Earnings Call Transcript - TWFG Q2 2025

Operator, Operator

Good morning. My name is Didi, and I will be your conference operator today. At this time, I would like to welcome everyone to the TWFG Second Quarter 2025 Conference Call. The operator has provided instructions for participants on the call. This call is being recorded and will be available for replay on the company's website. Before we begin, let me remind you that today's discussion may contain forward-looking statements, and actual results may differ materially from those discussed. For more information regarding forward-looking statements, please refer to the company's press releases and SEC filings. Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. The company has posted reconciliation of the non-GAAP financial measures discussed during this call in the tables accompanying the company's earnings press release located on the Investors section of the company's website at www.twfg.com. It is now my pleasure to introduce Mr. Gordy Bunch, Founder, Chairman and CEO of TWFG. Sir, the floor is yours.

Gordy Bunch, Founder, Chairman and CEO

Good morning, and thank you for joining us today. Joining me is Janice Zwinggi, our Chief Financial Officer. After our remarks, we'll open up the call for your questions. I'd like to start off by expressing my appreciation for our agents, employees, carrier partners, clients and shareholders. The dedication of our team and trust are the foundation of our continued success. Our second quarter results reflect a strong execution and growing momentum. We delivered total revenue growth of 13.8% to $60.3 million and organic revenue growth of 10.6%. Adjusted EBITDA rose 40.7% to $15.1 million, with margins expanding to 25.1%. Total written premiums increased 14.4% to $450.3 million. This performance highlights the scalability of our platform and our ability to drive profitable growth even as we invest in expansion. During the quarter, we added 9 new branch locations, expanded into Kentucky and completed 4 acquisitions, including a new MGA property program in Florida. As always, it's important to note that newly onboarded agents typically take 2 to 3 years to reach full productivity. We are confident that today's investments will continue to fuel our future growth trajectory. We continue to see softening in the personal lines market. Carrier capacity is expanding, rate increases are moderating, and certain regions have even seen rate reductions. As the market stabilizes, we're gaining more options for both new and renewal business. This contributed to a retention rate of 89% in Q2, consistent with our long-term averages. Looking ahead to the second half of 2025, we expect moderate rate increases and are monitoring how potential tariffs may impact loss costs. Our diversified network of agents is well positioned to capture share as conditions continue to improve. Our strategic focus is focused on 4 pillars: expanding our national footprint, investing in agent productivity, enhancing our technology infrastructure and deepening our carrier relationships. We've begun piloting AI-driven tools within our services teams to reduce manual processes and improve responsiveness. We believe these tools will help us scale our platform efficiently while continuing to deliver exceptional service to clients and agents alike. I will now turn it over to our CFO, Janice Zwinggi.

Janice Zwinggi, Chief Financial Officer

Thank you, Gordy, and good morning, everyone. Before diving into the quarter results, as a reminder, interest income was moved from the revenue line down to other income, so it will be comparable to prior and future periods. Starting with our top KPI, written premium increased by $56.7 million or 14.4% over the prior year period to $450.3 million. Within our primary offerings, insurance services grew $55 million or 16.5% and TWFG MGA grew $1.6 million or 2.7%. This increase was a result of growth in both renewals and new business. During the second quarter of 2025, within both of our product offerings, we saw healthy renewal business growth of $45.4 million or 14.9% as well as new business growth of $11.3 million or 12.6% over the prior year period. Within our insurance services offering, renewal business grew $41.8 million or 16.1% and new business grew $13.2 million or 17.8% over the prior year period. This growth is reflective of our corporate store acquisitions and expansion into new geographical areas. Within our MGA offering, we saw a shift in renewal and new business growth as compared to the same period in the prior year. In the second quarter of 2024, we saw both property programs open up capacity in an increased rate environment, providing exceptional new business growth during that period. In the second quarter of 2025, these programs faced a slowing rate and more competitive market where we saw a decline in new business growth, resulting from an exceptional to a more normalized growth period. Growth shifted towards renewal business, which grew $3.5 million or 8.1% compared to minimal growth in the same period of the prior year. Our consolidated written premium retention was 89% as compared to 93% in the prior year period, with current retention being in line with our long-term projected retention rate of 88%. The decrease quarter-over-quarter 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 $7.3 million or 13.8% over the prior year period to $60.3 million. This increase was mainly due to commission income representing 11.1% of the total growth. The remaining 2.7% total growth included contingent income of 1.5% and fee and other income of 1.2%. Commission income increased $5.9 million or 12.1% over the prior year period to $54.6 million, driven by new business growth and solid retention levels. Insurance services was the main contributor at 14.2% growth or 12.1% of the total growth, while the MGA remained relatively flat over the prior year period. Contingent income increased $0.8 million or 61.6% over the prior year period to $2 million, tracking closely with our written premium growth. Fee income was up $0.6 million or 23.8% to $3.3 million, driven by increases in branch fees, PPA fees, policy fees and licensing fees. Organic revenues increased $5.7 million, reaching $54.1 million compared to $48.4 million in the same period prior year for an organic growth rate of 10.6%, driven by new business production, normalized retention levels and moderating rate increases. Turning to expenses. Commission expense increased $2.2 million or 6.8% over the prior year period to $34.2 million, tracking with commission income, taking into account the impact of corporate store additions and programs with no related commission expense. Our total salary and employee benefits increased by $2.7 million or 39.3% over the prior year period to $9.5 million, reflecting our scale and the IPO transition, driven by $1.5 million increase from the RSUs issued in connection with the IPO, $0.7 million due to corporate store acquisitions and $0.5 million due to growth of the business. Other admin expenses increased $1.7 million or 44.2% over the prior year period to $5.4 million with approximately $0.4 million in IT costs, $0.3 million related to professional and consulting fees and the remaining $1 million increase was tied to ongoing growth and acquisition integration. Depreciation and amortization increased $0.9 million or 31.4% to $3.9 million, primarily from our recent asset acquisitions. Net income for the quarter was $9 million, up 30.1% over the prior year period. Adjusted net income increased 17.3% to $11.5 million, driven by earnings growth and partially offset by higher public company costs and a $3.4 million increase in tax expense. EBITDA was $11.8 million and adjusted EBITDA was $15.1 million, up 40.7% over the prior year period. Adjusted EBITDA margin expanded to 25.1% compared to 20.3% in Q2 2024, reflecting both top line growth and scale. With that, I will turn it back to Gordy.

Gordy Bunch, Founder, Chairman and CEO

Thank you, Janice. With half the year behind us, we are tightening our 2025 guidance as follows: organic revenue growth between 11% to 14%, adjusted EBITDA margin between 21% and 23%, and reaffirming total revenues between $240 million and $255 million. We remain well capitalized with $160 million in cash and a fully available credit revolver. This gives us flexibility to continue investing in our strategic growth priorities and expanding our M&A initiatives. In closing, I want to thank the entire TWFG team for their continued dedication and our shareholders for their support. We are energized by the opportunities ahead and confident in our ability to deliver long-term value. With that, Janice and I would be happy to answer any questions. Operator, please open the lines.

Operator, Operator

And our first question comes from Mike Zaremski of BMO.

Michael Zaremski, Analyst (BMO Capital Markets)

My first question is about the profit margins this quarter. The commission expense ratio was much better than expected and appears to be driving much of the upside in the earnings guide. Maybe you can help unpack how to think about what's taking place there. I'm assuming the MGA is impacting it the most, but maybe there were incentives you mentioned last quarter that didn't come to fruition as much. That's my first question.

Gordy Bunch, Founder, Chairman and CEO

At a high level, Mike, commission expense is lower due to commission revenues also being lower; there's an implied ratio in those projections that we will pay out a certain percentage of commission income. So that does drive part of it. I'll let Janice give you a little more detail on other components that help drive expansion of profitability.

Janice Zwinggi, Chief Financial Officer

Sure. So a big portion of that was the corporate store acquisitions that we're adding that had 0% commission expense. So that makes the ratio look lower compared to the commission income growth. And that was really driven by the later acquisitions that we did in '23 and also the acquisitions that we did in '25. So those really made a big difference in the drop to 6%, I think, of commission expense growth.

Gordy Bunch, Founder, Chairman and CEO

Yes. And then on top of that, the margin we're achieving on acquired corporate locations is exceeding the modeled margin, which is giving us some margin expansion off of those business units. So yes, the commission expense stands out a little bit, but that's more a reflection of lower commission income, and the profitability is coming from operating margins improving on the corporate locations.

Michael Zaremski, Analyst (BMO Capital Markets)

Got it. So I guess from your answer, I'll follow up maybe offline. It sounds like a good amount of this is run ratable. Some of it's not. It's going to be driven by growth, but maybe growth being below expectations, but it does sound like some of this could be a trend. Okay. Got it. Maybe we can pivot to another topic.

Gordy Bunch, Founder, Chairman and CEO

We will frame it as this: we're not guiding to the quarter's 25.1% margin. We're still giving you guys an EBITDA margin on the full calendar year between what '21 and '23 were. So we did have a gain on sale that gave us a little bit of a lift in the quarter. That's not a repeatable portion of that EBITDA margin. So we don't want you just to gross up the margin to say, run rate it out of Q2.

Michael Zaremski, Analyst (BMO Capital Markets)

Got it. That's helpful. Maybe pivoting, I'm sure there'll be more questions on organic growth, but maybe starting with — maybe you can talk about what's changed in the last few months versus prior expectations and that will help give us a flavor of how to think about your implied growth in the back half of the year. Maybe you can talk about what's changed in the dynamics there and help us kind of think through what's going on.

Gordy Bunch, Founder, Chairman and CEO

Sure. So I think at the highest level, you look at the overall market conditions. If you look at prior year 2024, the market was very hard for personal lines, a lot of capacity was constrained, and rate was flowing through. Our agents and customers had fewer choices in the market. As we roll into 2025, the market started to soften by the time we hit Q2 2025; you're starting to see additional capacity providers enter the marketplace at lower average premiums, not just for property, but also for private passenger auto. I think when we look at some of the other companies that have already reported, you can see that there is more competition in the overall market. And so our customers, as they renew in Q2 of 2025, have more options. So even if there's still a little rate flowing through, we may have two or three options that might be at pricing that's equivalent to prior year expiration or even below prior year written. And that's where we saw a mix shift of the business from renewal retention to a higher lift in our overall new business as a percentage of the mix. So we kind of expected this all to start coming through. I think what's driving the overall lower organic growth is probably going to be just the extent of the rate differential between expiring terms and what's available at renewal and what's also available at new business. That's much harder to predict and gauge in a forward-looking estimate.

Michael Zaremski, Analyst (BMO Capital Markets)

Okay. Got it. And as a follow-up to that, maybe you can kind of — we know your geographic footprint. Can you at a high level just paint a picture: are there certain footprints where rates went from double digits immediately to low singles? Or is it happening in certain pockets? I just want to understand if there's a regional bias to this that we should be thinking through — potentially temporary if rates are now negative, but long term they probably go back to positive. Any other color would be helpful.

Gordy Bunch, Founder, Chairman and CEO

Yes. Let me kind of bifurcate between auto and home. Auto on a national basis is relatively softening and stabilizing. We still expect mid-single-digit rate to flow through with the markets on private passenger auto being more open for new business growth. We are starting to see some of those incentives that we mentioned in Q1 starting to come into the distribution. The offset to that is auto is a six-month cycle. Policies are written on six-month terms. So Q2 will have more of an impact on auto, Q3 will be kind of the balance, and then once you get past that two-quarter cycle, the impact of private passenger auto gets more stable. We are able to add exposure in private passenger auto in a way that we weren't last year, so we are seeing growth with new business. On the homeowner side, you are going to see differentials by region. We don't have a large footprint in Florida, but there is some price deceleration in Florida given the results that state has had. We are also seeing some price deceleration in Louisiana, more stable in, say, Texas, our core state. But there are pockets that do have more downward rate trajectory in the current period that we don't anticipate being a long-term trend. Structurally, the entire country is not in a moderated mode on property; there are still some states that are taking rate. So it will come down to a blend of where we're getting our growth and where we have our current footprint, and that does impact organic growth. If you have a policy that was $6,000 last year and it can be written with two or three different markets at $5,000 this year, those do have impacts. But we don't see it like commercial lines where you have a wildly dramatic drop-in rate that then continues for a longer period of time. Catastrophe costs are still that base underlying force that will keep rate more elevated over the long-term historical. So we just have to get through these renewal cycles. It's more acute, as I said, in Louisiana and Florida, but more stable in our core state like Texas and other states that are more normalized; mid-single-digit to double-digit rates are still flowing through those lagging states.

Operator, Operator

And our next question comes from Pablo Singzon of JPMorgan.

Pablo Singzon, Analyst (JPMorgan)

Gord, thanks for your detailed explanation on organic growth. I was just hoping to get sort of a longer-term perspective here. If you look historically, Woodlands has sort of been a mid-teens organic grower. Maybe you saw some benefit from the hard market cycle in '22 and '23, but it was actually much less than the price that was going through the system. Now with prices moderating more broadly, how would you frame, more quantitatively, the benefit you're getting from pricing today? And where do you see that benefit moving in a more mutual environment? Just trying to get a sense of what the growth curve might look like in this environment. Going up, you didn't get much of a benefit, but as things are moderating, curious to see your view on what the growth curve looks like.

Gordy Bunch, Founder, Chairman and CEO

Right. So we still see double-digit organic growth in the near term and in the projected period forward. A lot of that, as we've discussed in prior quarters, is just a shift between renewal retention and new business growth. We are seeing new business growth that kind of offsets the retention ratio that shrank from 93% to 89% in this quarter. If you go back and look at our notes from spring of 2024, we had predicted this mix shift between renewal premium retention and new business growth normalizing to 88%. So we've seen that manifest in the last two quarters. We have additional market capacity that wasn't present in prior periods, so we'll have the ability to add more customers and retain more customers, albeit at maybe a lower average premium than in a rate-increasing environment. The offset is we'll have more total customers because of the ability to grow new business now that carriers are in growth mode. So we're still looking at double-digit organic in the forward periods. We reaffirmed organic for full year 2025 between—

Janice Zwinggi, Chief Financial Officer

Yes. 11% to 14%, sorry.

Pablo Singzon, Analyst (JPMorgan)

Yes, yes, 14%, yes. To summarize what you said, it seems like the magnitude of price moderation is not enough to offset all of that. In another world, if prices were going down by 30 points, it would overwhelm new business and renewal dynamics. But from what you were saying, prices are slowing down, yet the normal dynamics you described should ultimately result in the growth you're guiding to. Is that the message?

Gordy Bunch, Founder, Chairman and CEO

That's right. And we've lived through July, so we have a little bit of line of sight that where we're guiding to makes sense. If we saw something different, we would have adjusted further. Again, Q2 of 2024 was an exceptional growth period. Q2 of 2025, in our opinion, was still an excellent quarter. Top-line revenue growth, all things being considered, you're comparing an exceptional organic growth quarter to still an excellent growth quarter when you're doing the prior period analysis. So having the ability to still have the growth in the face of a moderating rate environment and increasing capacity, we're feeling good about the trajectory of where we're headed. We remain more than two times the industry average organic growth, and we are guiding to that double-digit forward-looking projection.

Pablo Singzon, Analyst (JPMorgan)

Okay. Understood. And then my second main question, I realize I snuck one in there, but this one is more about the broad revenue outlook and M&A. I think you affirmed your revenue outlook for the year, and I think the base for '24, taking out interest income, is $204 million. With $240 million to $255 million this year, there's roughly 18% to 25% growth. If organic is 11% to 14%, that implies the balance is M&A, roughly 7 to 11 points. By my math, it seems like the M&A contribution in the first half has been lower than 7% to 11%. If you're getting 2 to 3 points from M&A in the first half, can you unpack what's behind the numbers and what you expect for the second half?

Gordy Bunch, Founder, Chairman and CEO

When you're looking at the M&A contribution, it's always about timing of when you onboard that asset. We closed a few transactions at the beginning of Q1, a few at the beginning of Q2, and throughout Q2, and subsequent to Q2 we announced yesterday an acquisition in New York that occurred post-Q2. So we have the revenue seasonality of those acquisitions in our forward forecasts. Something we acquired in May wasn't that accretive to the first half of the calendar year but will be more accretive to the back half of the calendar. We had closings April 1, May 1 and June 1 in the quarter from announced M&A, and those will compound into more meaningful contributions in the back half of the year for M&A-contributed revenue. That's one of the reasons we reaffirmed our revenue guidance for the full year 2025: we have line of sight to the impacts of those now-acquired, onboarded and integrating assets joining the TWFG family.

Operator, Operator

And our next question comes from Tommy McJoynt of KBW.

Thomas McJoynt-Griffith, Analyst (KBW)

First question here. Looking ahead, should we assume continued year-over-year EBITDA margin expansion just as the corporate branch growth, either organic or via acquisitions, outpaces agency-in-a-box production? And more simply, is it feasible that margins get to 25% for a full year in the next couple of years?

Gordy Bunch, Founder, Chairman and CEO

It's feasible depending upon what additional acquisitions we have of scale that are operating at plus 30% margins. We're not currently projecting that in the forward 2026 or 2027, but it is plausible given that we are achieving greater than 30% margin on the corporate assets. It will be a combination of what we actually acquire, how we realize that higher-margin business into the overall total, and how much growth we have in lower-margin business that runs alongside that. There are a number of margin expansion initiatives via technology and our virtual assistance programs in the Philippines. We are working on AI initiatives that could lead to better efficiencies across operations, which might result in cost savings and improved scalability. Our Philippines operation is expanding facilities right now, and we anticipate those coming online toward the end of the calendar year, which should give us an opportunity to leverage that labor arbitrage further. So it's plausible, but we're not currently projecting it. As we get through the remainder of 2025 and take a refreshed look at 2026 and 2027, we'll provide updated margin guidance at that point.

Thomas McJoynt-Griffith, Analyst (KBW)

That's helpful. And then actually, going back to your response to one of the earlier questions, I think you referenced a gain on sale that gave a bit of a margin uplift. What was that referring to? Any way to quantify how much margin accretion that drove?

Gordy Bunch, Founder, Chairman and CEO

Yes, I'll let Janice answer that one.

Janice Zwinggi, Chief Financial Officer

So there were two items: the gain on the book of business sale was roughly $600,000. In addition to that, we had an increase of over $1 million in interest income on the IPO proceeds that we didn't have last year in Q2.

Thomas McJoynt-Griffith, Analyst (KBW)

Was the gain on sale just the $600,000?

Janice Zwinggi, Chief Financial Officer

Yes, just $600,000 is the gain on the sale.

Thomas McJoynt-Griffith, Analyst (KBW)

So just the $600,000 is a one-timer.

Gordy Bunch, Founder, Chairman and CEO

Yes, that's correct.

Operator, Operator

And we have a follow-up from Pablo Singzon of JPMorgan.

Pablo Singzon, Analyst (JPMorgan)

So Gordy, just another question on M&A. I was hoping you could provide a broad sense — and it can be a very loose range — of the properties you're considering in M&A. And would it be fair to assume that the deals you've closed thus far, what you paid for them, are a decent size below where you're trading in the public market?

Gordy Bunch, Founder, Chairman and CEO

Yes. We are acquiring assets of various sizes. The range of what we're paying depends on the growth of the asset, the profitability margin and the overall size of the business, so it's not a static number. On a blended basis through the quarters we've had, we're still coming out pretty close to what we modeled. We don't want to get too specific on exact multiples paid. We have a very robust pipeline going forward and are in active conversations with sellers. For your purposes, transactions are relatively in line with the M&A model we used last year. As we look at our forecast for the remainder of 2025, achieving that midyear convention of what we projected, things we possibly acquire in Q3 and Q4 will be accretive against that model.

Operator, Operator

And we have a follow-up from Mike Zaremski of BMO.

Michael Zaremski, Analyst (BMO Capital Markets)

My question is on the MGA side of the business. One of your public peers discussed on their earnings call approximately a week ago a meaningful increase in competition into the E&S home insurance marketplace. You talked about a lot of softening in home. The competitor also talked about that causing underwriting standards to loosen and that they might not be comfortable underwriting as much E&S home business. Do you have any comments? Is the softening you're seeing also taking place in the E&S marketplace? How is it impacting your MGA's trajectory?

Gordy Bunch, Founder, Chairman and CEO

Yes. Good question, Mike. I want to clarify our property programs. Our core program, FICO, is admitted and Texas-based. It did take rate in this calendar year, which slightly impacted retention. The biggest differential when comparing Q2 2024 to Q2 2025 for that program is last year a lot of the market for property in Texas went relatively catatonic: carriers shut down new business on April 1, 2024, which gave us outsized growth in that program in Q2 2024. Compared to Q2 2025, we're retaining that portfolio and adding new PIF, but the growth differential between the two years reflects that we had outsized growth last year when parts of the market were closed. We also constrained our own growth going into the second quarter because the reinsurance for that program renews June 1 and we wanted to ensure longevity in the program and growth forward. Reinsurance is a huge component of cost for that program, so at renewal we evaluated including growth, and that growth was restrained. So we self-inflicted some of our own growth trajectory by staying closed in geography where we could have added additional risks later in the hurricane season to better utilize that cat program. That program should have growth potential in Q3 and Q4 as we've loosened some guidelines to open up geography we were closed to in Q2. The Dover Bay program, which is E&S, is an exclusive program to its own distribution channel and it's still growing. We have opportunities for expansion into additional geography that we are working through, so we think that program has legs. That program doesn't operate on a premium-to-commission ratio; last year we transitioned that contract to a more level cost that adjusts annually, which skews premium-to-commission ratios in total. We're not seeing the same necessarily correlated E&S impact. Where the E&S market dynamics flow through to us is in renewal premium differentials; if E&S carriers lower rates, that might flow through into the renewal premium differential I mentioned earlier.

Michael Zaremski, Analyst (BMO Capital Markets)

Got it. Okay. One more follow-up: If we're transitioning to an environment where pricing is stable, let's say mid-single digits overall, how do you think about new branch locations? Do you think about them in terms of cadence — is there a normal run rate — or will it remain inherently volatile?

Gordy Bunch, Founder, Chairman and CEO

I would say recruiting is an ongoing effort and the pipeline is solid. The emphasis on how many in any given month or quarter is less important than the quality of the talent and aligning that talent to our platform. Depending on the type of prospect, the sales cycle to bring on a new location can be quick if the individual isn't encumbered by existing agreements or portfolios, or it can be long if they're disposing of a captive portfolio they cannot bring with them. We're having success with smaller independent agencies converting to our model via an 80/20 relationship where they can scale and leverage our infrastructure. We're hyper-focused on qualitative onboardings and looking for those that can bring some portfolio with them to provide immediate benefit to the organization, versus building from scratch. They each have different onboarding timelines. We'll spend more effort increasing the pipeline to have a better culling of opportunities. Geographically, carriers opening up for more capacity provides a better outcome for recruitment; one of the biggest questions prospects ask is, 'Can I actually write business?' Many prospects are in captive single-carrier environments, and access to a broader market makes our model attractive. Carriers willing to appoint and grow gives us a good trajectory. Not all geography is softening — California still has persistent rate and good opportunities for us, but it remains a hard market in California for personal lines.

Operator, Operator

Thank you. I'm showing no further questions at this time. I'd like to turn it back to Gordy Bunch for closing remarks.

Gordy Bunch, Founder, Chairman and CEO

Thank you, Didi, and thank you all for attending today's call. I just want to reiterate that TWFG remains a highly capitalized, nearly debt-free organization with good tailwinds at our back. Our organic and inorganic strategies are playing out. We will continue to update guidance as we see changes within our performance. We appreciate everybody who's attended this call and look forward to our Q3 call here in the near future. So thank you for attending and until next time.

Operator, Operator

And this concludes today's conference call. Thank you for participating, and you may now disconnect.