TWFG - NASDAQ

Good day, ladies and gentlemen. Welcome to the TWFG First Quarter 2025 Earnings Conference Call. Today's call is being recorded. A replay will be available on our Investor Relations page following the conclusion of the call. Before we begin, please note that today's remarks may contain forward-looking statements and references to non-GAAP financial measures. Please refer to our press release and SEC filings for a discussion of risk factors and reconciliations to GAAP measures. I'd now like to turn the conference over to Gordy Bunch, Chief Executive Officer. Sir, please begin.

Thank you, operator, and good morning, everyone. I appreciate you taking time to join us today. Joining me is Janice

Thank you, Gordy, and good morning, everyone. Before diving into the quarter results, I want to note a couple of items. One, beginning this quarter, branch conversions are no longer treated as a comparative variance. They were converted in January 2024, so year-over-year comparisons are now apples-to-apples. And 2, interest income was moved from the revenue line down to other income, so we will be comparable to prior and future periods. Starting with our top KPI, written premium. Total written premium increased by $50 million or 15.5% over the prior year period to $371 million. Within our primary offerings, insurance services grew 40.7% or 14.7% and TWFG MGA grew $9 million or 20.1%. This increase was a result of growth in both renewals and new business. During the first quarter of 2025, within both of our product offerings, we saw new business growth of 26% or $18.4 million as well as renewal business growth of 12.5% or $31.3 million over the prior year period. Within our insurance services offering, we saw a shift in renewal and new business growth as compared to Q1 2024. New business growth was 17%, up from 13% in Q1 2024, while renewal premium growth was more modest at 14% compared to 29% in the prior year period. The higher renewal business in the first quarter of '24 included an initial influx of premium from the 2023 corporate store acquisitions, resulting in an elevated renewal growth rate in that period. In our MGA offering, we saw a healthy uptick in new business growth of 89% or $8 million over the prior year period, primarily from the expansion of a key MGA program. Our consolidated written premium retention was 88% as compared to 94% in the prior year period. This decrease is correlated to the shift in renewal business growth as previously discussed and as a result of carriers moderating rate increases and opening up for new business after a period of restricted capacity and aggressive rate increases. Our total revenues increased $7.7 million or 16.6% over the prior year period to $53.8 million. The increase of 16.6% was mainly due to commission income, which represented 13.5% of the total growth. The remaining 3.1% included fee income of 1.7%, contingent income 1.3% and other income of 0.1%. Commission income increased $6.2 million or 14.7% over the prior year period to $48.8 million, driven by new business growth and solid retention levels. Insurance services contributed 11.9% growth or 10.4% of the total, while the MGA delivered 33.7% growth or 4.3% of the total growth. Contingent income increased $0.6 million or 54.6% over the prior year period to $1.7 million, tracking closely with our written premium growth. Fee income was up $0.8 million or 34.9% to $3 million, largely driven by higher policy volume from increased business in the MGA. Organic revenues increased $6.2 million, reaching $49.2 million for an organic growth rate of 14.3% compared to 13% in the prior year period, which depicts our continued success in our core business. Now turning to expenses. Commission expense increased $5.4 million or 20.3% over the prior year period to $31.8 million. The increase represents $3.9 million or 13.9% growth, which is consistent with commission income growth and a onetime favorable adjustment related to the branch conversions of $1.5 million. Total salary and benefits increased by $1.9 million or 31.1% over the prior year period to $8.2 million, reflecting our scale and the IPO transition, which was driven by a $1.2 million increase from the RSUs issued in connection with the IPO and the remaining $0.7 million due to the growth of business and corporate store acquisitions. Other administrative expenses increased $1.6 million or 50.9% over the prior year period to $4.7 million with approximately $0.4 million related to professional and consulting fees associated with being a public company. We also had $0.3 million in increase in IT costs, $0.3 million in underwriting fees, which were due to growth and the remaining $0.6 million was tied to ongoing growth and acquisition integration. Depreciation and amortization increased $0.3 million or 11.5% to $3.4 million, primarily from the branch conversions and prior corporate store acquisitions. Net income for the quarter was $6.9 million, up 3.4% over the prior year period. Adjusted net income increased 14.3% to $9.2 million, driven by earnings growth and partially offset by higher public company costs and a $2.7 million increase in tax expense. EBITDA was $9.1 million and adjusted EBITDA was $12.2 million, up 35.3% over the prior year period. Adjusted EBITDA margin expanded to 22.6% compared to 19.5% in Q1 '24, reflecting both top line growth and operating leverage. While we continue to manage the ramp-up in public company costs, we are confident in our ability to expand margins further as we scale. With that, I'll turn it back over to Gordy.

Thanks, Janice. Looking ahead, we remain confident in our ability to deliver on our 2025 guidance. Therefore, we are modestly adjusting upward our 2025 guidance to organic revenue growth 12% to 16%, adjusted EBITDA margin between 20% and 22% and total revenues between $240 million and $255 million. We are mindful of the broader macroeconomic uncertainty, including tariff discussions and interest rate sensitivities. But rather than pulling back, we are seeing increased demand for insurance options and workable solutions. Periods of economic complexity highlight the value of a trusted local adviser, and TWFG is well-positioned to support clients through those transitions. Going into the second quarter with a robust M&A pipeline, $196 million in cash on hand and a fully available credit revolver, we retain significant balance sheet flexibility to invest where opportunities are strongest. Our focus remains squarely on expanding our national footprint, investing in agent success, maintaining operational efficiency and executing on our strategic growth priorities. In closing, I want to thank the entire TWFG team for their dedication and our shareholders for their ongoing support. We are energized by the opportunities ahead and confident in our ability to deliver long-term value. With that, Janice and I will be happy to open the line for questions.

[Operator Instructions] Our first question or comment comes from the line of Pablo Singzon from JPMorgan.

First question, is the first quarter expense fully loaded for public company costs? Or do you think there could be incremental costs from here beyond the usual expenses you incurred to operate the business?

I would say there will be future public company expenses as we move towards complying long-term with internal audit functions and other public-related obligations we pick up over time. So the first quarter is not fully loaded with all future public company expenses.

Got you. And then second question, just on retention. And I know you referenced that you're sort of at the historical level, which makes sense. But what gives you comfort that retention bottoms out here, right? And what I have in mind is it's a premium retention number, right? So there could be some pressure from price moderation, but then maybe you're getting some offsets from better per policy or per customer retention. So just sort of your perspectives on why this retention level is a good number to think about moving forward?

Yes. If you go back to last year's Analyst Day, this was the target we had set for our long-term average. It just took a few quarters longer for us to end up where we expected. That 88% premium retention number was our long-term average. So taking into account previous market cycles of our core personal lines portfolio. To your point, it is a softening market. That does mean rate is a little suppressed. And that gives us the ability to shift clients on their renewals into possibly favorable pricing prior to -- compared to their expiring term, which would lead to more client retention, but at a lower average premium, plus being with the markets opening up in the vast majority of geographies, we're able to place more new business risks where previously the market has been constrained. So we're fairly confident in that 88% premium retention number. That's been our long-term average. Right now, that's what we're seeing. If we see anything dipping or improving, we'll make that update in the next quarterly call.

Our next question or comment comes from the line of Tommy McJoynt from KBW.

When we look at the commission rates, that's the commission income as a percentage of written premium. I know there's a lot of moving inputs like the mix of surplus and mix of insurer of last resort. But I guess, how would you characterize the commission rates in the quarter? Does everything sort of balance out in 1Q as a good number to use going forward? Or is there upside or downside in the year ahead?

I would frame it as fairly stabilizing. As far as the commission rate as a percentage of premium, you're correct. When it goes to an E&S marketplace, that's going to have a lower average commission. It goes into a state-backed insurer that's going to have a lower average commission percentile as a percentage of premium. But the market opening up on private passenger auto, you're seeing now new business incentives. So you're going to see some enhanced new business compensation that will skew upward the percentage of commission relative to new business premium. And then on the homeowner side, you're seeing more stability around the current rates that are out there. So I think it's a good indicator in the first quarter. Again, as in anything, if we see anything trending differently, we'll make those adjustments in future guidance and on the next call.

Great. And then you called out the 17 branch additions in the quarter. Was that a gross number or a net number? And then if so, I guess, just how does this compare to the outsized growth in branches that you added the last few quarters? I know that was really driven by a single carrier pulling back from operations in certain geographies. So I just want to get a sense of how this compares to the prior quarters.

Correct. I mean it's not really comparable to prior quarters. To your point, we had the influx of agents from a singular captive market that was being disruptive. So 2024's onboarding count was significantly above our average year of onboarding new agencies. The 17 agencies were gross added, not net. We will, in any period, have agents that retire or merge into existing locations. As a reminder, the portfolios never leave. They just move into another office or new principal steps into the position of the exiting principal. So -- but 17 was gross. That compared to first quarter of 2024, 17 new offices in the first quarter of '25 is higher than our pre-singular carrier disruption from 2024.

And then just last question. When we look at the full year guidance for 2025, is there a certain amount of dollars of revenue or bottom-line EBITDA that's the inorganic contribution from acquisitions? Is there a number that we can back into from this guidance?

I think the guidance that we're using today is still along the lines of what we had in the analyst model as the acquisitions we've made to date follow that trend line. So in the first quarter, you'll notice in the details provided, our revenue from the first 2 acquisitions was slightly under the projected $3 million that would have been acquired at the beginning of the calendar year. Subsequently, we've made additional acquisitions that will plug that run rate hole for the first half of calendar year 2025. What we have in our pipeline and in our queue, we believe will satisfy the second tranche of the analyst model from July forward, which would then give us the confidence to raise the guidance that we provided in the earnings release. Supplementing that, we could have additional activity that would even take it beyond where we've already guided towards. So today, what's in the current guidance is still the original analyst model, but with a little bit more of a confidence factor and we're achieving and closing and signing transactions that are bringing that modeling into fruition.

Our next question or comment comes from the line of Paul Newsome from Piper Sandler.

I was hoping you could go one more time because I get this question a lot about why new additions in terms of agents for TWFG tends to take -- become more productive a little bit slower than what appears some other distribution systems like the Goosehead would do. It's just pure agent by agent count. Maybe you could just talk about the model differences and why that is the case and [indiscernible].

Yes. So off the top, the Goosehead business model is around bringing in agents that may not have as much experience as our existing sales force is coming into our channel. So our agents we recruit are typically coming out of the captive relationship. So take any of the national brands that have captive distribution. When those agents exit those business models, they're bound by noncompete clauses. So they're under a restricted sales agreement with the prior employer. When they start with us, they're not allowed to bring over any of their clientele, which means they're starting from 0. If you go into a Goosehead franchise, many of the folks they're bringing in may not even be from insurance backgrounds as they're willing to bring in less experienced folks, train them up. They also have their lead gen mortgage referral program that helps their newer agents launch with some referral flow from those initiatives. Our agents tend to be hunters and gatherers, ones that already have centers of influence in the marketplace. They're going to have to reposition and relaunch themselves from 0 in force portfolio. So it just takes a little bit more time to build up a portfolio of business when you're bound by non-competes and having to reestablish yourself.

That's fantastic. Could you talk maybe a little bit more about the new addition of GEICO and how -- is that -- just trying to size how important adding one more product is to folks? And maybe as a corollary to that, is there potentially more to come pretty broad range of products already, I think.

Yes. I think GEICO is a significant addition in having an additional market within our portfolio. We're doing commercial auto, personal lines, auto, specialty lines launched in Ohio this month. And so what that is providing is another national branded product to our distribution at favorable pricing to our customers and at favorable commission rates that I think helps stabilize the commission reductions we had all seen over the past decade. I think new competition in the IA channel is going to create more stability around comp and also is going to incentivize other markets to come out with new business incentives, retention incentives in order for them to maintain their market share. As you guys know, GEICO's combined ratio has been excellent in the last few quarters. That gives them a pricing position that is favorable. And that also will play into, as we talked to with Pablo, some of our premium retention. We'll now have another market for our customers to consider as they go into their renewals as you're seeing rate increases from other markets. Progressive and GEICO both have some pricing advantages that gives our customers the ability to be retained, albeit at a lower average premium. So I think GEICO is going to be a significant player in the IA channel. And so far with us, we're seeing great early success.

Our next question or comment comes from the line of Brian Meredith from UBS.

A couple of ones here. First, just want to follow up on Pablo's questions. On the margin outlook, when should we expect some of the additional IPO expenses to start to hit just because as I look at the guidance, obviously, margins in the first quarter were kind of higher than when your guidance range is.

I think the timing is really going to be like we're just now getting line of sight to our audit expenses for 2025 and the additional recommended infrastructure around those audit functions, our future needs for infrastructure that then support compliance requirements that don't really hit us until 3 or 4 years down the road. So we're working internally on building out those timetables of when are we going to be onboarding some of these additional functions that we're not currently required to have, but we will be in the out years. And so I think the timing of that for us, I think we want to be thoughtful and probably get to that layer level of compliance and infrastructure well in advance of the actual date we're required to do so. And so I think I don't really have a great answer right now, Brian, on what timing that those expenses will be incurred. We have them baked into our base forecast. So yes, we are seeing some positive variance from what we had forecasted for the first quarter from those expenses not being incurred. But that's not the entire driver of why we had a margin beat. We have improved economics on contingencies that's also driving margin up. That's one of the reasons we raised the lower end of our margin going forward for 2025 guidance is there's more confidence in our ability to attain a higher margin than -- and inclusive of absorbing those public company costs. So they probably are not going to be the dragger that we probably have seen in our previous projections, but they are going to be onboarded. They are going to have some impact. And then the timing as when those come in, they will be really dependent upon the outcome of our implementation strategy we're working on with Deloitte and others to make sure we have the infrastructure we need 3 years from now sooner.

Got you. Got you. So there was nothing unusual in the first quarter because like I said, you're 22.6% in their guidance is for 20% to 22%. So -- and I don't recall was any seasonality in margins.

No, we had an uptick in contingencies that was significant and contingencies are got directly dropped to the bottom line. And I think that's indicative of the improved combined ratios we're seeing across the industry. So our profitability projections are up, and we're recognizing those in the current quarter too.

Great. That makes a lot of sense. And the second question, Gordy, I'm just curious, as the homeowner's market and maybe some of the other markets at least opens up and auto softens, should we expect the wholesale business to start MGA wholesale to start moderating the growth rates there? Is that your expectation?

No, I would expect that our program side will actually expand. Even as the auto market might be stabilizing, the homeowner's market is still highly fragmented, especially in cat-prone geographies. So I would be looking at us leaning into those opportunities where rate and competition provide advantageous deployment of those programs.

Our next question or comment comes from the line of Mike

So a question on organic growth and tell me why my question is maybe naive. But if I look at the branch count growth over the past year plus, last year, 27%, I think. I know this might be a gross basis, not a net, so that might be part of the answer. And then 1Q, if I annualize the numbers, also tracking in the low doubles. I know the folks from American National probably need to ramp up. But just on branch count growth, you get to a significant double-digit number. Pricing softening, but still well into the high singles, I'm assuming. So I guess why wouldn't we plug in a higher organic growth number for -- on a go-forward basis. What am I missing high level?

Yes. So I'll just expand on the agents that came from the market that you mentioned, they're still in a straddled contracting position. So they still have active agreements with the prior market. So there -- they have some restrictions in what they currently can produce. Right now, for all states, except for California, those agents are restricted to personal lines only. The product that's being nonrenewed out of their portfolio is their homeowner's product. In some of the geographies, their private passenger auto rate in the incumbent carrier is substantially below market, which is making it more difficult for them to rewrite those policies as their property is non-renewing, they're able to replace the home elsewhere within our portfolio, but the auto [indiscernible] will be retaining with the incumbent marketplace. So they're not the same type of agency as one that comes to us less encumbered by ongoing covenants and agreements. As they get past certain time periods, some of those restrictions may lift, and that's why we put them into the out years of being more meaningfully contributing. So -- and we've talked about this before, using store count metrics is not a great way to model our business. We can have an existing -- one of these new agents can come to us. And in the next 2 months, we could buy another agency with them and fold that into their agency-in-a-box branch. That would skew all cohort analysis because that inbounded portfolio wasn't organically produced, it was acquired. And so we try to steer away from trying to use number of stores, number of agents. If you take our wholesale brokerage side, we may add significant numbers of wholesale brokerage agents in any kind of period. They don't produce all their business through our markets. So it's not a good metric to use agent count or agency counts because they're not all equally yoked. They're also not all producing the same lines of business. We have some branches that are commercially oriented and only do commercial lines. We have multiline agencies. We have personal-lines-only agencies. We have some that have a financial services flare. And so it's not a good metric would be one reason, Mike. But really, the reason you don't take the gross numbers from last year and try to come up with a higher organic is the vast majority of those onboarded last year still have a foot in another company's camp, and they are restricted from writing all lines at the moment.

Okay. Then, yes, that have me -- okay, that gave me a lot of reasons to, I guess, walk back my comments. That's helpful. It's more of a question we get also from investors, too, so not just coming from me. Just switching gears really quick. I know you gave a lot of color on kind of the market opening up and softening. Just Texas specific, we can see kind of the year-end loss ratio data for home. It felt like it was in kind of spitting distance of back to kind of -- as long as everyone gets rate this year and there's not significant catastrophes; it feels like the loss ratios will get back to normal. Is that a fair comment? Or are there nuances about the Texas market we should be thinking about?

Yes. My expectation is Texas should be in a favorable position on property on a going-forward basis as reinsurance renewals clear for 6/1 and 7/1, there probably will be some more capacity within existing markets. I still think you're going to have PML aggregate management initiatives from the major national markets. So they may not come in full throttle trying to do growth on the property side. But the regionals, which we have access to and one that is our own program should have expanded capacity in the state given the improving economic conditions.

Got it. And a follow-up on Texas. There's one major national saying that they're implementing meaningfully higher deductibles in all Texas business. Is that a phenomenon you're seeing in your portfolio? And if it is, how is it impacting kind of the, I guess, your revenues?

Yes. So essentially, most of our carriers on the property side have been at 2% wind hurricane hail deductibles for the last several years. That's pretty much baked into the average homeowner premium across the state at this point. It started off probably a decade ago more coastally and then as severe convective storm frequency continued to hit the outer coastal bands, that 2% wind hurricane hail deductible started to expand in inland. It's now essentially everywhere. You have very few markets that will write a 1% wind deductible anywhere in the state. There are a few companies that will do it. But as far as our current average premium, that's pretty much baking in with a 2% wind hurricane hail deductible. If you're talking about a market that's trying to go in above the 2% when hurricane hail deductible, probably not going to be sellable. There's plenty of capacity at a 2% when hurricane hail deductible. So I would think that would be a market that would be stressed by loss of clientele given the fact that there is an open marketplace that would write that business at a lower deductible.

Got it. That's helpful. And just lastly, follow-up to your insights on GEICO. Thanks for those comments. I think it's surprising to some to hear kind of you feel GEICO will be a strong force within the IA channel because they're kind of a monoline carrier and it's thought that agents usually try to sell a bundle. So just curious, is there something -- is it more specific to TWFG, the Woodlands where you all just are more willing to do business with a monoline writer or maybe you guys just work harder to find solutions so -- than others? Or is this -- was your comment kind of a broad comment? Do you think the IA channel will embrace GEICO?

Yes. So I think if you look at the IA channel as a whole, bundling for an independent agency is having the clients' home and auto with our agency, not necessarily a specific market that's combined. So we have long been packaging Progressive Auto with another homeowner's product or even Travelers auto with another homeowner's product, especially when you get into cat geography where most carriers don't have open capacity in cat-prone geography. So as a channel, we've always been packaging auto with a disparate home and vice versa. The programs that we have for TWFG, where we're underwriting and issuing from our MGA, they have companion discounts built into that property product. So we can actually bundle our Twico program with any of our auto markets within our agency distribution. So we do have a competitive advantage there and that we can give our customers a discount on that homeowner's product with GEICO, with Progressive, with Travelers, with Allstate, with any of the markets that are in our portfolio.

[Operator Instructions] We have a follow-up question from Mr. Pablo Singzon from JPMorgan.

So first, I just wanted to get some perspective on how much incremental expense is needed as you expand from here, just putting aside public company costs, right? So just to give a simple example, if you get 20% gross commissions from a new cohort of 100 agents, how much of that 20% would you need to spend in OpEx or CapEx or maybe even marketing to support these agents, recognizing that they're unlikely to be fully productive on day 1 for the reasons you've started Gordy? And I guess what I'm really trying to get to is, is there a way to think about incremental margin you can generate for each new agent or cohort you onboard versus the all-in, I guess, at this point, 20% to 22% EBITDA number you've provided?

Yes, Pablo, I'll try to answer that best as I can. For us, the onboarding of a new agency is not a profit center. So we do have the internal infrastructure that is designed for ongoing adding of new locations, agents and ongoing training of the same. Those same resources are utilized to support the existing over 500 locations and 2,000 independent agencies. So it's kind of like a sunk cost on the agent onboarding activities because we're utilizing personnel across channels in order to be efficient with our resources. There's not a lot of CapEx related to onboarding of new agents. Last year, we had -- or yes, last year, we had a lot of CapEx and creating the facilities that we have now that's supportive of those initiatives. So as far as infrastructure, adding some additional business development managers that could help grow our recruiting pipeline and maybe increase the average size of our quarterly onboarding of agents. That would be more of a P&L direct expense. So that would be a margin hit, but not significant in order to get the growth and additional productive units. And then I think the second part of your question is -- was related to trying to get to how are we going to sustain this now higher-level EBITDA margin? Is that the gist of the question?

No, it's -- so the business model just strikes me as pretty high margin, right? To your point, like you can basically -- you have absorbed capacity, right? You don't necessarily have to hire one for one as you bring in 100 agents, you don't have to hire 100 more people, right?

Right.

So that tells me that the incremental margin for each new 100 is higher than your all-in margin was 20 to 20 today. So I just want to get some -- and maybe it's a number we can't talk about at this point, but just some perspective. And I do think that you sort of got that, Gordy. So that was helpful. And then the other question, and you might have already touched it in your answer, but I'll just ask it anyway. So from a new agent perspective, right, you haven't had to do much active recruiting, in my opinion, because your profile looks much more visible post IPO and then there's disruption at another captive market, which is good, right? But do you think at some point, Woodlands will need to spend more money and resources to onboard talent? And by this, what I mean, maybe you said like business development managers, right? Maybe you need 20 more people to be located across the U.S. and be just actively recruiting? Or again, is the answer that just given your infrastructure now, you think you'll be able to achieve your organic growth plans just based on what you already have?

So I would say, yes, I think it would be smart for us to expand more resources, expanding our recruiting activities, especially as we've opened new geography. How impactful those expenditures would be to margin, I don't think it's going to be ultimately that margin dilutive for the upside of adding more productive locations across a broader geography. So I do think that's a smart initiative that we have in our plan down the road is to, yes, add more resources related to recruiting and developing more agencies. And that goes for both wholesale brokerage, MGA operations and agency in a box. We will be leaning into those opportunistic programs that help drive both initiatives. So we can add independent agents into our MGA brokerage channel that would actually give us line of sight to folks that may want to convert into our retail business model as well as creates a pool of potential downstream acquisitions as those independent agencies look to exit at retirement. I think you'll see investment along all those areas that should help us grow distribution continuously. So that is part of our plan. I don't think it's 20 recruiters though. I think that would be a little bit overshooting. I think it will be more measured as we build out the processes around that expanding into other geography. We did actually bring in additional recruiting resources last year. We have a position that's called a field manager. So when we talk about all those agencies that came from the carrier that we've been discussing, they had regional territorial managers that were also displaced. And those are the managers that hired, recruited and developed the agents that we ended up onboarding last year. So we have several field managers now in different geography that came in to TWFG with those agents. They're also going through that transitioning of portfolio for the personal lines market, supporting their agents and learning the new environment that we bring to the table. I think as they get past that near-term distraction of having to rewrite and help their agents rewrite their entire property portfolios, those field manager resources can then be activated for, okay, now that we've stabilized your team, let's turn around now and start building additional agencies like you have for the last 10, 20, 30 years. So we have added field managers in the last 12 months. They're tied to those agencies we brought in, in mass, and we expect some of those to turn around and start recruiting for us in those new geographies.

I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Gordy Bunch for any closing remarks.

Well, I'd just like to end with thank you for everybody who attended today. Thank you for all the thoughtful questions. We really are in a great position today as we head into the second quarter, well-capitalized, looking at a lot of unique opportunities to help grow our organization across a broader geography. Look forward to updating everybody in our second quarter call as that comes to fruition. I just want to say thank you again to all of our analysts, carriers, clients and TWFG family for being with us throughout the last 24.5 years. And we are looking forward to a great 2025, and thank you all for being here today.