Overview

TWFG, Inc. is a leading, high-growth, independent distribution platform for personal and commercial insurance in the United States. The company has established a track record of creating solutions for independent agents, insurance carriers and clients, with sustainable growth regardless of economic and P&C pricing cycles.

TWFG embraces a simple philosophy of “Our Policy is Caring” which informs how the company interacts with all its stakeholders and the communities it serves. The company seeks to attract partners committed to making a difference in the lives of people and communities.

Factors Affecting Results of Operations

Several key factors affect TWFG’s results of operations:

1. Attracting and retaining experienced agents: TWFG’s growth strategy focuses on attracting experienced agents nearing retirement who can bring their existing books of business. The company offers agents succession planning options and a high degree of autonomy to operate their branches.

2. Insurance carrier relationships: TWFG’s growth depends on its relationships with insurance carriers. The company develops innovative products that address client needs, which benefits carriers. This symbiotic relationship broadens the carriers’ reach and enhances TWFG’s market presence.

3. Reliance on insurance intermediaries: TWFG’s success is dependent on the financial strength of the insurance carriers it works with. Liquidity problems or insolvency at intermediaries or carriers could negatively impact TWFG.

4. Investment in technology: Continued investment in technology to drive scalability and efficiency is crucial for TWFG’s growth. The company leverages technology to enhance the agent and client experience.

5. Strategic asset acquisitions: TWFG supplements organic growth through strategic acquisitions of agencies, MGAs, networks and renewal rights across specialties and geographies.

6. Insurance industry pricing trends and natural disasters: Softening insurance markets or major losses from natural disasters could negatively impact TWFG’s profitability.

7. Macroeconomic trends: Factors like inflation, interest rate increases and economic deceleration can affect demand for TWFG’s services and increase its costs.

8. Cost of being a public company: As a public company, TWFG will incur new expenses related to compliance, reporting and other public company requirements.

Corporate Structure

TWFG, Inc. is a holding company whose sole material asset is a controlling ownership interest in TWFG Holding Company, LLC. All of TWFG’s business is conducted through TWFG Holding Company, LLC and its subsidiaries.

TWFG Holding Company, LLC has been treated as a pass-through entity for tax purposes. After the IPO, TWFG Holding Company, LLC continues to be treated as a partnership, and TWFG, Inc. is subject to U.S. federal, state and local income taxes on its allocable share of TWFG Holding Company, LLC’s net taxable income.

Revenue Streams

TWFG generates revenue from the following sources:

1. Commission income: Commissions earned from placing insurance contracts between carriers and clients, typically ranging from 7-22% of premiums.

2. Contingent income: Variable income based primarily on carrier underwriting results and, to a lesser extent, business volume.

3. Fee income: Includes policy fees, branch fees, license fees and third-party administrator fees.

4. Other income: Primarily from premium financing arrangements, agent conventions, interest income and miscellaneous sources.

Expenses

TWFG’s key expenses include:

1. Commission expense: The largest expense, representing commissions paid to agents for producing and retaining business.

2. Salaries and employee benefits: Base compensation, bonuses, equity compensation and benefits for employees.

3. Other administrative expenses: Technology costs, legal and professional fees, office expenses and other operating costs.

4. Depreciation and amortization: Primarily amortization of intangible assets from strategic acquisitions.

Consolidated Results of Operations

Comparing the three months ended June 30, 2024 to the same period in 2023:

• Total revenues increased 17.4% to $53.3 million, driven by higher commission income, contingent income, fee income and other income.
• Commission income grew 16.5%, primarily due to higher premium rates, business growth and the rollout of commissions from 2023 acquisitions.
• Contingent income increased 25.4% due to improved carrier profitability and business growth.
• Fee income rose 21.8%, with increases across policy fees, branch fees and license fees.
• Other income grew 66.8%, mainly from higher interest income.
• Commission expense increased 3.5%, with higher TWFG MGA commissions partially offset by lower Agency-in-a-Box commissions.
• Salaries and benefits rose 102.3%, primarily from the branch conversions and 2023 acquisitions.
• Other administrative expenses increased 36.8%, due to higher IT, underwriting and public company costs.
• Depreciation and amortization grew 161.7% from the amortization of intangible assets from recent acquisitions.
• Net income was $6.9 million, compared to $7.1 million in the prior year period.

Comparing the six months ended June 30, 2024 to the same period in 2023:

• Total revenues increased 16.8% to $99.6 million, driven by the same factors as the quarterly comparison.
• Commission income grew 16.2%, with the same drivers as the quarterly comparison.
• Contingent income increased 17.4% for the same reasons as the quarterly comparison.
• Fee income rose 16.2%, with the same trends as the quarterly comparison.
• Other income grew 103.1%, mainly from higher interest income.
• Commission expense was flat, with higher TWFG MGA commissions offset by lower Agency-in-a-Box commissions.
• Salaries and benefits rose 94.9%, primarily from the branch conversions and 2023 acquisitions.
• Other administrative expenses increased 31.4%, due to the same factors as the quarterly comparison.
• Depreciation and amortization grew 172.5% from the amortization of intangible assets.
• Net income was $13.5 million, compared to $13.3 million in the prior year period.

Key Performance Indicators

Total Written Premium:

• Increased 20.3% in Q2 2024 and 20.6% in H1 2024 compared to the prior year periods.
• Growth driven by higher premium rates, business growth and the rollout of written premiums from 2023 acquisitions.
• Shift in mix from Agency-in-a-Box to Corporate Branches due to branch conversions.
• TWFG MGA saw new business growth but lower retention.
• Consolidated written premium retention was 93% in Q2 2024 and H1 2024, down from 94% in the prior year periods.

Non-GAAP Financial Measures

Organic Revenue and Organic Revenue Growth:

• Organic Revenue grew 13.8% in Q2 2024 and 13.3% in H1 2024 compared to the prior year periods.
• Organic Revenue Growth excludes the impact of acquisitions, contingent income, fee income and other income.

Adjusted Net Income and Adjusted Net Income Margin:

• Adjusted Net Income was $9.8 million in Q2 2024 and $17.9 million in H1 2024.
• Adjusted Net Income Margin was 18.4% in Q2 2024 and 18.0% in H1 2024.
• Adjustments include amortization, non-recurring items and the impact of the IPO.

Adjusted EBITDA and Adjusted EBITDA Margin:

• Adjusted EBITDA was $10.8 million in Q2 2024 and $19.8 million in H1 2024.
• Adjusted EBITDA Margin was 20.2% in Q2 2024 and 19.8% in H1 2024.
• Adjustments include interest, taxes, depreciation, amortization and other non-operating items.

Adjusted Free Cash Flow:

• Adjusted Free Cash Flow was $3.7 million in Q2 2024 and $11.0 million in H1 2024.
• Calculated as operating cash flow less capital expenditures, tax distributions and acquisition costs.

Liquidity and Capital Resources

TWFG has historically managed liquidity through cash flow from operations, strategic acquisitions, distributions to owners, and borrowings under its credit facilities.

As of June 30, 2024, TWFG had $25.8 million in cash and cash equivalents. The company’s primary cash flow activities include:

1. Generating cash flow from operations
2. Making strategic acquisitions
3. Distributing cash to owners
4. Borrowing, making interest payments, and repaying debt

TWFG has two credit agreements:

1. Term Loan Credit Agreement: $7.0 million outstanding as of June 30, 2024, maturing through 2027.
2. Revolving Facility: $50.0 million facility, with $41.0 million outstanding as of June 30, 2024, maturing in 2028.

The credit agreements contain covenants restricting TWFG’s activities and require the company to maintain certain financial ratios.

TWFG expects its primary future liquidity needs to include funding organic growth, operating expenses, acquisitions, debt service, and tax payments. The company believes it will have sufficient liquidity from cash flow, working capital, and its credit facilities to meet these needs.

Outlook

TWFG is well-positioned for continued growth and success. The company’s innovative products, strong carrier relationships, technology investments, and strategic acquisitions provide a solid foundation. However, the company remains exposed to macroeconomic risks, insurance industry cycles, and the challenges of operating as a public company. Prudent management of liquidity and capital resources will be crucial as TWFG navigates these dynamics and pursues its ambitious growth plans.