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THISRESEARCHREPORTEXPRESSESSOLELYOUROPINIONS.Weareshortsellers.Wearebiased.Soarelonginvestors.SoisBaldwin.SoarethebanksthatraisedmoneyfortheCompany.Ifyouareinvested(eitherlongorshort)inBaldwin,soareyou.Justbecausewearebiaseddoesnotmeanthatwearewrong.UseBOCTexas,LLC’sresearchopinionsatyourownrisk.Thisreportanditscontentsarenotintendedtobeanddonotconstituteorcontainanyfinancialproductadvice.Investorsshouldseektheirownfinancial,legalandtaxadviceinrespectofanydecisionregardinganysecuritiesdiscussedherein.Youshoulddoyourownresearchandduediligencebeforemakinganyinvestmentdecisions,includingwithrespecttothesecuritiesdiscussedherein.WehaveashortinterestinBaldwin’ssecuritiesandthereforestandtorealizesignificantgainsintheeventthatthepriceofsuchsecuritiesdeclines.Pleaserefertoourfulldisclaimerlocatedonthelastpageofthisreport.
COMPANY:BaldwinInsuranceGroup,Inc.│NASDAQ:BWIN
INDUSTRY:InsuranceBroker
PRICE(ASOFCLOSE10/29/2024)
USD50.49
MARKETCAP
USD5.9BN
WeareshortBaldwinInsuranceGroup,Inc.(“Baldwin”orthe“Company”),achronicallyunprofitablerollupofinsurancedistributorswhichwebelieveengagesinquestionablefinancialengineeringtohidecostsfromitsincomestatementandinflateadjustedEBITDAandoperatingcashflow.
OurdiligencehasuncoveredmultipleinstancesinwhichBaldwinhasacquiredsmallinsurancefirmsofagentsthat,accordingtostaterecords,werealreadyworkingforBaldwinbeforethetimeoftheacquisition.WebelievethatBaldwin’sacquisitionsamounttoaggressivefinancialengineering,allowingittoshiftcommissioncostsfromitsincomestatementtothebalancesheet
intheformofearnoutliabilitiesandcapitalizedassets,thusartificiallyinflatingadjustedEBITDAandoperatingcashflow.
Theimpactofthisfinancialmaneuveringappearstohavebeensignificant.WebelievethaterasingcommissioncostsinflatedBaldwin’sadjustedEBITDAbynearly50%anditsoperatingcashflowsby252%overthelastfourandahalfyears.Tomakemattersworse,wesuspectthatBaldwinmanipulatesthediscountratetounderstatethereportedcontingentearnoutliabilitiesandartificiallyunderstateitsleverageratio.
What’smore,webelievethat,undisclosedtoinvestors,Baldwin’smostsignificantdriverofEBITDAisabouttoloseitskeyunderwriter.SinceBaldwinpurchasedWestwoodInsuranceAgency(“Westwood”)fromQBE(QBE:AU)in2022,WestwoodhasbeenBaldwin’sprimarydriverofadjustedEBITDAandismorethantwiceasprofitableasallofitsotherbusinessestakentogether.ButQBErecentlyalertedthemarketthatitwillceaseunderwritingWestwoodpoliciesinMay2025becauseithasbeensuchanunprofitablebusiness.Remarkably,toourknowledge,BaldwinhassaidnothingofQBE’simminentdeparturetoinvestors.WebelievethatwhoeverBaldwinfindstoreplaceQBEwilldemandmateriallybetterterms,hammeringWestwood’smargins.Thus,webelieveBaldwin’sprimarydriverofadjustedEBITDAisabouttobesignificantlyhamstrung,strainingabusinesswhichalreadyoperatesataloss.
Baldwinhasconsistentlyreportedsignificantpre-taxlosseseachyearsincegoingpublic,insteadinstructinginvestorstouseadjustedEBITDAtojudgeitsprofitability.Butwebelievethatthismetricissoheavilymanipulatedbynonsenseadjustmentsthatitnowdeviatessignificantlyfromoperatingcashflowsgeneratedbythebusiness.Inouropinion,thisnon-GAAPmetricnotonlyinflatesBaldwin’sperceivedprofitabilityamonginvestors,butunjustlyenrichesmanagement,whosecompensationistiedtothisnonsenseandseeminglyinflatednon-GAAPmetric.
Ultimately,webelieveBaldwinissetupforanuglycorrectionasinvestorscometounderstandthetruthofitstroublingleverageandchronicunprofitability,hiddenbeneathafa?adeoffinancialalchemy.
1.DisguisingCommissionPaymentsManipulatesReportedCashFlows,OperatingLosses,andAdjustedEBITDA.We
believethat,undisclosedtoinvestors,Baldwinacquiresinsuranceagenciesfromitsownagents.WediscoveredmultipleinstancesinwhichBaldwinhasacquiredsmallinsurancefirmsofagentsthat,accordingtostaterecords,werealreadyworkingforBaldwinbeforethetimeoftheacquisition.WashingtonstaterecordsshowmultipletransactionsinwhichtheagentswerealreadyregisteredtoBaldwinmonths(ifnotayear)beforeBaldwinacquiredtheirsmallagencies.
WesuspectthatBaldwinutilizesacquisitionaccountingtoeraseoperatingexpensesbyshiftingwhatwouldhavebeencommissionstoinsuranceagentsfromtheincomestatementintoearnoutliabilitiesonthebalancesheet,which,whenpaid,donotflowthroughtheincomestatement.Themagnitudeofitsearnoutpaymentsisamajoroutlieramongpeers,suggestingthatBaldwinhasbeenfarmoreaggressiveindisguisingagentcompensationbeyondtheundisclosedrelated-partydealsalone.Inourview,thisisaformoffinancialengineeringthatartificiallyinflatesoperatingincome,adjustedEBITDAandoperatingcashflows.
2
BaldwinInsuranceGroup,Inc.│NYSE:BWIN
WebelievethatanypropervaluationofBaldwinshouldadjustitsfinancialstocategorizecontingentearnoutpayments,whichwebelieveareessentiallydisguisedcommissioncosts,asoperatingexpenses.Baldwinisalreadyheavilyleveredandhasreportedstaggeringpre-taxlosseseveryyearsinceitsIPO.Webelievethat,withoutitsuseoffinancialengineeringtomaskagentcommissionsasacquiredassetsandcontingentearnoutliabilities,Baldwin’sreportedlosseswouldhavebeenfarworse.
Webelievethat,adjustingforearnoutpaymentsalone,Baldwin’soperatinglossesoverthelastfourandahalfyearswerenearlydoubletheamountreported.Thisre-categorizationalsosuggeststhatBaldwininflateditsadjustedEBITDAbynearly50%anditsoperatingcashflowsby252%.Tomakemattersworse,webelievethatBaldwinmanipulatesthediscountratetounderstatethefairvalueofitscontingentearnoutliabilitiesreportedonthebalancesheet,thusunderstatingtheliabilitiesassociatedwiththesetransactionsandartificiallyunderstatingitsleverageratio.
2.ImminentDemiseofBaldwin’sPrimaryProfitCenter.SinceBaldwinpurchasedWestwoodfromAustralianlistedpubliccompanyQBE(QBE:AU)in2022,WestwoodhasbeenBaldwin’sprimarydriverofadjustedEBITDAandismorethantwiceasprofitableasallofitsotherbusinessestakentogether.ButQBErecentlyalertedthemarketthatitwillceaseunderwritingWestwoodpoliciesinMay2025becauseithasbeensuchanunprofitablebusiness.Itisnothardtoseewhy.QBE’ssegmentwhichunderwritesWestwoodpolicieslost$250millioninFY2023andlost$90millioninthefirsthalfofFY2024.Remarkably,toourknowledge,BaldwinhassaidnothingofQBE’simminentdeparturetoinvestors.EvenifBaldwincanfindareplacement,thenewunderwriterwillalmostcertainlydemandfarbettertermsthanQBE,includinglowercommissionsforBaldwin.NotonlyisthenewunderwriterlikelytohammerWestwood’smarginsbutgiventhatwebelievethesepolicieswillsoonbecomemoreexpensiveforconsumers,organicgrowthisalsolikelytosuffer.Ultimately,webelieveBaldwin’sprimarydriverofadjustedEBITDAandasubstantialdriverofitsorganicgrowthisabouttobehamstrung,strainingabusinesswhichalreadyoperatesataloss.
3.TheEBITDAIllusion:VeryLittleCashFlowConversionfromHeavilyAdjustedProfitabilityMetricDrivingManagementBonuses.Baldwinhasconsistentlyreportedsignificantpre-taxlosseseachyearsincegoingpublic.ButtheCompanyconvenientlypromotesitsheavilyadjustedEBITDAasitsprimaryprofitmetric.Thisnon-GAAPfigure,inouropinion,ismerelyanillusion,soheavilymanipulatedbynonsenseadjustmentsthatitshowsnomeaningfulrelationshiptounderlyingcashflows.Inthepasttwofiscalyears,Baldwinhasonlyconvertedapaltry8%ofadjustedEBITDAtooperatingcashflow,suggestingthenon-GAAPmetricbearslittlerelationshiptotheunderlyinghealthofthebusiness.Baldwin’sEBITDAadjustmentsappearsubstantiallymoreaggressivethanitspeers,particularlywithrespecttoelevatedshare-basedcompensation,andamysteriousbucketof“other”items.Inouropinion,thisheavilyinflatedadjustedEBITDAfigurenotonlymisleadsinvestorsbyinappropriatelyinflatingBaldwin’sperceivedprofitability,butunjustlyenrichesmanagementwhosecompensationistiedtothisnonsensenon-GAAPmetric.
4.HighLeverageandPersistentUnprofitabilityUndermineFinancialStability.Since2020,Baldwinhasraised$1.5billionindebttofuelitsacquisitionspree,sendingtheCompany’scashinterestexpensesoaringfrom$9millionin2019to$109millioninLTM1H24.BaldwinasksinvestorstomeasureitscapacitytoserviceitsdebtusingitsinflatedadjustedEBITDAmetric,which,again,isnotrepresentativeofitstrueunderlyingoperatingcashflows.Wecalculatethat,whencomparingitsinterestpaymentswithitsadjustedpre-interestoperatingcashflow,Baldwinissoleveredthatitsmountinginterestpaymentsconsume90%oftheCompany’sadjustedpre-interestcashflowfromoperations.
5.HeavyInsiderSelling.InsiderswhoknowtheCompanybestaresellingsharesatafreneticpace.LedbyBaldwin’sChairman,insiderssold$76.7millioninstocksince2022,includingsubstantialsaleswhenBaldwin’ssharestradedathalfthecurrentprice.WhyshouldinvestorshaveanyfaithinBaldwin’sbusinessifthosewhoknowitbestareheadingfortheexits?
3
BaldwinInsuranceGroup,Inc.│NYSE:BWIN
1.DisguisingCommissionPaymentsManipulatesReportedCashFlows,OperatingLosses,andAdjusted
EBITDA
WehavediscoveredmultipleinstancesinwhichBaldwinhasacquiredsmallinsurancefirmsofagentsthatstaterecordsindicatewerealreadyworkingforBaldwinbeforethetimeoftheacquisition.Inouropinion,wesuspectthatthepurposeoftheseundisclosedrelated-partyacquisitionsistomanipulatetheCompany’sfinancialsbydisguisingcommissionpayments,whichwouldotherwiseberunthroughtheincomestatementasoperatingexpenses.
WespecificallyobservedthepatterninWashington,whichnotcoincidentally,isoneoftheonlyjurisdictionsinwhichthestatewideregulatoryagencyprovidesmoredetailedandgranulardisclosuresabouttheworkhistoryofinsuranceagents.Withthisadditionaldata,wewereabletoseethatBaldwinwasacquiringtheinsurancebusinessesofregisteredinsuranceagentsthataccordingtoWashingtonstaterecords,werealreadyworkingforBaldwin.Wesuspectthatthispatternislikelymorewidespread,however,withoutmoregranulardisclosuresfromotherstateregulators,furtherinstancesarenotasreadilyapparent.
Tous,thisappearstobeaplaincaseofmanipulativefinancialengineering.Baldwinisaroll-upofinsurancedistributors,acquiring35firmssinceIPO.Manyoftheseacquisitionswerepurchasedatunusuallyhighmultiples.Whenwespoketoanagentaboutthenatureoftherelatedearnouts,heconfirmedthattheywerecontingentpaymentstiedtonewbusiness–whichinourview,areclearlycommissionpaymentsindisguise.
WebelievethatBaldwinrollsupagenciestotransformcommissionexpensesduetoagentsintoearnoutliabilitiesonthebalancesheet.Whenpaid,theydonothittheincomestatement,butareinsteadcategorizedascashoutflows,partiallywithincashfromoperatingactivitiesandpartiallywithincashfromfinancingactivities.Inouropinion,thismaneuverthusinappropriatelyerasesoperatingexpenses,inflatesoperatingcashflowsandinflatesadjustedEBITDA.What’smore,wealsobelievethatthereissignificantevidencetosuggestthattheCompanyarbitrarilytogglesthediscountratetounderstatetheamountofsuchearnoutliabilities.
WebelievethatanypropervaluationofBaldwin’sstockmusttreatthesedisguisedcommissionsasoperatingexpenses.Ourcalculationssuggestthatdisguisingfuturecommissionsasearnouts,insteadofexpenses,aloneerased$69millioninoperatingcosts,whichshouldbeaddedbacktoitsincomestatement.ThisimpliesthatBaldwin’soperatinglossesoverthelastfourandahalfyearswerenearlydoubletheamountreported.Italsosuggests,inouropinion,thatBaldwin’sadjustedEBITDAwasinflatedbynearly50%anditsoperatingcashflowswereinflatedby$145million,
or252%.1
a.UndisclosedRelatedPartyShenanigans:BuyingAgenciesfromAgentsAlreadyWorkingforBaldwin
Inmultiplecases,publicrecordsshowthattheownersoragentsofcompaniesacquiredbyBaldwinwerealreadyworkingforoneoftheCompany’ssubsidiariespriortotheacquisition.Tous,thedatasuggeststhat,undisclosedtoinvestors,theCompanyacquiredmultipleinsuranceagenciesfromitsagents.Webelievetheseacquisitionsareatypeofundisclosedrelated-partytransactionwhichwethinkenabledBaldwintoshiftcommissionsoutofitsincomestatement,erasingoperatingexpensesandinflatingbothoperatingincomeandoperatingcashflow.
Forexample,betweenJuly2020andApril2021,BaldwinacquiredfoursmallMedicareinsurancefirmsinWashington
State.
1Webelievethisestimateisconservative.Forsimplicity,ourcalculationsdonotaccountforoursuspicionthatBaldwinacquiredtheseagenciesatahighermultiplethantheindustryaverage,anoverpaymentwhichwebelievecouldalsobeaformofbackdoorcommissionpayment.Ifadditionaladjustmentsweremadetoaccountfortheinflatedvaluationoftheacquirees,ourcalculationswouldsuggestthatBaldwin’sadjustedEBITDAandoperatingcashflowswereinflatedbysubstantiallymorethan50%and252%,respectively,sinceFY2020.
4
BaldwinInsuranceGroup,Inc.│NYSE:BWIN
BaldwinWashingtonStateAcquisitions
Date
CompanyName
Operatingas
Business
Revenue($m)
7/31/2020FletcherFinancialGroup,IncMedicare2.3
3/1/2021
RileyFinancial,Inc.
MedicareHelpNow
Medicare
1.5
4/1/2021
TimAltman,Inc.
OnlyMedicareSolutions
Medicare
1
4/30/2021
Seniors’InsuranceServicesofWashington,Inc.
Seniors’InsuranceServices
Medicare
0.9
Source:BaldwinPublicFilingsandPressReleases
InWashingtonState,insuranceagenciesandcarriersreporttheiraffiliationswithagentsinapublicdatabase.FilingsfromWashingtonState’sinsuranceregulatorshowthatowners/agentsregisteredtoworkforthefourfirmsacquiredbyBaldwinwerealreadyregisteredtorepresentoneoftheCompany’ssubsidiariesmonthspriortotheacquisition.Inotherwords,staterecordssuggestthatBaldwinacquiredtheseagenciesfromitsownagents.
.Example1:TimAltman,Inc.–AcquiredbyBaldwinonApril1,2021
InApril2021,BaldwinacquiredTimAltman,Inc.foranundisclosedamount.Thefirmisasmallbrokeroperatedunderthename“OnlyMedicareSolutions”withannualrevenueofapproximately$1milliondollars.AccordingtotheWashingtonStateOfficeoftheInsuranceCommissioner’sonlinedatabase(“WashingtonInsuranceDatabase”),TimAltman,Inc.onlyhadoneregisteredagent,TimAltmanhimself.2
Source:WashingtonStateOfficeoftheInsuranceCommissioner
YetitappearsthatAltmanwasaBaldwinagentforoneyearpriortotheacquisition.Accordingtothesamedatabase,TimAltmanwasalreadyanagentofBRPInsuranceIII,LLC,aBaldwinsubsidiary,startinginApril2020.Inotherwords,thestateinsurancerecordsindicatethatTimAltmanworkedfortheCompanyoneyearbeforeBaldwinacquiredhisinsuranceagency.
TIMA.ALTMAN
Source:WashingtonStateOfficeoftheInsuranceCommissioner
2TheWashingtonInsuranceDatabaseonlygoesbacktwoyearsinthecaseofretiredagents,soTimAltman,Inc.mayhavehadmoreagentsatthetimewhohavenolongerworkedattheagency.
5
BaldwinInsuranceGroup,Inc.│NYSE:BWIN
WecalledtheWashingtonStateOfficeoftheInsuranceCommissionertoconfirmthefilingdatesforTimAltman’saffiliationwithBaldwin.RepresentativesoftheCommissioner’sofficeconfirmedthatTimAltman’saffiliationdateslistedontheonlinedatabaseareaccurateandnotbackdated.
Putsimply,webelievethattheWashingtonstateinsurancerecordsindicatethatBaldwinacquiredtheinsuranceagencyofoneitsownagentswhowasalreadyworkingfortheCompany.Butthisisnottheonlyexample.
.Example2:Seniors’InsuranceServicesofWashingtonInc.–AcquiredbyBaldwinonApril30,2021
BaldwinalsoacquiredSeniors’InsuranceServicesofWashingtonInc.(“SIS”)inApril2021.AccordingtoLinkedIn,SISisownedbyRonSanford.
Source:GoogleMaps
AccordingtotheWashingtonInsuranceDatabase,RonSanfordwasalsoregisteredasanagentforBRPInsuranceIII,LLC,oneyearbeforeBaldwinpurportedlyacquiredSIS.Whenwecalled,arepresentativefortheCommissioner’sofficeconfirmedthedateforRonSanford’saffiliation,meaninghewasofficiallyregisteredasaninsuranceagentforBaldwinayearbeforeBaldwinacquiredhisagency.
Source:LinkedIn,WashingtonStateOfficeoftheInsuranceCommissionerTheWashingtonregulatorydatabaseshowsthatSIShadfiveagents.
SENIORSINSURANCESERVIcesoFWASHINGONINC
Source:WashingtonStateOfficeoftheInsuranceCommissioner
6
BaldwinInsuranceGroup,Inc.│NYSE:BWIN
AlmostalltheseagentsregisteredwithWashingtonStatetorepresentBRPInsuranceIII,LLCinearly2020.Inotherwords,agentsatSISalreadyworkedfortheCompanyayearbeforeBaldwinacquiredthesmallagency.3
HEIDIJ.ERICKSON
Source:WashingtonStateOfficeoftheInsuranceCommissioner
JenniferLorrainepotter
Source:WashingtonStateOfficeoftheInsuranceCommissioner
TIMOTHYF.SANFORD
Source:WashingtonStateOfficeoftheInsuranceCommissioner.Example#3:RileyFinancialInc.-AcquiredbyBaldwinonMarch1,2021
InMarch2021,BaldwinacquiredRileyFinancial,operatingas“MedicareHelpNow,”amom-and-popinsurancebrokerinWashingtonstatewithonly$1.5millioninrevenue.
3AllofSIS’fiveagentsareentitledtorepresentBaldwin.FourofthemwereregisteredwithBaldwininApril2020,ayearpriortotheacquisition.TheonlyexceptionisJohnPotter,whoonlyregisteredwithBaldwininOctober2021,afterthetransaction.
7
BaldwinInsuranceGroup,Inc.│NYSE:BWIN
Source:YahooFinance,February17,2021
Baldwinacquiredthissmallfirmfor$4.5millionofcashand~$1millionworthofstock,withafurtherpotentialearnoutof$2.5million.AccordingtotheWashingtonStateInsuranceCommissioner’soffice,twoagentscouldrepresentRileyFinancial,ErikNelsonandJamesTeagueJr.
Source:WashingtonStateOfficeoftheInsuranceCommissioner
RecordsindicatethatthesetwoagentsstartedtorepresentBaldwininMayandAugust2020,respectively,monthsbeforeBaldwinpurportedlyacquiredtheirbusiness.
ErikToddNelson
Source:WashingtonStateOfficeoftheInsuranceCommissioner
JAMESE.TEAGUEJR
Source:WashingtonStateOfficeoftheInsuranceCommissioner
OfthefiveacquisitionsinthestateofWashington,staterecordsshowinfourofthefivetransactions,theagentswerealreadyregisteredtoBaldwinmonths(ifnotayear)beforeBaldwinacquiredtheirsmallagencies.InplainEnglish,itappearsthatBaldwinwasbuyingtheagenciesofagentsthatalreadyworkedforthem.
OnlytheWashingtonStateOfficeoftheInsuranceCommissionerprovidesgranularagentaffiliationdatanecessarytoconfirmthissuspicion.Butgiventhatthispatternoccurredin80%oftheacquisitionsofWashingtonbasedagencies,wethinkitisfairtoassumethatthispracticewasfarmorewidespread.
8
BaldwinInsuranceGroup,Inc.│NYSE:BWIN
b.CommissionsinDisguise
Commissionpaymentstoagentsaretraditionallyexpensedasoperatingcostsandrunthroughtheincomestatement,reducingEBITDAandnetincome.ButwhenBaldwinacquirestheseagencies,itinsteadpaysearnoutstotheagentsunderthetermsoftheacquisition.TheCompanyrecordsacontingentearnoutliabilityrepresentingthefairvalueoftheseestimatedpaymentsonitsbalancesheet,whicharereducedovertimeasearnoutpaymentsaremadetothesellers.Critically,earnoutpayments,whichwethinkarecommissionsindisguise,donotflowthroughtheincomestatement.Instead,theearnoutpayments,whenmade,arerecordedasoperatingandfinancingcashoutflows.
CommissionsPaidtoExternalAgentsareNormallyRecordedasOperatingExpenses
Source:Baldwin202310-K
CommissionsPaidtoAcquiredAgenciesareRecordedasOperatingandFinancingCashOutflows
Source:Baldwin202310-K
Byacquiringtheseagencies,Baldwintransformscommissionpaymentsthatwouldhavenormallyrunthroughtheincomestatementintoearnoutpaymentsrecordedonthecashflowstatement,partiallywithinoperatingactivitiesandpartiallywithinfinancingactivities.Ineffect,weseetheseacquisitionsasaformoffinancialengineeringthatartificiallyinflatenetincome,adjustedEBITDA,andoperatingcashflow.4
4Baldwindoesincludealineitemwithinitsoperatingcostsentitled“Changeinfairvalueofcontingentconsideration.”Thisrepresentsonlythechangeinfutureestimatedearnoutpayments,accordingtotheCompany’smethodologyforupdatingthevalueofthecontingentconsiderationliabilityonitsbalancesheet.Butcontingentearnoutsrecordedatthetimeoftheacquisitionare
9
BaldwinInsuranceGroup,Inc.│NYSE:BWIN
ImpactofBaldwin’sFinancialEngineering
Source:BOCAnalysisofBaldwin'sAccountingPolicies
WhenweinterviewedaformerexecutivefromanagencyacquiredbyBaldwin,hestatedthatthecontingentearnoutwastiedtothegrowthofnewbusiness.Inotherwords,itappearsstructuredjustlikeacommissionpayment.
“ThereisalwaysagrowthcomponentthatyouhavetogrowXamountoverathreetofiveyearperiod.…Andthatisnewbusinessgrowth.”
-FormerManagementfromanagencyacquiredbyBaldwin
Importantly,Baldwinappearstobeamajoroutlierinthemagnitudeoftheseearnoutpayments,suggestingthatithasbeenmoreaggressivethanpeersinshiftingpaymentstoagentsfromitsincomestatementtoitsbalancesheet.Whilecompetitorsalsoperformacquisitionsandreportearnoutpayments,earnoutpaymentsforthepeergroupaverage2-5%ofadjustedEBITDAsinceFY20.5Bycomparison,Baldwin’searnoutpaymentsaverage32%ofadjustedEBITDAoverthesametimeperiod,representingamuchgreatershiftingofwould-beexpensesoutoftheincomestatementthanitspeergroup.
EarnoutPaymentsasaPercentageofAdjustedEBITDAComparison
FY20
FY21
FY22
FY23
1H24
Cumulative
Brown&Brown
4%
8%
9%
8%
11%
8%
ArthurJ.Gallagher
3%
8%
7%
6%
7%
6%
WillisTowersWatson
0%
1%
1%
1%
0%
1%
Marsh&McLennan
2%
2%
1%
3%
4%
2%
Average
2%
5%
5%
4%
5%
4%
Baldwin
7%
11%
50%
21%
45%
32%
Source:CompaniesPublicFilings
WebelievethattheundisclosedrelatedpartynatureofBaldwin’stransactions(e.g.,rollingupinsuranceagenciesofagentsthatalreadyworkforBaldwin),constitutesaparticularlyegregiousformoffinancialengineeringwhichsetsBaldwin’sacquisitionsapartfromthepeergroup.
Yetitiscriticaltonotethatregardlessofwhethertheacquisitionsareindeedrelated-partytransactions,rollingupinsuranceagenciesandshiftingcommissionexpensesontothebalancesheetisaformoffinancialalchemy.When
immediatelyreportedasaliability,andactualearnoutpaymentsarerecordedonthecashflowstatement.Accordingly,theyarenotexpensedontheincomestatementanddonotreducenetincomeoradjustedEBITDA.
5SelectedbyBaldwinandlistedonitsinvestorpresentationinJune2024.
10
BaldwinInsuranceGroup,Inc.│NYSE:BWIN
doneatthescaleatwhichBaldwinisrollingupagencies,webelieveitmateriallymisleadsinvestorsabouttheunderlyingprofitabilityandcashgenerationofthebusiness.
c.FinancialEngineeringInflatesReportedCashFlowsandUnderstatesReportedLosses
Baldwinisalreadyheavilyleveredandhasreportedstaggeringpre-taxlosseseveryyearsinceitsIPO.Webelievethatwithoutthefinancialengineeringtomaskagentcommissionsascontingentearnoutliabilities,suchlosseswouldhavebeenevenmoresevere.WealsobelievethatBaldwin’sfinancialengineeringinflatesoperatingcashflows,ascontingentpaymentsassociatedwithsuchacquisitionsarecategorizedinpartascashflowsfromfinancing.
Wecalculate,intotal,theCompanypaid$246millionincontingentearnoutsoverthepastfourandahalffiscalyears.BaldwinPaid$246MillioninContingentEarnouts
$m
FY20
FY21
FY22
FY23
LTM1H24
Cumulative
SettledContingentearnoutliabilities
OperatingCashFlows
PaymentofContingentEarnout
ConsiderationinExcessofPurchasePriceAccrual
FinancingCashFlows
PaymentofContingentEarnout
ConsiderationuptoAmountofPurchasePriceAccrual
(1.7)
(4.8)
(49.9)
(24.3)
(38.6)
(101.2)
(1.2)
(7.7)
(48.3)
(27.9)
(80.3)
(145.1)
ContingentEarnoutsettledbyCash
(2.9)
(12.5)
(98.2)
(52.3)
(118.8)
(246.3)
Source:BaldwinPublicFilings
Webelievethat,withoutfinancialengineering,Baldwin’soperatinglosseswouldbe$146millionoverthepastfourandahalfyears,insteadofthe$76millionlossreportedtoinvestors.ThisreflectsouradditionofBaldwin’s$246millionofreportedearnoutpaymentsbackintotheincomestatementasanoperatingexpense.Wealsoremovethe$177
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