingent payment obligation atSeptember 30, 2022 was$980.5 million , of which$78.4 million must be settled in cash and the remaining$902.1 million can be settled in cash or stock at our option. The aggregate estimated contingent earnout liabilities included on our consolidated balance sheet atSeptember 30, 2022 was$229.6 million , of which$24.4 million must be settled in cash and the remaining$205.2 million can be settled in cash or stock at our option. We have a commitment to USF to donate a total of$5.3 million throughOctober 2028 . The gift will provide support for theSchool of Risk Management and Insurance in theUSF Muma College of Business . It is currently anticipated thatLowry Baldwin , our Board Chair, will fund half of this commitment.
Tax Receivable Agreement
We expect to obtain an increase in our share of our tax basis of the assets when BRP's LLC Units are redeemed or exchanged for shares ofBRP Group's Class A common stock. This increase in tax basis may have the effect of reducing the future amounts paid to various tax authorities. The increase in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. We have a Tax Receivable Agreement that provides for the payment by us to the parties to the Tax Receivable Agreement of 85% of the amount of cash savings, if any, inU.S. federal, state and local income tax or franchise tax that we actually realize as a result of (i) any increase in tax basis inBRP Group's assets and (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the tax receivable agreement. During the nine months endedSeptember 30, 2022 , we redeemed 1,734,568 LLC Units of BRP on a one-for-one basis for shares of Class A common stock and cancelled the corresponding shares of Class B common stock. We receive an increase in our share of the tax basis in the net assets of BRP due to the interests being redeemed. We have assessed the realizability of the net deferred tax assets and in that analysis have considered the relevant positive and negative evidence available to determine whether it is more likely than not that some portion or all of the deferred tax assets will be realized. We have recorded a full valuation allowance against the deferred tax assets atBRP Group as ofSeptember 30, 2022 , which will be maintained until there is sufficient evidence to support the reversal of all or some portion of these allowances.
SOURCES AND USES OF CASH
The following table summarizes our cash flows from operating, investing and
financing activities for the periods indicated:
For the Nine Months
Ended September 30,
(in thousands) 2022 2021 Variance
Net cash provided by (used in) operating activities
Net cash used in investing activities
(407,466) (223,581) (183,885) Net cash provided by financing activities 446,999 475,955 (28,956) Net increase in cash and cash equivalents and restricted cash 22,880 279,415 (256,535) Cash and cash equivalents and restricted cash at beginning of period 227,737 142,022 85,715 Cash and cash equivalents and restricted cash at end of period$ 250,617 $ 421,437 $ (170,820) 42
--------------------------------------------------------------------------------
Operating Activities
The primary sources and uses of cash for operating activities are net income adjusted for non-cash items and changes in assets and liabilities. Net cash provided by operating activities decreased$43.7 million for the first nine months of 2022 as compared to the same period of 2021 driven by a decrease in cash relating to payments of contingent earnout consideration and related party notes payable. Payment of contingent earnout consideration in excess of the liability recognized at the acquisition date of$48.9 million is captured as an operating cash flow during 2022 and is reflective of Partnerships that have outperformed on our platform since the date of Partnership. Cash also decreased from a higher balance in premiums, commissions and fees receivable of$39.0 million resulting from revenue growth and the timing of revenue recognition under direct bill policies in employee benefits for which payment is received monthly through the duration of the year. These decreases were partially offset by an increase in cash from a higher balance in accounts payable, accrued expenses and other current liabilities of$41.5 million related, in part, to the aforementioned revenue growth and higher premiums receivable balance.
Investing Activities
The primary sources and uses of cash for investing activities relate to cash consideration paid to fund Partnerships and other investments, as well as capital expenditures. Net cash used in investing activities increased$183.9 million for the first nine months of 2022 as compared to the same period of 2021 driven by an increase in cash consideration paid for Partnership activity of$170.9 million due to completing our largest Partnership to date during the second quarter of 2022. In addition, capital expenditures increased$12.2 million as a result of purchases to support our growth and software development projects for infrastructure to support our business, including key customer relationship management software.
Financing Activities
The primary sources and uses of cash for financing activities relate to the issuance of our Class A common stock, borrowings from and repayment to our credit agreements, payment of debt issuance costs, payment of contingent earnout consideration, and other equity transactions. Net cash provided by financing activities decreased$29.0 million for the first nine months of 2022 as compared to the same period of 2021 driven by a decrease in proceeds of$268.3 million from an equity raise completed during 2021 and an increase in payments of contingent earnout consideration up to the amount of purchase price accrual of$46.1 million , offset in part by an increase in net borrowings on our credit facilities of$270.0 million .
CRITICAL ACCOUNTING ESTIMATES
In preparing our financial statements in accordance with GAAP, we are required to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, expenses, disclosure of contingent assets and liabilities and accompanying disclosures. We evaluate our estimates and assumptions on an ongoing basis. These estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances; although, actual results may differ from these estimates and assumptions. To the extent that there are differences between our estimates and actual results, our financial condition, results of operations and cash flows will be affected. There have been no material changes in our critical accounting policies during the three months endedSeptember 30, 2022 as compared to those disclosed in the Critical Accounting Estimates section under Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K filed with theSEC onMarch 1, 2022 .
RECENT ACCOUNTING PRONOUNCEMENTS
Please refer to Note 1 to our condensed consolidated financial statements
included in Item 1. Financial Statements of this report for a discussion of
recent accounting pronouncements that may impact us.
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