TWFG, Inc. (TWFG) Q3 2025 Earnings Call Transcript

Good morning, and welcome to TWFG's Third Quarter 2025 Earnings Conference Call. All participants are in a listen-only mode. Following management's prepared remarks, we will open the line for questions. As a reminder, today's call may include forward-looking statements that are subject to risk and uncertainties. Actual results could differ materially. For more information, please review our filings with the SEC. And now, I'd like to turn the call over to Gordy Bunch, Chief Executive Officer. Please go ahead.

Thank you, Operator, and good morning, everyone. TWFG delivered another strong quarter of performance, reflecting both the resilience of our distribution platform and continued scalability of our operating model. Total revenues increased 21% quarter over quarter to $64.1 million, supported by 10.2% organic revenue growth and M&A revenues, while adjusted EBITDA grew 45% to $17 million, expanding margins by 430 basis points to 26.5%. That margin expansion underscores the earnings power of our distribution platform and execution on accretive M&A as we leverage scale and financial discipline. We continue to see encouraging signs of personal lines normalization. Carrier appetite has returned, rate increases have moderated, and underwriting discipline remains strong, all of which are helping to normalize retention and new business growth across our platform. Our diversified model, spanning retail, MGA, and affiliated agencies, positions us to capitalize on those hard and soft market cycles. Our third quarter recruiting and M&A activities were productive, with the addition of eight new retail locations, one new corporate location, and 370 independent agents to our MGA platform. Following the quarter, we completed the acquisition of Alabama Insurance Agency, adding 23 additional retail locations and marking Alabama as our newest state expansion. These additions strengthen our foundation heading into the fourth quarter and enhance our ability to serve clients across a broader national footprint. Strategically, our priorities remain unchanged. engaged, investing in our technology initiatives, executing our accretive M&A goals, expanding our retail and MGA distribution channels, and executing disciplined capital deployment to support these priorities. I'll now turn the call over to Janice Swinge, our CFO, to discuss some of the financial highlights.

Good morning, and thank you, Gordy. Starting with our top KPI written premium, increased by $67.6 million or 16.9% over the prior year period to $467.7 million. We saw strong double-digit growth within both of our primary offerings. Insurance services grew $56 million or 16.5%, and the MGA had a spike in growth of $11.7 million or 19.2%. This increase was a result of healthy growth in both renewals of $51 million, or 16.4%, and new business of $16.6 million, or 18.7%. Our consolidated written premium retention remains strong at 91%. While a softening rate environment typically translates to increased customer shopping, our retention performance underscores the stability and engagement of our client base. Our total revenues increased $11 million, or 21.3%, over the prior year period to $64.1 million. This increase was driven primarily by commission income growth of $10 million, or 20.8%, to $58.3 million, as a result of continued expansion in both of our product offerings and supported by strong renewal and new business activity. Higher contingent income and increased fee-based revenues from one of our NGA programs also contributed to the revenue growth. Organic revenues increased $5 million, reaching $54.2 million, compared to $49.2 million in the prior year period, for an organic growth rate of 10.2%, demonstrating solid momentum across both our agency and NGA platforms, and positioning us well to meet our full-year growth target. From a profitability standpoint, adjusted EBITDA of $17 million grew 44.7%, translating to a margin of 26.5%, which was up more than 400 basis points from the prior year quarter. This expansion reflects operating leverage, expense discipline, and an increasing mix of higher margin corporate branch locations. On the expense side, commission expense increased $3.9 million, or 13%, over the prior year period to $34.6 million, tracking with commission income growth, taking into account the impact of corporate store acquisitions and programs with no related commission expense. Salaries and benefits increased $1.6 million, or 19.2%, over the prior year period to $9.9 million, driven by investments in new corporate branch acquisitions, headcount growth, and public company infrastructure. Other administrative expenses increased 8% to $5.2 million, reflecting technology upgrades and compliance initiatives. Net income was $9.6 million, up 40% over the prior year period, with a net margin of 15%. Adjusted net income rose 55% to $13 million, equating to an adjusted net income margin of 20%. We also delivered operating cash flow of $15 million and ended the quarter with $151 million in cash and no draws in our revolver, leaving us well positioned to fund both organic initiatives and potential tuck-in M&A. For the full year 2025, we've tightened the ranges on our guidance to reflect our year-to-date performance, recent expansion activity, and current market conditions. We expect total revenues between $240 and $245 million, an organic revenue growth rate in the range of 11 to 13 percent, and adjusted EBITDA margins between 24 and 25 percent. As the personalized market continues to soften and carrier availability expands, our current recruiting and acquisition initiatives, including the addition of new retail locations, independent agents, and the Alabama Insurance Agency, provide further momentum and earnings visibility heading into year end. Together with our balanced capital allocation and disciplined execution, these factors reinforce our confidence in achieving our full-year 2025 target. I'll now hand the call back to Gordy for closing remarks.

Thank you, Janice. As we close out the third quarter, I'm proud of how our teams continue to execute. We've proven that investing for growth and focusing on margin expansion can coexist, exist, and that our TWFG family culture remains one of our greatest advantages. TWFG is squarely aligned with that playbook, focused on profitable growth, a creative M&A, deepening carrier and agency relationships, and expanding our retail and MGA footprint to sustain our long-term growth objectives. We enter the final quarter of the year with momentum, a fortress balance sheet, and a clear view toward our long-term objectives, to build one of the best high-growth independent agent-centric data-driven distribution platforms in the country. I want to thank our employees, agents, carriers, and shareholders for their continued trust and commitment to TWFG. With that, operator, let's open the line for questions.

As a reminder, to ask a question, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Tommy McJoynt of KBW. Please go ahead, Tommy.

Hey, good morning, guys. Thanks for taking our questions. The first one I think is going to be related to the M&A front, but I just want to share it on. If I look at the statement of cash flows, there is a $10 million line that's attributed to other investment. Could you clarify what that is? Is that related to M&A?

Sure. So we've long had our own premium finance operations, and we've been outsourcing operations for years and also using credit facilities to fund those premium finance notes. With so much capital in our coffers, we deployed our own capital into the premium finance operations, giving us a higher yield on that operating business.

Okay. Got it. So is that an accretive transaction, I guess? Is that needle moving?

I'd say it's highly accretive. Yeah, highly accretive for us. you're getting 4% plus interest in most interest-bearing instruments, and the yield of swapping out our capital for the credit facility that was funding the premium finance notes put us well above 7% on the same deposits.

Okay, got it. And then staying on the M&A's front, you obviously are, you know, constantly looking at a pipeline of potential acquisitions. As we think about the 2026 pipeline, would your expectations right now that you guys put more capital to work on the M&A front, do more deals, or how do you think about it relative to the pace that we're seeing this year?

I think we'll be executing a little bit earlier in the cycle in 26 than we did in 25, and depending on how we view M&A throughout the calendar year, we should exceed 26. I mean, exceed 25.

Yeah, understood.

Thank you. Our next question comes from the line of Paul Newsom of Piper Sandler. Your line is open, Paul. Good morning.

Thanks for the call. Appreciate the help. So maybe a little bit of additional color on the market environment would be And I was wondering if you could kind of walk through maybe in addition to some of the pieces of rate plus, you know, true organic growth plus M&A just to kind of get us a better sense of as we go into 26, what are the moving pieces that will get you to that double digit organic growth, and what are the things that we should be sensitive to if things change? One of the things I've struggled with is, you know, a hard market turned out to be kind of bad for organic growth because of the availability issues, but now we have more availability, but we've got a soft market, so maybe some thoughts there would be helpful, at least for me.

Yeah, first on the market transitioning from hard to soft. That has an impact on renewal rate and premium retention as those policies that were enforced last year come in at lower rates. As the market also then opens up, customers have more access to different carrier options than they had in prior periods, which could lead to even rewriting the account into an even lower rate than what the renewing expiring carrier offered. That cycle plays through a full calendar year. So we should see the impact of that, you know, abating once we get into the second quarter of 26. That would give us a full 12-month run of the softening of the market, which really began early in the second quarter of 25. The availability of additional capacity allows for more clients to be onboarded. The tradeoff is, you know, higher, lower average premium for the same accounts. We are seeing growth in exposure that, you know, is offsetting some of that reduced premiums. When we look at organic going into 26, it's a combination of our same store sales growth velocity, sales velocity, as well as new program initiatives that we've launched from the MGA, existing program expansion, which then allows for more exposures to be brought in through those channels that are creating additional commission income above the base year. So it's really not one area. It's a multitude, all of the different parts of our platform executing against their growth initiatives.

And maybe a kind of sort of similar question. You've made a lot of additions of new agents over the last year, so. I think you've said in the past most of them won't have an impact anytime super soon. How is that sort of waterfall of impact from those newly acquainted agents coming and is there a point where we see some sort of inflection point where those new agents you've accumulated over the last year or so start to have a measurable impact on this growth rate?

Yeah, their impact is baked into our forecasting and I think as we talked about it over time, the immediate year they come in, there's not much of an immediate contribution. As they grow their agency over a multi-year process, they start becoming more meaningfully contributed now as like say we we added a lot of stores in 24 so in 24 and early 25 you know they're not contributing uh a lot to the organic story as they start getting their portfolios larger they do become organic contributors but at a percentage of the larger base now so um they're all part of the the uh you know organic base and so they're going to be part of the organic forecast based on our trend lines. So when we look at agency in a box, all those recruited locations are in the AIB bucket, and so they get baked into there. We don't do cohort analysis around those because of the vast diversity of locations, average premiums, and some of them doing their own tuck-in producer acquisitions that then skew the data points um so but anyways they are they're going to start being contributors they're part of the base assumption going into the double digit 2026 projection thanks appreciate the help thank you our next question comes from the line of pablo sings on of jp morgan please go ahead pablo um hi thanks uh first on the mga

channels, so good premium growth at this quarter, I think you said 19%. But commission income actually grew much faster. I think it was about 56, and then commission expense only grew 27. As a result, the NGA was highly margin-accredited this quarter. I think net commissions over gross commissions were about 53% against, I think, mid-30s historically. Anyway, can you just talk about what happened there, you know, strengths-wise, and what drove the strong results of the score?

Yeah, sure. So, we launched a program in Florida at the end of the second quarter. Part of that program, there's two components to it. We are an exclusive TPA MGA for Florida property program. They had a takeout that materialized in June that creates a TPA revenue stream for underwriting claims, marketing, and on the earn-out of the takeout, there's not a commission expense. So we get a commission revenue without the corresponding commission expense. As those policies renew, they do end up having a commission expense, and you'll see a normalization of that ratio between commission income and commission expense. And then separate and aside from that, there's a voluntary organic program that's new, that's writing new business, albeit in the reported quarter, not really a large contributor, should become a contributor at the end of fourth quarter and more going into 2026.

Thanks, Lordy. And then second question, I guess this one's a bit bigger picture, right? So many of the public brokers have recently announced significant cost reduction or investment programs, which may be good longer term for them, but with the new term cash flow. So I guess the question is, do you anticipate something similar for your company? And if not, how would you respond to the objection that you might be underinvesting in the business compared to everyone else?

Yeah, we haven't announced our full year 2026 estimates. We plan to do so as we come out of the K. We're in the midst of our 2026 planning process looking at those investments. Some of the investments we make, as you recall, our technology operation, our evolution management systems company is outside the public company. Those capital investments are made within that tech environment, which then doesn't burden the public entity with that capital spend. We will have investments similar to our peers, probably not at the scale of what they're spending. And part of that is just how we're organized. given the ability we can invest in technology outside of the public company operations and benefits of those tech investments then in order to the public company operating business units.

So it's just totally different.

We will have expansion of management team. You'll see an announcement later on this afternoon of some roles and title changes that we put out. And then as we finish up our 26th planning, we'll be putting out the full-year estimates alongside our K. Okay.

Thanks, Gordy.

Thank you. Once again, to ask a question, please press star 11 on your telephone. Our next question comes from the line of Brian Meredith of UBS. Please go ahead, Brian.

Yeah, thanks. Gordy, first question, back on the MTA. So as capacity becomes more available, particularly in the Texas market, and I'm assuming business kind of goes back to the admitted market from the wholesale ENS market, will that create some pressures maybe on growth in the MGA?

Well, fortunately for us, our MGA programs are currently all admitted. So if anything, the capacity that's shifting back from ENS into the admitted space enters to our benefit. So both Texas and Florida are admitted products.

Terrific. That's helpful. Thanks. And then a second question. I'm just curious, when we think about EBITDA margins for your corporate versus agency in a box business, what's the difference there? And is there a difference in kind of where your agency in a box EBITDA margins can go versus the corporate margins, do you think?

So, you know, we've talked about agency in a box and the passing through of 80% of the revenue new and renewal kind of puts a cap on what that margin can produce. Because we are at scale as a business operations, we do have a healthy net revenue margin on that business unit. But on the corporate locations, our margin is going to be greater than 2x of what we achieve in agency in a box because we're retaining 100% of the renewal and have more control and constructive receipt of the profitability of the operations.

Makes sense. Thank you.

And I want to circle back, Brian, while I got you. So I partially misspoke. Our programs that we originate and operate are all admitted. The Dover Bay program is indeed an ENS program, and I just wanted to clear that up.

Okay, thanks. Thank you. Our next question comes from the line of Charlie Letterer of BMO. Your line is open, Charlie.

Sorry, I joined late, so I apologize if I'm repeating someone else's question or if you touched on your remarks. But, you know, you made the comment in the press release about the product environment, you know, improving significantly. Just curious if you could break that out geographically a little bit and, you know, if you're seeing that both the new business and renewal side and I guess how to think about, you know, exploring P&L near term.

Sure. Sure. So we did touch on it earlier, but I don't mind repeating the hard market for personal lines started moving soft in really the beginning of the second quarter of 25 that changes carrier posturing. So think about the hard market 23, 24, and the early parts of 25. Carriers are taking significant rate. Carriers are restricting capacity. By restricting capacity, that means they're not running the right new business, they're not wanting to add new production appointments, and that becomes a challenge.

Can you guys still hear me?

Yeah. Okay, sorry. The computer screen went blank, so I thought I was talking into the abyss. So, as the market started to soften, carriers start reducing rates. They start opening up geographically for new business growth they start putting out incentives to to uh get agents to re-engage in the sales process and it becomes a highly competitive environment geographically i would say that's present everywhere except california california remains to be a hard market you're still seeing property uh you know shifting between california fair plan surplus lines uh there's fewer uh carriers right now operating in the California marketplace. You had Safeco make the decision to essentially exit the state by transferring its portfolio to Liberty Mutual. And so capacity is shifting from left pocket to right pocket. We are in both of those carriers' distribution. And so California is still hard on the personal line side. It's relatively soft on the commercial lines. And then you have spotty geographical hardness where you have significant wildfire exposure regardless of state. And then I'd say largely the cat exposed hurricane driven PML geographies are relatively soft given the reduction in cat pricing and the significant availability of cat out in the market today.

Thanks. Maybe on the M&A pipeline that you talked about, can you give us a sense of commercial or personal tilt toward that in terms of how your business mix might evolve in the next year or so?

So when we're looking at M&A, the first thing we're looking at is the cultural fit of the organization. Secondarily, the quality of the portfolio, is it accretive? Meaning, Does the portfolio have similar loss ratio qualitative characteristics as our core portfolio? Is there some geographical expansion benefit of the acquisition? So does it possess unique carrier contracts and programs that benefit the large organization? So there's an immediate accretion. The EBITDA margin of the operating business, And is there some internal scale lift of that post-closing? You know, we don't really focus on is it personal, is it commercial, is it retail, is it MGA, is it network. We really look at the qualitative accretiveness of the totality of everything. And so we have in our pipe and we have in our near term a little flavor of everything. So, you know, if I look in the rear, the last two acquisitions we closed were, I would say, majority commercial lines, retail organizations. And part of that was, you know, geography. We picked up some scale in New York with the Inger and Lips acquisition that we announced in August. and then you know we had a larger operation in Louisiana that was also more commercially focused in the McGinnis operation that we acquired in June as I look at the first quarter 26 pipeline I would say it's a little bit of everything so we have you know one entirely commercial organization that's in the pipe we have several that are a mix so more of a multi-line agency flavor where you have probably 40, 50% personal, 60 to 50% commercial. And then we have some that are entirely personalized. So I think that that's a good question to ask. And I'll probably use your question as an opportunity to talk about premium projections. When we look at our acquisitions and we put together our base analyst model, I think we use the assumption that the majority of our acquisitions and deployed capital, we're going to be buying retail-oriented businesses that generate a lower average commission, but would project a higher premium. Our internal view is we're less sensitive to premium because we're not a carrier. We're more focused on the acquired revenue and the EBITDA output of the acquiring business. So when we acquire program-oriented type businesses, it's going to bring in less premium than you may have projected, but it's going to bring in a higher average commission than you projected. So when we hear or we see that there's a mess on premium, we're not a carrier. We just use premium as a barometer of how you can project future revenues. And maybe we got to be a little bit more strategic about how we communicate that, because to the extent that we expand programs, and we will because they present a higher margin for us, it's going to be a lower premium, but a higher revenue and a higher EBITDA margin off of what we put in our base M&A assumptions. So I think when we come around and provide 26 guidance, you're going to see us trying to update those assumptions. Because I think when you look at our actual results from an M&A basis, we're achieving on the acquired revenue, we're achieving on, but maybe overachieving on the EBITDA margin. And then where we see there's questions is, but the premium number didn't come in. But I think for me as an investor and owner of the business, I'm more focused on the revenue and the net income and the earnings and the ability to reinvest those earnings into the growth of the business long term than the top line premium that I don't get to retain because we're not a carrier balance sheet organization. Is that fair? Very fair.

Just one last one on the contingent and the contingent finance. putting you into what contingents might look like for kids?

So, we do. One of the reasons we were very confident in our full-year guidance is we made it through the nine-month treadmill and obstacle course known as insurance. We've got those third quarter lock-in opportunities so we can lock in some of those contingencies that are at our base level projections. So we have a high confidence in achieving what we've got in our current performa through the full calendar year. Thank you.

Thank you. I would now like to turn the conference back to Gordie Bunch for closing remarks.

Well, we, again, appreciate all of our shareholders, our staff, even the analysts and investors that are working with us. We think we have a great opportunity going into 2026 with our strong balance sheet, our very healthy M&A pipeline, our organic strategies for existing operations, the expansion of our programs. programs, we look to execute on all the different levers that we have to ensure consistent growth and profitability across the organization. I look forward to further feedback and appreciate everybody again, and thank you for attending This concludes today's conference call.

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