B.P. Marsh & Partners PLC (BPM) Earnings Call Transcript & Summary

Good morning all. I'm pleased to welcome you to the B.P. Marsh interim results to the 31st July 2023 presentation. As usual, presenting on these interim results is myself, Dan Topping, Chief Investment Officer; and Jon Newman, our CFO. We're very pleased with these results, and I would like to thank all the members of the B.P. Marsh team and the wider portfolio for their efforts in allowing us to achieve them. The key highlights being set out on Slide 3. Net asset value increasing in the period, GBP 203.5 million, an increase of GBP 14 million or 7.3% over 6 months or GBP 23.7 million or 13.2% over a year. An 8.6% increase in equity portfolio in the period, or 12.3% excluding Kentro, which remained flat due to the exchange and completion on that investment. And consolidated profit before tax in the period of GBP 15.6 million, delivering a total shareholder return for the period of 7.9%, which has left us with available capital of GBP 51.5 million currently, GBP 4.3 million as at 31 July 2023. We declared a special dividend of GBP 1 million and a further dividend of GBP 6 million proposed being paid in GBP 2 million annual installments from 2024. We're delighted with the overall performance of the Group in the period, which is a continuation of our previous results as of 31st January 2023. Slide 4 shows our consistent long-term net asset value growth, which I believe speaks for itself. And Slide 5 outlines our dividend strategy, which I shall discuss in further detail later in this presentation. The significant event for the group in the period was the sale of Kentro, as outlined in Slide 6 and 7. The Group ceased investment and disposal of Kentro is a prime example of our unique investment approach and our ability to produce bespoke investment situations, which should provide the opportunity for significant returns. As you will note, we initially acquired a 5% stake of GBP 1.5 million and what was Nexus Underwriting Management, a profitable independent underwriting agency specializing in financial lines and trade credit insurance. Since then, what was Kentro and is now -- what was Nexus and is now Kentro has leveraged B.P. Marsh's experience and skill set and has completed circa 20 acquisitions, and grown its revenue and profitability by approximately 10x, with adjusted EBITDA growing from circa GBP 2 million at the time of our investment to north of GBP 20 million at the time of our disposal. We'll end our partnership with Kentro as the largest single shareholder having provided an aggregate of GBP 15 million in equity funding, which has returned the Group GBP 51.5 million. Completion took place post period end on 9th October 2023, which delivered an IRR of 23.66% and a money multiple on the equity invested of 3.41x over a 9-year investment period. Before moving on to how we intend to utilize these proceeds, I thought it made sense to provide an overview of how Kentro's grown since the Group invested in 2014, and Slide 7 shows this in respect to the key milestones and valuation increases. Turning to Slide 8, in terms of what we intend to do with Kentro proceeds. The Group confirmed it intends to return GBP 7 million of the proceeds to shareholders via dividends, a special dividend of GBP 1 million is already declared and will be paid in November, and the further GBP 6 million over 3 years from 2024. It's our ongoing aim to strike a balance between returning funds to shareholders and retaining funds to grow NAV. And I believe that the Kentro disposal adequately displays how we intend to do that. Regarding dividends, by 2028, GBP 18.6 million will have been distributed since 2010, equating to 53.56p per share or 38% of our flotation price of GBP 1.40 per share. We believe this has demonstrated long-term rewards for our shareholders for their patient support to the company, whilst also providing significant firepower for new investments and to support the existing portfolio, which has delivered exceptional NAV growth. In terms of new business, turning to Slide 9. The Group has an exciting pipeline of new investment opportunities, which we will have the opportunity to execute on subject to us being able to obtain satisfactory terms of investments. Whilst we expect an increase in new business proposals on the back of the disposal of Kentro, it's our intention to maintain our measured approach to new business without the need to feel obligated to deploy cash too quickly or change our modus operandi. In the period, the Group undertook 2 new investments, Pantheon Specialty Limited and Verve Risk Services. Pantheon, on Slide 10, with an opportunity to once again partner with Rob Dowman, an individual with over 30 years experience in the sector, having previously been joint CEO of Besso Group and Besso Limited since 2015. B.P. Marsh previously been a shareholder in Besso Limited exiting in 2017. Rob and his team are recognized as leading London market casualty brokers specializing in complex liability placements throughout the world. And given our long association with Rob Dowman, this provided B.P. Marsh with an excellent opportunity to partner with him once again, totally deliver exceptional long-term shareholder returns. Verve Risk Services, on Slide 11, is an underwriting agency specializing in professional and management liability business for the insurance industries in the U.S.A., Canada, Bermuda, the Cayman Islands and Barbados. The experienced management team, Scott Simmons and Alan Lambert, had operated as a unit within another business, but B.P. Marsh offer them support to undertake a management buyout and delivering management a majority shareholding in their business, which they previously didn't have. Both of these investments are examples of B.P. Marsh's start investment approach, offering unique structures, attracting motivated and entrepreneurial management teams. Turning to our aggregate insurance position, Slide 12. So this demonstrates the aggregate size of the premium within the portfolio. And as previously mentioned by me, the market often says that B.P. Marsh walks softly but carries a big stick, and I suspect this is what they mean to, in terms of the GBP 1.75 billion amongst the B.P. Marsh portfolio companies. The full insurance portfolio is set out on slides 13 and 14, and I thought I'd highlight some noticeable -- notable performance within that. XPT, Slide 15, is now the Group's largest investment, which is no mean feat given we invested in 2017 as a startup, and this business now produces over circa $700 million of GWP, has made 14 acquisitions today, has 19 office locations throughout the U.S. with over 250 employees, which when we invested, was 4 individuals with no office and a business land. Over the course of the period, the Group lent XPT a further GBP 4.9 million, GBP 800,000, which has already been repaid. The majority of this funding is used to allow XPT to continue its M&A strategy. Slide 16, CBC, continues to deliver excellent growth and was the biggest riser within the portfolio for the period. This has allowed it to grow. This growth has been delivered by organic and new hires. In the period, the Group lent CBC an additional GBP 1.5 million, which together with their own funds allow CBC to repay its loan facilities with this bank Coutts & Company initially post period end. The Group lent an GBP additional 800,000, which allowed CBC to exercise a call option with the Group over 5.9% shareholding in CBC, which was owned by the Group. These shares were canceled. As a recap, the Group originally invested in CBC in 2017. And since then, that time, our valuation has increased significantly, with the Group's current equity stated NAV worth over GBP 30 million. And over the period in question, CBC's value has increased by GBP 11.3 million or 59%. Other notable performers across the portfolio are ATC, Slide 17; Lilley Plummer Risks, Slide 18; and Stewart Specialty Risk Underwriting, Slide 19. ATC has grown to one of the largest Lloyd's underwriting agencies in Australia, having more than doubled its GWP since we invested in July 2018. Lilley Plummer Risks, Slide 18, continues to grow and expand its product offering, whilst established to be a marine broker. The business has now developed into a number of other niche areas, including political violence, terrorism and North American property. The performance of Lilley Plummer Risks has allowed it to repay just over GBP 1 million to the Group during the period by a redemption of preference shares and repayment of loans. The Group's equity investment of GBP 308,000 is currently valued at GBP 8.86 million. Stewart Specialty Risk Underwriting, slide 19, also shown impressive growth, producing circa CAD 75 million in 2022. This will grow to about CAD 83 million in 2023, and we expect it to surpass CAD 100 million of GWP in 2024. From humble beginnings, an equity investment of GBP 17 by B.P. Marsh, alongside 400,000 or so loan, SSRU has become one of the largest owner-operated underwriting agencies in Canada, which we now value in excess of GBP 11 million, just under GBP 12 million. On the subject of the wider market, we've included on Slide 20, a high-level overview of where pricing sits on a premium basis. Property premium growth is showing no sign of abatement, whilst casualty market rates continue to rise, although at a slower pace. The noninsurance investments currently is LEBC, which we detail on Slide 21. I think we've discussed this previously, and the rationale for supporting this investment. That rationale has not changed, and the management team led by Derek Miles continues to take the group forward. And we fully support Derek Miles and his team in continuing to deliver the turnaround at LEBC. In drawing my presentation to a close, as I said at the beginning, we're delighted with the results achieved, thanks to our partnership with our portfolio companies. As our partnership with Kentro has drawn to a close, the results do demonstrate that we have an ongoing portfolio with the ability to produce further significant growth, noting that the growth in the underlying portfolio without Kentro was 12.3% in the period and 23.8% over the last 12 months. The sale of Kentro, whilst transformational for the future, does not lead to the need or desire to change our modus operandi being that we continue to identify businesses with strong management teams and good growth potentials, which we can help fund support and develop so they can deliver on these growth opportunities, which, in due course, we believe, produces returns on our investments to our shareholders by our blend of ongoing equity and NAV growth within the portfolio and regular returns of capital to shareholders. Given the strong cash position, our current portfolio and strong pipeline of new business opportunities, we believe that the Group is in a very positive position moving forward. We all as a team at B.P. Marsh excited about the future. As Chief Investment Officer share, the sense of environment -- excitement given the opportunities available to us. Such opportunities should have a positive outcome on the company and ultimately, the share price and shareholder returns, which in the long run is the scorecard for a listed business. Before handing over to Jon and hopefully repeating myself for the final time, all of this could not be achieved without the team at B.P. Marsh and our partners within the portfolio to whom we are particularly grateful. I can now hand over to Jon to talk through in more detail his thoughts on the key financial performance indicators within our results, after which we will deal with any questions.

Thank you, Dan. So I'm pleased to present the key financial highlights for the 6-month period to 31st of July 2023. So overall, our NAV increased by GBP 14 million or 7.3% for the period to GBP 203.5 million, which is equivalent to 567.3p per share or 556.3p on a diluted basis. So that equates to a total shareholder return of 7.9% for the period, including the dividend of GBP 1 million paid in aggregate in February and July of this year. Overall, the Group has delivered a consolidated profit before tax of GBP 15.6 million for the period. Whilst this is 8% lower than the prior year period, this was due to foreign exchange movement, the prior period benefited from GBP 5.8 million in foreign exchange gains in the valuations, whereas the current period saw a GBP 3.8 million reversal of those gains. Adjusting for this, the comparison would be GBP 19.2 million versus GBP 11.2 million in the prior period, an increase of 73%, excluding FX movement. The majority of the profit relates to the increase in valuations of the investments, with the equity portfolio rising by 8.6% after adjusting for realizations and additions, and that now stands at GBP 185.8 million. One of our core strategies is to seek to ensure that the yield from our portfolio covers our operating expenses so that investment cash isn't depleted by working capital. On an underlying basis, the profit before tax was GBP 0.8 million for the period, compared with GBP 0.7 million in the prior year period. The final dividend of 1.39p per share or GBP 0.5 million was paid in July, bringing the total distribution to 2.78p per share or 1 million, in line with the previous year. Turning to Slide 24. Since flotation, the Group has achieved compound growth of 8.9% per annum and 11.8% since inception. That is after all expenses, tax dividend distributions and excluding any capital raised. So this slide sets out the key investments, realizations and loan portfolio movements during the period. We invested GBP 0.4 million in equity this period, which was the new investments in the MBO of brokerage services, and a nominal investment in equity in Pantheon Specialty. We also received GBP 0.8 million in proceeds from realizations during the year, Lilley Plummer bought back GBP 0.7 million of redeemable preference shares. And we received an additional GBP 0.1 million from the previous sale of Summa. Turning to the loan book. This stood at GBP 17.8 million at 31st of July, compared with GBP 11.5 million at January '23. We granted GBP 8.2 million in new loans during the period to our portfolio: GBP 4.9 million to XPT in the U.S. to fund deferred consideration payments on acquisitions; GBP 2 million to CBC, which was used to fund a new MGA investment and repay bank debt; and 0.7 million to Denison and Partners through Pantheon; and GBP 0.6 million to Verve for working capital. The GBP 1.6 million of loans were repaid during the period, GBP 0.8 million from XPT, from the loans we provided earlier in the year; GBP 0.5 million from Fiducia; and GBP 0.3 million from Lilley Plummer. And given that we don't set exit clauses, we're a medium to long-term investor with an average holding period of over 7 years, we often structure our investments as a mixture of debt and equity, although never just debt. This enables the yield to be received on the investment to cover our operating costs, and debt repayments helped to replenish our capital funds, rather than having our capital tied up until an eventual exit. We do have a slide on Slide 30 in the appendices. It sets out all of the loans in details. All our loans are valued at par. The average interest rate charge for the period was 9.9%, which was up from an average of 8.6% charge in the year to 31st of Jan. '23. At the period end, we had GBP 4.3 million in cash, down from GBP 12.1 million at January 2023 due to the investments and loans are set out following the GBP 1 million dividend paid and GBP 0.7 million in share buybacks. Turning to Slide 25. There have been a number of significant developments since the period end. Regarding investments, we've provided GBP 4.6 million in new loans, GBP 3 million loaned to Pantheon for working capital as they continue to hire new staff and producers. GBP 0.8 million, as Dan said earlier, was lent to CBC to fund the exercise of a share option whereby we sold shares back to CBC, which we then canceled. GBP 0.5 million was loaned to Brown & Brown as part of the Kentro sale for specific legal matters outstanding to enable completion. And GBP 0.3 million was lent to LEBC Holdings to part finance the acquisition by Aspira of LEBC Group's assets. The loan portfolio balance is now at GBP 22.4 million, approximately 11% of our NAV. In October, we received the cash proceeds from the sale of Kentro and now have GBP 51 million of liquidity prior to distributions. Based on the current share price, there's a significant discount to our NAV. So Slide 26, to summarize, why invest in B.P. Marsh? We are a leading specialist investor with an excellent track record and a team with a wealth of experience. Although we specialize in financial service businesses with a specific interest in the insurance intermediaries, our portfolio is diversified in terms of product lines and geographically mitigating risk. We have achieved 8.9% compound growth since flotation and 11.8% since inception after all costs and distributions through identifying excellent growth opportunities and delivering added value and return to shareholders as demonstrated by growing the NAV to now over GBP 200 million. We've now got GBP 51 million in cash pre-distributions. We've demonstrated that we can successfully realize investments at or above prior valuations with strong exit performance over the last 18 months with sales of Walsingham and Summa and now the exceptional performance for the sale of Kentro. We have a strong pipeline of investment opportunities, both within our existing portfolio for continued growth and expansion and in new opportunities. And we consider the current discount to diluted NAV to be unwarranted. So this concludes our formal presentation. I would now like to invite any questions that you may have. Barrie, you want to start? You're on mute.

Barrie, unmute yourself.

Sorry can you hear me now?

Yes.

Yes, 3 questions, if I may. First of all, Dan, I think in the market commentary, you talked about how you don't anticipate seeing a sort of a soft underwriting market conditions to come anytime in the sort of short to medium term. I just wondered, given that you've got professional lines and financial lines coming off quite strongly, what gives you that confidence that we won't return to some sort of boom-and-bust, hard-and-soft underwriting cycle? That was the first question. Second one, I just wondered, in terms of share buybacks, you obviously say in the RNS that you're -- you got a share buyback under consideration. I just wondered what the consideration is? Given that previously there were issues in terms of a large shareholding. And the last question I had was, in terms of, again, the second page of the RNS talks about a new share option scheme. And I just wondered what the background to that was? Was it in response to a specific issue or a number of issues in terms of staff leaving, which resulted in you introducing this new scheme?

Thanks, Barrie. I'll try and do question 1 and some of 3, John can pick up the final question and share 2 after that, if that makes sense. In terms of rate softening, I think yes, we wouldn't move away from that end financial lines and professional lines. But I think to an extent, if you look at the increase on the financial and professional lines, the only way they could come off was by reducing because of how high they got. But I think whether -- I don't think at the moment, the return to a boom-or-bust underwriting at Lloyd's is on the horizon or the table, given what Lloyd's is saying. I think they have a significant period of softening rates with new market entrants coming in at unsustainable pricing. I think Lloyd's by Decile 10 try to move that model on. And they're certainly talking about the same approach to underwriting going forward. And there's also, yes, significant CAT losses going through the market from prior years that have to be factored in, in particular on property. And also the instability in the world as we currently see impacting on the marine market from a war risk standpoint. So no, I think what we say in the presentation and the Chairman's statement and the results hold firm. Hopefully, that deals with your first question. On the new share option scheme, I don't think that -- it certainly wasn't a function of staff leaving. We've got a good retention rate. I think it's more a function of incentivizing and aligning interest between shareholders and management with delivering on meaningful share price increases. I think by these sort of share schemes where value only kicks in, in excess of where the options are granted, drives management to increase the share price in a meaningful long-term way. We certainly try and encourage these share schemes within the portfolio. And I think the company sees the value there. So replicating that within B.P. Marsh corporately is the intent behind us to continue to deliver increases in the share price alongside the dividends that we're paying. And I think that's what we tell on that before handing over to Jon.

On your second point, Barrie, I suppose the key point is that the Board is continuing to consider probably the most appropriate and cost-effective mechanism for shareholder distributions of this size. Obviously, the aim is to strike a balance between investment for long-term capital growth whilst providing shareholders with a meaningful return in the short to medium term alongside the dividends that we have already set out. There's going to be GBP 1 million special dividends payable in November, alongside GBP 3 million per annum for the next 3 years. Obviously, as we get additional realizations, the Board will revisit that. And yes, in terms of share buybacks, those discussions are ongoing and the Board is -- will provide an update information in due course on that.

Do we have any other questions from anyone? Please feel free. Andreas?

Yes. Hello. Good morning. Can you hear me?

Yes.

Thank you very much for the presentation. I was just curious, there's obviously a lot of activity in the MGA market here in London. I just wondered, in your -- when you sit down in the investment committee and decide whether to invest in a new or existing MGA, what are the key considerations to invest? And I'm thinking of this also in context of the amount of underwriting capacity available within Lloyd's to put to work and back these MGAs.

I think there's sort of 2 considerations there. One, for when it's a start-up, and 2 for when it's an existing MGA. To be fair, when it's a startup, we won't invest without capacity being provided. So we'll give a letter of intent or heads of terms, but that's always subject to the specific underwriting agency having satisfactory capacity to underwrite to deliver on the business plan. Obviously, if we see a business plan for -- which we haven't, thankfully, an aviation start-up MGA that wants to write GBP 200 million of GWP in its first year, experience would tell us that's a challenging plan to not only deliver but to deliver profitably. So we would take a view on that. So that's sort of overview from a start-up. And then if it's an existing MGA, frankly, we've got the internal skill experience to run the rule over where the capacity is coming from, what the longevity of it is, and what the growth horizon is. So we've all internally on the investment committee seen more than enough binding authority agreements to know where the pitfalls are, and also what the results look like. So we've all had to go through triangulation reports for loss profiles, underwriting agencies, and we continue to do that. So I think generally speaking, from our experience, if management teams can source capacity and allocate it profitably, there'll always be a supplier of underwriting capacity to support those agencies.

That's very interesting. And is there any difference when you go through your due diligence between the capacity and the longevity of the capacity being provided by a Lloyd's syndicate or outside of Lloyd's in the London market or elsewhere?

I think we'd always take a view on the nature of the capacity. I think, certainly, Lloyd's would be considered blue chip. So that's always a vote of confidence given that has to go through various delegated authority underwriting teams at the syndicate and also within Lloyd's. But then one of our marine MGA in Leeds, Fiducia, underwrites some of its capacity on behalf of Berkshire Hathaway, which I would say is at least equally as good capacity as Lloyd's. But other ones, for example, our Motor MGA, Walsingham, underwrote on behalf of New India, which is a new entrant to the London market or the U.K. market. But where we saw that, we were also working in partnership with the reinsurance broker Aon Benfield, who alongside New India provide us with the reinsurance that there was the appetite to provide the reinsurance or the retro capacity so long as Walsingham delivered its results. And that was a long-term relationship that ultimately proved successful for the Group.

Yes. A key part of that, though, was also A-rated paper. So we -- that's a key part of what we look at, is the quality of the paper because there's a big difference between that kind of capacity versus, at the time when we did Walsingham, there was quite a few unrated capacity from Eastern Europe, which I'd be surprised if they didn't offer. I certainly know of 2 that did.