Q2 2024 TWFG Inc Earnings Call

August 28, 2024

Michelle: Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the TWFG 2nd quarter 2020-24 conference call.

Operator: today. At this time, I would like to welcome everyone to the TWFG second quarter 2024 conference call.

Operator: All lines have been placed on you to prevent any background noise.

Michelle: All lines have been placed on you to prevent any background noise.

Operator: After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star or 1-1 on your telephone key page. If you would like to withdraw your question, please press star 1-1 again.

Michelle: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star of 1-1 on your telephone key payet. If you would like to withdraw your question, please press star 1-1 again.

Operator: 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.

Michelle: This call is being recorded and will be available for replay on the company's website.

Michelle: 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.

Michelle: For more information regarding forward-looking statements, please refer to the company's press releases and SEC violence.

Michelle: Also, in today's call, our speakers will reference certain non-gap financial measures which we believe will provide useful information for investors.

Operator: The company has posted reconciliations of the non-GAAP financial measures discussed during this call in the tables accompanying the company's earnings press release, located on the investor section of the company's website at investors.twfg.com.

Michelle: The Company has posted re-conciliation of the non-gap financial measures discussed during this call in the tables accompanying the company's earnings press release, located on the investor section of the company's website at investors.kwfg.com.

Michelle: It is now my pleasure to introduce Mr. Gordy Bunch, founder, chairman, and CEO of TWFG. Sir, the floor is now yours.

Michelle: It is now my pleasure to introduce Mr. Gordy Bunch, founder, chairman and CEO of PWFG. Sir, the floor is now yours.

Gordy Bunch: Thank you, Michelle. Good morning, everyone, and thank you for taking time to join us today to discuss our second quarter of 2024 results.

Gordy Bunch: Thank you, Michelle. Good morning, everyone, and thank you for taking time to join us today to discuss our second quarter of 2020 for results.

Gordy Bunch: I would like to welcome all our new stockholders and the analysts to our first earnings call as a public company. Joining me on this call is Janis Weenie, our Chief Financial Officer. After my opening remarks, Janis will review our financial results, and then we will take your questions.

Gordy Bunch: I would like to welcome all our new stockholders and the analysts who are first earnings call as a public company.

Speaker Change: Joining me on this call is Janice Ween, our Chief Financial Officer.

Speaker Change: After my opening remarks, James will review our financial results and then we will take your questions.

Gordy Bunch: First of all, I would be remiss if I didn't take this time to thank all of our employees, carriers, agents, clients, and vendors over the past 23 years and have helped TWFG reach our goal of becoming a public company. We truly have an amazing team collaborating every day to create one of the fastest growing independent insurance distribution platforms. I started TWFG with an essential IPL in mind so that one day our agents and employees would be aligned with equity when the time was right. I am pleased with the number of agents and employees that we can now count as shareholders.

Speaker Change: First of all, I would be remiss if I didn't take this time to paint all of our employees, carriers, agents, clients and vendors over the past 23 years and have helped PWFG reach our goal of becoming a public company.

Speaker Change: We truly have an amazing team collaborating every day to create one of the fastest growing independent insurance distribution platforms.

Speaker Change: I started PWFG with an essential IPL in mind, so that one day our agent's employees would be aligned with equity on the time it was right.

Speaker Change: I am pleased with the number of agents and employees that we can now count as shareholders.

Gordy Bunch: Ownership an alignment with our talent and continue to grow as we use board as a public company.

Speaker Change: Hello, Shippin' Align with our talent with continue to grow as we move forward as a public company.

Gordy Bunch: Our second quarter saw an inflection with our agency in the box offering with the opening of 44 new TWFG branches. These branches are staffed by 44 experienced former Captivators, and we are excited that they have decided to join the TWFG family. This opportunistic onboarding of seasoned client-focused talent demonstrates how TWFG is uniquely positioned to capture the ongoing shifts from captive distribution to independent. We do not expect this endless of talent to have a significant impact on our revenues this year or next, but over the long term we expect the agents we are onboarding in 2024 to contribute to our organic growth.

Speaker Change: Our second quarter, so in flexion and growth, with our agency in the box offering, with the opening of 34 new TWG branch.

Speaker Change: These branches are staffed by 44 experienced former captivated and we are excited to say if you're excited to join the TWG family.

Speaker Change: This opportunity to take on-boarding of seasoned client-focused talent demonstrates how TWFG is uniquely positioned to capture the ongoing shift from captain's distribution to independent distribution.

Speaker Change: We do not expect a sense of what's the talent to have a significant impact on our revolution this year or next, but over the long term, the expect the agents we are onboarding in 2020 for to contribute to our organic growth.

Gordy Bunch: As far as the operating environment, we are beginning to see improvements in carriers' appetite for growth as the industry achieves significant improvement in loss ratios. This is expected to lead to higher new business growth and expansion opportunities heading into 2025.

Speaker Change: As far as the operating environment, we are beginning to see improvements in carriers appetite for growth as the industry achieves to get the improvements in lawstrations.

Speaker Change: This is expected to lead to hiring in business growth and expansion opportunities heading in 2025.

Gordy Bunch: TWFG had a strong second quarter highlighted by 17.4% total revenue growth, 13.8% organic revenue growth, 18.4% adjusted net income margin, and a 20.2% adjusted pivot margin. At TWFG, we believe we offer a strong value proposition for the tens of thousands of after-day agents and in the ten agents looking for the right partner to help them grow and perpetuate their business. Our value proposition coupled with a conservative balance sheet, flexibility around yield structuring, and our efficient operating model positioned us well knowing forward.

Speaker Change: TWFG had a strong second quarter, highlighted by 17.4% of total revenue growth, 13.8% organic revenue growth, 18.4% adjusted that income margin, and a 20.2% adjusted to even the margin.

Speaker Change: At TWFG, we believe we offer a strong value proposition for the tens of thousands of cathodages and interconnections, looking for the right partner that helps them grow and perpetuate their business.

Speaker Change: Our value proposition, coupled with a conservative balance sheet, flexibility around yield structuring and our efficient operating model, position as well going forward.

Gordy Bunch: While we pause our M&A initiatives leading up to the IPO, we did continue to build a pipeline of potential acquisition. We look for acquisitions with the following characteristics. First, cultural alignment. It is critical for any acquisition we close that there is pre-existing cultural alignment. We will not transact a deal if an organization is culturally sublimated. Second, portfolio alignment. We prioritize acquisitions delivering profitable portfolios to their trading partners. Our focus on a loss ratio, retention, and carrier-free approval of our transactions helps avoid adding diluted portfolios. Third, organic growth. We are looking for opportunities that are accreted to our organic growth trajectory, or that have the potential to be added.

Speaker Change: While we pause our M&A initiative, leading up to the IPO, we did continue to build a pipeline at potential acquisition.

Speaker Change: We look for acquisitions with the following characteristics.

Speaker Change: First, cultural alignment. It is critical for any acquisition we close that there is pre-existing cultural alignment. We will not transact to deal if an organization is culturally superior.

Speaker Change: Second.

Speaker Change: Portfolio alignment. We prioritize acquisitions, delivering profitable portfolios to their trading partners. Our focus on a lost ratio, retention, and carrier-free approval of our transactions, help avoid adding diluted portfolios.

Speaker Change: We are looking for opportunities that are created to our grant growth trajectory. Or that have the potential to be added.

Gordy Bunch: Fourth, even in margin, we expect to acquire accretive margin agency, MGA, and other strategic partners. Our M&A model shows margin expansion in the out years as we absorb public company expenses. Some of the margin expansion is expected to come from our M&A activity, and the balance from achieving further scale in our core businesses. Fifth, Geography. We are looking for the right opportunities to expand and to need geographic locations. Our goal is to fill in more of the country with the efficiency of a true branded location, whether by acquisition or recruiting. Different areas of the country utilize different carriers, with whom it is often difficult to obtain employment.

Speaker Change: 4. Even a margin, we expect to acquire a creative margin agency.

Speaker Change: MGA and other strategic targets. Our M&A model shows margin expansion in the out-nears, as we absorb public company expenses. Some of the margin expansion is expected to come from our M&A activity, and the balance from achieving further scale in our core businesses.

Speaker Change: that geography.

Speaker Change: We are looking for the light opportunities to expand into energy and graphic locations.

Speaker Change: Our goal is to fill in more of the country with additional TMT-3 branded locations, whether by acquisition or recruiting.

Speaker Change: Different areas of the country utilize different carriers with whom it is often difficult to obtain a planet.

Gordy Bunch: Acquiring contracts with carrier-free approval is a cruising way to expand our market and increase viability in these areas. Six, synergy. We target acquisitions that strategically bring a compounding benefit. These benefits include technology, niche NGA platforms, distribution that is not overlapped with our current footprint, and deals where we have internal synergies that increase the target and TWAG value.

Speaker Change: The acquiring contracts with carrier pre-approval is a crucial way to expand our markets and increase viability in new areas.

Speaker Change: 6. Energy. We target acquisition that's strategically burning a compelling investment.

Speaker Change: These benefits include technology, NICGNGA platforms, distribution that is not overlapped with our current footprint, and deals where we have internal synergy that increase the target and key to NICG's value.

Gordy Bunch: We expect to continue re-engaging in our M&A efforts and look forward to future accretive. I will now ask Janice to review our second-quarter results in greater detail.

Speaker Change: We expect to continue re-engaging in our MADFs and look forward to future accretion deals.

Janus: I will now ask Janus to review our second quarter results in greater detail.

Janis Weenie: Thanks, Gory, and good morning to everyone on the call. Starting with top line, written premium increased $66.5 million, or 20.3%, over the prior year period to $393.6 million. Under our primary offerings, insurance services grew $58.5 million or 21.2%, and TWFGMGA grew $8 million or 15.6% over the prior year period.

Janus: Thank you for joining us. Thank you for joining us.

Janus: Starting with top lines, written premium increase 66.5 million or 20.3 percent over the prior year period to 309.6 million.

Janus: Under our primary offering, insurance services for 58.5 million or 21.2% and TWFGMGA through 8 million or 15.6% over the primary period.

Janis Weenie: Retention remains high, and branch locations are driving same-store sales, coupled with carriers continuing to fish through rate increases, particularly in the personal line to arena. Total revenue increased $7.9 million, or 17.4%, over the prior year period to $53.3 million, of which commission income represents 15.2% of this 17.4% growth. My product offerings, insurance services, is the main driver representing 15.9% of the 17.4% total revenue growth. Commission income increased $6.9 million, or 16.5%, over the prior year period to $48.7 million. This increase is due mainly to higher premium rates, business growth, increased retention, and continued grow out of our book of business acquisitions in 2023 into the current period.

Janus: Retention remains high, and branch locations are driving St. George's cell, coupled with carriers continuing to fish through rate increases, particularly in the personal lines of arena.

Janus: Total revenue increased 7.9 million or 17.4% of the prior year period to 53.3 million of which information bank on represents 15.2% of this 17.4% growth.

Janus: My product offerings insurance services is the main driver representing 15.9% of the 17.4% total revenue growth.

Janus: Commission Ancon increased 6.9 million or 16.5% over the prior period to 48.7 million. This increase is due mainly to higher premium rights, business growth, increased retention, and continued grow-out of our book of business acquisitions in 2023 into the current period.

Janis Weenie: Organic revenues increased $5.7 million, or 13.8%, to $47.5 million, driven by strong retention increases in premium rates and helping new business growth.

Janus: Well, thank revenues increase 5.7 million or 13.8% to 47.5 million driven by strong retention, increase some premium rates and healthy new business growth.

Janis Weenie: Turning to expenses, note that expense comparisons to prior periods mainly commission expense and salary and employee benefits are skewed given the acquisition of nine of our independent branches in January 2024, which in prior years were operated as agencies in a box and have now been converted to corporate stores. The commission expense associated with the branch conversions decreased, while salary and benefits increased compared to prior periods. Commission expense increased $1.1 million, or 3.5%, over the prior year period to $32 million. Commission expense increased due to the technical growth of the period by $4.2 million, offset by a decrease of $3.2 million related to the branch conversions, with an offsetting increase in salary and employee benefits at $2.2 million.

Janus: During to expenses, note that expense comparisons to prior periods for mainly commission expense and salary and employee benefits are suited given the acquisition of nine of our independent branches in 2020, January 2024, which in prior years were operated as agencies in a box and have now been converted to corporate stores.

Janus: The Commission Experts Association was a branch conversion increase while salary and benefits increased compared to prior periods.

Janus: Commission expects increased 1.1 million or 3.5 percent over the prior year period to 32 million.

Janus: Commission Expense and Created use of the TEFNASGRAW for the period by 4.2mins, offset by a G-crease of 3.2mins, related to the branch conversions.

Janus: With an off-setting increase in salary and afforded benefits of 2.2 million.

Janis Weenie: Total salary and employee benefits increased by $3.4 million or 102.3% over the prior year period to $6.8 million. As mentioned above, $2.2 million of the increase was related to the branch conversion, and $1.1 million of the increase was due to corporate store asset acquisition. Other administrative expenses increased $1 million or 37% over the prior year period to $3.7 million due to the continued growth in the business and the sorrows of public company costs. Emeritization and depreciation expenses increased $1.8 million, or 162%, over the prior year period to $3 million due to the compensation of intangibles associated with our branch conversions in the 2023 acquisition.

Janus: Toe Sally and employee benefits increased by 3.4 million or 102.3% of the prior year period to 6.8 million.

Janus: As mentioned above, 2.2 million of the increase was related to the branch conversion and 1.1 million of the increase was due to corporate store asset acquisition.

Janus: Other administrative expenses increased 1 million or 37% of the prior year period to 3.7 million each of the continued growth in the business and the absorption of public country costs.

Janus: Anvilization and Appreciation Expenses Increased 1.8 million or 162% over the prior period to 3 million due to the anniversation of Intentuals associated with our branch conversions and the 2020-3 acquisitions.

Janis Weenie: Net income for the quarter decreased 0.2 million or 2.1% over the prior period to 6.9 million, and adjusted net income increased 1.5 million or 18.1% over the prior period to 9.8 million, due mainly to the addback of increased organization expenses associated with our branch conversions earlier this year and the 2023 petitions. Both EBITDA and adjusted EBITDA for the quarter were 10.8 million, representing 28.5% and 25.8% growth, respectively. Our adjusted EBITDA margin was 20.2% in the second quarter versus 18.8% in the prior period. The margin expansion was driven by branch conversions, corporate locations required last year, and economies of scale offset somewhat by public company costs, which we expect to continue to ramp into our run rate expense base over the next several quarters.

Speaker Change: Next time for the 4th of D-Crage

Speaker Change: 0.2 million or 2.1 percent over the prior period to 6.9 million. And addressed at netting time, increased 1.5 million or 18.1 percent over the prior year period.

Speaker Change: To mount the point-haken line, do you mainly to be at back if increased in conversation expenses associated with our branch conversions earlier this year, and at the 2020

Speaker Change: So, EBITDA and address the EBITDA for the 4th or 10.8 million that we're sending 28.5% and 25.8% growth respectively.

Speaker Change: Our objective, even imagine, was 20.2% in a second quarter, versus 18.8% in a priori period.

Speaker Change: The margin expansion was driven by branch conversions, corporate locations for our last year, any economies of scale, offset somewhat by public company cost, which we expect to continue to rampage our run-right expense rates over the next several quarters.

Gordy Bunch: With that, I'll turn it back to 40. Thanks, Janice. In summary, this will be a solid second quarter, and we are pleased with results.

Speaker Change: This ad, I'll turn it back to 40.

Speaker Change: Thanks, Jazz. In summary, this was a solid second quarter and we are pleased with results.

Gordy Bunch: I want to remind analysts and investors that we were not public in the second quarter, and we are now incurring public company expenses that will impact our quarterly results going forward.

Speaker Change: I want to remind Analyst investors that we were not public in the second quarter. And we are now incurring public company expenses that will impact our quarterly results going forward.

Gordy Bunch: We anticipate providing 20.25 guidance later this year when we have a clear line of sight into our public company expenses.

Speaker Change: We anticipate providing 225 guidance later this year when we have a clearer run inside into our public public company expenses.

Michelle: With that, we would like to open the call for questions.

Michelle: Michelle? Thank you.

Speaker Change: With that, we would like to open the call for questions.

Michelle: As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for the first question.

Speaker Change: Shall?

Speaker Change: Thank you. As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment for the first question.

Michael Zorinsky: And the first question comes from Michael Zorinsky with BMO. Your line is now open.

Speaker Change: And the first question comes from Michael Zarensti with BMO. Your line is now open.

Michael Zorinsky: Hey, good morning, and congrats on your first quarter out. I guess my first question is on M&A, and it's maybe a bit high level, but I wanted to see if you'd be willing to kind of offer what you think is a suitable kind of long term. That's an EBITDA ratio level that you think is realistic or that you're seeking to get you over time.

Speaker Change: ouch!

Michael Zarensti: Hey, good morning and congrats on your first quarter out. I guess my first questions on M&A and it's...

Speaker Change: It's maybe a bit high level, but...

Speaker Change: I want to see if you'd be willing to kind of offer.

Speaker Change: What you think is a suitable kind of long term

Speaker Change: That's the EBITAR ratio.

Speaker Change: level that you think is realistic or that you're seeking to get you over time and maybe it's dependent on whether.

Gordy Bunch: Maybe it's dependent on whether to transform M&A takes place or doesn't, but any color around whether you just expect some small tuck-ins or it could be lumpy and we could really see some leverage being deployed over time. Thanks.

Speaker Change: Transformation on an A takes place or doesn't but any any

Speaker Change: Any color around, you know, whether you just expect kind of small tuck-ins or it could be lumpy and we could really see some leverage being deployed over time. Thanks.

Gordy Bunch: Yeah, thanks, Mike. So, as we mentioned, we did shut down M&A leading into the IPO. We did still continue to have conversations.

Speaker Change: Yeah, thanks, Mike. So, as we mentioned, we did shut down M&A leading into the IPO.

Gordy Bunch: We're happy to be back in the M&A game. We do have a good pipeline. There are some larger, lumpier opportunities that were currently just now in the beginning phases of entertaining. As far as you know, IPO proceeds, we have plenty of cash on hand, we have equity and currency, and we do have our credit facility we can draw on. If we deployed all that capital and drew all of our credit facility, we still wouldn't have much of a debt to EBITDA ratio. I think when we had our conversations during the road show, we indicated that for transformational opportunities, things that make really good long-term sense, you know, one to three times that EBITDA ratio would be where we have comfort.

Speaker Change: We did still continue to have conversations. We're happy to be back in the M&A game. We do have a good pipeline.

Speaker Change: There are some larger lumpier opportunities that we're currently just now in the beginning phases of entertaining.

Speaker Change: As far as, you know, I feel proceeds. We have plenty of the cash on hand. We have equity as currency. And when you have our credit facility, we can draw on.

Speaker Change: If we deployed all that capital and drew all of our credit facility, we still wouldn't have much of a debt to even a ratio.

Speaker Change: I think when we had our conversations during the Rocho, we indicated that for transformational opportunities, things that make really a good long-term sense.

Gordy Bunch: I don't see us there in the near term given the capital on hand, the free cash that we have, and the credit facilities that we can draw down on current.

Speaker Change: You know, one to three times that even a ratio would be when we have comfort. I don't see us there in the near term given the capital on hand, the free cash when we have and the credit facilities that we can draw down on currently.

Michael Zorinsky: Okay, that's helpful. Maybe pivoting to the, in the release, and I think you touched on it during the prepared remarks, Gordy, you talked about in the first half of the year, so not too cute, but the first half, hiring 44 experienced folks from captives. Can you give us just a flavor of what the base is so we can kind of better understand that how those 44 could provide a potential lift to organic growth over time?

Speaker Change: Ok, that's a good one.

Speaker Change: I'll talk for. Maybe pivoting to the...

Speaker Change: In the release, and I think you touched on it during the prepare remarks, Gordi talked about in the first half of the year, so not to give you the first half, hiring 44 experienced folks from captives. Can you give us just a flavor of...

Speaker Change: What the basis, so we can kind of better understand that how those 44 could provide a potential left to, to, to, to, again, it grows over, over time.

Gordy Bunch: Sure, and I'll clarify: the 44 new branches were just in the second quarter. So all 44 were onboarded April through June. If they're prior captive agents, they're multi-line, good mix of personal commercial lines. As we launched a new agency, these are agencies, not producers, so they have additional staff within their own locations. We have always made sure that we communicated that these are starting from scratch. They don't have any enforced business. It takes a while for us to get them through the transitional training of how to be independent agents, how to utilize independent technology, how to access the broader independent markets that we bring to fair, working with our marketing team on rebranding and deploying in their communities.

Speaker Change: Sure, I'll clarify the 44 new branches were just in the second quarter.

Speaker Change: So, all 44 were onboarded April 3rd June.

Speaker Change: If a prior cap to the agents, they're multi-line, you know, good mix of personal commercial lines, as we launch new agency, these are agencies, not producers.

Speaker Change: So they have additional staff within their own locations.

Speaker Change: We have always made sure that we communicated that.

Speaker Change: These are starting from scratch.

Speaker Change: They don't have any enforceiveness.

Speaker Change: It takes a while for us to get them through the

Speaker Change: Transitional training of how to be independent agents, how to utilize independent technology, how to access the broader independent markets that we bring to the fair.

Speaker Change: Working with our marketing team on rebranding and deploying in their communities.

Speaker Change: They'll have some production, but nothing that's going to drive the needle in the near-term. They do become beneficial to us in the long term, and helping us sustain those load a mid-teen organic growth rates.

Michael Zorinsky: We're starting to see some traction that we wanted to get from the IPO, the awareness of our operands, and so we're starting to see some improvements. Great to see that we have end bound activity pre-IPO. So we hope that's helpful, Mike.

Speaker Change: So we're very happy to have added them. We're starting to see some traction that we wanted to get from the IPO, the awareness of our operators. And so we'll start to see some improvements, great to see that we end my own activity, pre-IPO.

Michael Zorinsky: If we get a little bit more inside on that as we come towards the end of the year, we'll be happy to share more details.

Speaker Change: So, love here.

Speaker Change: I hope that's helpful Mike. If we get a little bit more insight on that as we come towards the end of the year, we'll be happy to share more details.

Tommy McJoint: Okay, well, I'll just use my follow-up. It's just about that recording. So it's the 44 to be clear, is that on a base of about 400 prior as of 1Q? Yeah, I don't remember the actual 1Q number, but that's about right. I think it's 410 or 411, and now we're over 4. Okay, and then just so just to be clear on, so you've had nice margin improve, but there's been some, you know, there's a number of, I think, drivers of that, but are the, if you can remind us as you add, you know, if you keep up with this cadence of, you know, hiring, let's just, you know, tend, you know, a decent chunk of unproductive producers.

Mike: Okay, I'll just I'll use my follow up and just probably that recording. So it's the 44 just be clear is that on a base of about 400 prior. And as one cue.

Speaker Change: Yeah, I don't remember the actual one, two, number, but that's about right. I think it's four, ten, four, eleven, and now we're over four, ten.

Speaker Change: Okay, and then just so just to be clear on so you've had nice margin prove that there's been some

Speaker Change: Some, you know, there's a number of, I think, drivers at that, but are the, if you can remind us, as you add.

Speaker Change: You know, if you keep up at this cadence of hiring, let's just, you know, a decent chunk of unproductive producers, does that have a material impact in your margins or not really the way your business model works?

Gordy Bunch: So that have a material impact in your margins or not really the way your business model works. Yeah, it's a good question.

Gordy Bunch: So I'll add some further clarification. These are recruited 1099, agency in a box, branches. So we have no salary and wages, brick and mortar expenses attached to these new 440k. The prior capped in principles that will be operating in these retail branches will bear the expense of the local onboarding. We have some minimal expenses onboarding them with the training and information that we provide to them. The websites we set up, the initial collateral for launch, but that's not going to have a meaningful impact on our expenses. So no, there's not like a drag. It's not like I hired a producer who's not going to produce, and I'm paying them a salary.

Speaker Change: It's a good question, so I'll ask you a further clarification. These are recruited 1099 Adenstein-Avox branches.

Speaker Change: So we have no salary and wages, brick and mortar expenses attached to these new 24-volt cages.

Speaker Change: The prior cap is principles that will be operating in these.

Speaker Change: retail branches will barely expand to the local

Speaker Change: on board. We have some, you know, minimal expenses on boarding them with a training and information that we provide to them the websites we set up the initial.

Speaker Change: collateral for launch.

Speaker Change: But that's not going to have a meaningful impact to our expenses. So, no, there's not like a drag. It's not like I hired a producer who's not going to produce and I'm paying them a salary. They're bearing that local expense.

Gordy Bunch: They're bearing that local expense. And so hopefully that's, that's a clearer.

Speaker Change: So

Paul Newsom: Thank you.

Speaker Change: And so hopefully that's clear.

Paul Newsom: And our next question comes from Paul Newsom with Piper Sandler. Your line is now open.

Speaker Change: Thank you.

Speaker Change: And our next question comes from Paul Newsom with Piper Sandler, your line is now open.

Gordy Bunch: Good morning. Congratulations on the call.

Gordy Bunch: I was hoping you could give us just your most updated thoughts on the environment, particularly in Texas, and how that, you know, move on. My de facto might not affect the outlook for organic organic growth, obviously, the fast, changing, personalized market at the moment. So, you know, Texas for us is our core state. We also have our own proprietary property program that goes through our MTA. That's actually fostering growth in the current period. And so for us, Texas continues to see growth. We're able to effectively add new locations in Texas. We're able to obtain the carrier access that is necessary for those to be viable and successful.

Paul Newsom: Thank you.

Paul Newsom: Good morning, congratulations on this call. I hope you could give us just your most updated thoughts on the environment particularly in Texas and how that, you know.

Paul Newsom: My defector, my aspect, the outlook for the brand of organic growth, obviously the fast, changing personalized market at the moment.

Speaker Change: So, you know, Texas for us is our core state. We also have our own proprietary property program that goes to our MGA. That's actually fostering growth in the current periods.

Speaker Change: And so, for us, Texas continues to see growth, we're able to effectively add new locations in Texas.

Speaker Change: We're able to obtain the carrier access that is necessary for those to be viable and successful.

Gordy Bunch: Barrel that did come in, that was in the third quarter. You know, it did have some disruption into production for the early part of July. Most of that is when any time a hurricane enters the Gulf through the E20 parallel; binding is suspended. When the hurricane comes through and make line fallen past, depending on the path of the storm, certain geography remains closed for a period of time. Once carriers have done assessing post-landfall damage, then they reopen binding. So, the state is fully reopened for business. I would say the areas along Barrel's path were closed for about a week.

Speaker Change: barrel that did come in, that was in the third quarter, you know, it did have some disruption into production for early early parts of the eye.

Speaker Change: Most of that is when any time a hurricane enters the Gulf through the E20 parallel, Bonnie Ming is suspended when the hurricane comes through and make one fall and pass.

Speaker Change: depending on the path of the storm, certain geography remains closed for a period of time.

Speaker Change: Once carriers have done assessing postland fault damage.

Speaker Change: Then they reopen binding. So the state is fully reopened for business. I would say the area is a long barrels path or close for about a week.

Gordy Bunch: After that week, the new business resumed. We really haven't had any new carriers put in restrictions post barrel. So for us, we continue to grow in Texas. I think that carriers are looking at refining, refining their pricing and methodology of where they want to grow in the state. I think most of you I shared with our program that we operate through our MGA does have a non-structural hail endorsement that helps mitigate the frequency of severe convective storm losses. And that's providing us an outlet to write preferred homeowners across the state, where other carriers are still working through how to address that issue that's been causing a pause in underwriting by tomorrow.

Speaker Change: After that week, we did this resumed. There we really haven't had any new carriers put in restrictions, most peril.

today.

Speaker Change: So, for us, we continue to grow in Texas. I think that carriers are looking at refining, refining, they're pricing, and a methodology where they want to grow in the state.

Operator: At this time, I would like to welcome everyone to the TWFG Second Quarter 2024 conference call. All lines have been placed on you to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star of 1-1 on your telephone key page. If you would like to withdraw your question, please press star 1-1 again. This call is being recorded and will be available for replay on the company's website.

Speaker Change: I think most of you I shared with our program.

Speaker Change: We operate through our MGA.

Speaker Change: Does have a instructional hairland orsman.

Speaker Change: That helps mitigate the frequency of severe conductive storm losses and that's providing an outlet to light.

Operator: 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-gap financial measures, which we believe will provide useful information for investors. The company has posted reconciliations of the non-gap financial measures discussed during this call in the tables accompanying the company's earnings press release, located on the investor section of the company's website at investors.twfg.com.

Speaker Change: Is the environment outside of the time of the similar commentary, including how we're able to accept through the hurricane, okay?

Gordy Bunch: So if I talk about the broader country-wide appetite, even California is starting to soften. Our largest trading partners, Progressive and American Mercury, have both opened back up more for new business. I'm not going to say that they are back to pre-personal and hard markets levels of growth initiatives, but each of our top two markets are back into accepting business, writing business, looking for growth, looking for growth in smart geography and smart locations.

Speaker Change: So, if I talk about the broader country-wide appetite.

Speaker Change: Even California is starting to soften.

Speaker Change: Our largest trading partners.

Speaker Change: Progressives in American Mercury

Speaker Change: I have those those little back up.

Speaker Change: More for the business I'm not going to say that they are.

Speaker Change: back to pre

Speaker Change: personal lines hard market levels of growth initiatives, but each of our top two markets are back into accepting business, writing business, looking for growth, looking for growth, smart, and smart geography and smart locations. And so I do think to release the call.

Gordy Bunch: It is now my pleasure to introduce Mr. Gordy Bunch, founder, chairman, and CEO of TWFG. Sir, the floor is now yours. Thank you, Michelle. Good morning, everyone, and thank you for taking time to join us today to discuss our second quarter of 2024 results. I would like to welcome all our new stockholders and the analysts to our first earnings call as a public company.

Gordy Bunch: And so I do think that we lose the call. Oh, okay. Sorry, we have a flashing on my screen, so I want to make sure that we lose it. So California is emerging. I'm not going to call it wide open growth there. Other states, less wildfire exposed, less cat exposed, are starting to get back to three personal and smart market growth initiatives. And so, as we meet with our top trading partners, we look for those states where they have wide open capacity at appetite to appoint new distribution points and to put in growth initiatives for us to grow that need geography.

Speaker Change: Thank you.

Speaker Change: Sorry, we had a flashing one-way screen, so I'm going to make sure that there's a little bit of shit.

Speaker Change: So California is emerging. I'm not going to call it wide open growth there.

Speaker Change: Other states, less wildfire exposed, less cat exposed, are starting to get back to three personal ones, our market, grow finishes.

Gordy Bunch: Joining me on this call is Janis Weenie, our chief financial officer. After my opening remarks, Janis will review our financial results and then we will take your questions.

Speaker Change: And so as we meet with our top trading partners

Speaker Change: We look for those states when they have wide open capacity at a appetite to a point new distribution points and to put in growth initiatives for us to grow that need geography.

Gordy Bunch: So the balance of the country not cat exposed and not wildfire exposed is getting back to three personal and smart market levels. The rates have come through, the lost ratios have improved, and so the balance of the country is essentially wide open. And some of those harder market states, state-by-state new initiatives are coming in, and they'll start to follow. We think in 2025, outside of California, and maybe like a New York, the rest of the state should be back to a three-yard market more.

Speaker Change: The balance of the country not that exposed and not law far exposed is getting back to three personal and hard market levels. The rates have come through, the most ratios have improved, and so the balance of the country is essentially why open. And some of those harder market states.

Gordy Bunch: I am pleased with the number of agents and employees that we can now count as shareholders. Ownership an alignment with our talent and continue to grow as we use board as a public company. Our second quarter saw an inflection with our agency in the box offering with the opening of 44 new TWFG branches. These branches are staffed by 44 experienced former captivators and we are excited that they have decided to join the TWFG family.

Speaker Change: State-by-state new initiatives are coming in and they'll start to follow. We think in 2025, outside of California and maybe like in New York, the rest of the states should be back to a pre-yard market more.

Paul Newsom: Very much appreciate it, Hill. Thank you.

Speaker Change: very much appreciate the help. Thank you.

Bob Jen Wong: And the next question comes from Bob Jen Wong with Morgan Stanley. Your line is open. Hi, good morning. Maybe this is sort of a follow-up on the M&A side, on the growth side. In terms of expansion into the newer states, so outside the Texas, California, Louisiana, can you maybe talk about how much of the future growth in the newer states will likely be driven by M&A? Is M&A really the bigger focus there rather than the Texas in California, or would you say M&A is more balanced across all states? And just curious as to how you think about the M&A side, when it comes to the newer states?

Speaker Change: And the next question comes from Bob Jen Wong with Morgan Sandley, your line is open.

Gordy Bunch: This opportunistic onboarding of seasoned client-focused talent demonstrates how TWFG is uniquely positioned to capture the ongoing shifts from captive distribution to independent. We do not expect this endless of talent to have a significant impact on our revenues this year or next, but over the long term we expect the agents we are onboarding in 2024 to contribute to our organic growth. As far as the operating environment, we are beginning to see improvements in carriers appetite for growth as the industry achieves significant improvement in loss ratios. This is expected to lead to higher new business growth and expansion opportunities heading into 2025.

Speaker Change: Hi, good morning. Maybe this is sort of a follow-up on the M&A side and the group side.

Speaker Change: In terms of

Speaker Change: the expansion into the newer states. So outside the Texas California, Louisiana, can you maybe talk about how much?

Speaker Change: of the future growth in the newer states will likely be driven by M&A. It's M&A, really, the bigger focus there rather than the Texas and California or would you say M&A is more balanced across all states.

Speaker Change: And just curious about how you think about the M&A side, when it comes to the newer states.

Gordy Bunch: So for us, as I mentioned in the call, going into new geography, many of the areas that we're looking to expand into are relying upon superregions and regional markets that we don't currently trade with. And so for us to have a strong footprint in a new geographical area, acquisitions are the best way to plant our flats. Once we make an acquisition in a state, we can do the integration on board, everybody into the TW of G way. Then we look at how do we expand from that initial acquisition into recruiting and developing branches and expanding the M&A in that same state.

Speaker Change: So, for us, as I mentioned in the call.

Gordy Bunch: TWFG had a strong second quarter highlighted by 17.4% total revenue growth, 13.8% organic revenue growth, 18.4% adjusted net income margin, and a 20.2% adjusted pivot margin. At TWFG we believe we offer a strong value proposition for the tens of thousands of after-day agents and in the ten agents looking for the right partner to help them grow and perpetuate their business. Our value proposition coupled with a conservative balance sheet, flexibility around yield structuring and our efficient operating model positioned us well knowing forward.

Speaker Change: Going into new geography, many of the areas that we're looking to expand into are relying upon super regionals and regional markets that we don't currently trade with.

Speaker Change: And so for us to have a strong footprint in a new geographical area, acquisitions are the best way to plant our flag.

Speaker Change: Once we make an acquisition in a state, do the integration on board everybody into the TWFG way.

Speaker Change: When we look at how do we expand from that initial acquisition into recruiting and developing branches and expanding M&A in that same state. So I'll use Ohio as an example when we made our acquisition in Ohio two years ago.

Gordy Bunch: So I'll use Ohio as an example when we made our acquisition in Ohio two years ago. We have the first one, and now we have recruited into the state new scratch retail branches. So I look at the M&A for geographical expansion as kind of like a front-running establishing a camp that then we can build off of a base of strength and deploy the balance of our offerings into that new geography, having added the right carrier components in order to make that successful. So we are going to expand into new geography via recruiting as well. So our geographical expansion will not be solely M&A focused, and so we will have new geography open up purely from our agency box recruiting initiatives as that talent aligns to our platform.

Speaker Change: We make subsequent acquisitions from the first one, and now we have recruited into this day, new scratch retail branches.

Speaker Change: So, I look at the M&A for a geographical expansion of kind of like a front running establishing a camp that then we can build off of a base of strength and deploy the balance of our offerings into that new geography, having added the light character components, and we're gonna make that successful.

Gordy Bunch: Third, organic growth. We are looking for opportunities that are accreted to our organic growth trajectory, or that have the potential to be added. Fourth, even in margin, we expect to acquire accretive margin agency, MGA and other strategic partners. Our M&A model shows margin expansion in the out years as we absorb public company expenses. Some of the margin expansion is expected to come from our M&A activity, and the balance from achieving further scale in our core businesses.

Speaker Change: So we are going to expand this new geography via recruiting as well. So our geographical expansion will not be solely M&A focused.

Speaker Change: And so we will have new geography open up, purely from our AGC to box recruiting initiatives. Add that talent, aligns to our platform.

Bob Jen Wong: Okay, got it. Really appreciate that. Thank you.

Bob Jen Wong: That's all I got. Thank you, Bob.

Speaker Change: Hi everyone.

Speaker Change: Okay, got it. Really appreciate that. Thank you. That's all I got.

Tommy McJoint: And our next question comes from Tommy Mcjoint with KBW. Your line is open. Hey guys, good morning.

Speaker Change: Thank you. And our next question comes from Tommy McJoyant with KBW, your line is open.

Gordy Bunch: Fifth, geography. We are looking for the right opportunities to expand and to need geographic locations. Our goal is to fill in more of the country with the efficiency of a true branded location, whether by acquisition or recruiting. Different areas of the country utilize different carriers, with whom it is often difficult to obtain employment. Acquiring contracts with carrier-free approval is a cruising way to expand our market and increase viability in these areas.

Tommy McJoint: When we think about the puts and takes that drove the 13.8% organic growth in the quarter, is there a way to quantify the tailwind from REIT and then perhaps conversely the headwind from customer shopping, hurting retention? Any way to put some numbers around those two figures? I would put it on. We had higher premium retention than our historical norms, which, on balance, gave us a lower percentage of new business contributing towards the organic revenue. And as the market starts to normalize, I won't say software yet, although with normalize, then you'll see an eventual shifting of the organic revenue from retention, trickling down towards our historical average retention rates and our new business as a percentage of total organic revenue is trickling back up.

Tommy McJoyant: Hey guys, the morning. When we think about the place and take that drove the 13.8% organic growth in the quarter, is there a way to quantify the tailwind from re, and then perhaps conversely, the headwind from customer shopping, hurting retention? Anyway, to put the numbers around those two figures.

Tommy McJoyant: since

Speaker Change: I would put it on, we had higher premium retention than our historical norms, which on balance gave us a lower percentage of due business contributing towards the organic revenue.

Gordy Bunch: Six, synergy. We target acquisitions that strategically bring a compounding benefit. These benefits include technology, niche NGA platforms, distribution that is not overlapped with our current footprint, and deals where we have internal synergies that increase the target and TWAG value.

Speaker Change: And as the market starts to normalize, I won't say software yet, I'll go with normalize.

Janis Weenie: We expect to continue re-engaging in our M&A efforts and look forward to future accretive I will now ask Janice to review our second-quarter results in greater detail. Thanks, Gory, and good morning to everyone on the call. Starting with top line, written premium increased $66.5 million or $20.3% over the prior year period to $393.6 million. Under our primary offerings, insurance services grew $58.5 million or $21.2% and TWFGMGA grew $8 million or $15.6% over the prior year period.

Speaker Change: Then you'll see a eventual shifting of the organic revenue from retention, trickling down towards our historical average retention rates. And our new business as a percentage of total organic revenue is trickling back up.

Gordy Bunch: So for us, as we looked at it in the rear, we're getting to the same low to mid teens organic revenue growth and the components of premium retention versus new business, new customers. It just, it just adds who flows depending on what part of the cycle we're in, but we're landing at the same number.

Speaker Change: So, for us, as we look at it, in the rear.

Speaker Change: We're getting to the same bloated mid-teens organic rather than a grow and the components of premium retention versus new business new customers. It just adds them flows depending on what part of the cycle we're in, but we're landing at the same number.

Gordy Bunch: So I'd say in the current period, you're going to see because of the higher premium retention, or that came from rate during that period, as we shift back into normal, normalcy, you'll see that less of it will be rate and more will be new business to apply at. Okay, got it.

Speaker Change: So I'd say in the current period, you're going to see because of the higher premium retention, more of that came from right during that period. As we shift back into normal, normalcy, you'll see that less of it will be right, more of it will be new to this supply apps.

Janis Weenie: Retention remains high and branch locations are driving same-store sales coupled with carriers continuing to fish through rate increases, particularly in the personal line to arena. Total revenue increased $7.9 million or $17.4% over the prior year period to $53.3 million of which commission income represents $15.2% of this $17.4% growth. My product offerings, insurance services, is the main driver representing $15.9% of the $17.4% total revenue growth. Commission income increased $6.9 million or $16.5% over the prior year period to $48.7 million.

Tommy McJoint: Thanks.

Tommy McJoint: And then switching gears, can you give us a sort of a tax refresher just in terms of how you can leverage your upcy structure and M&A? And is that only valuable for larger perhaps transformational type fields? So the UPST structure provides us with two different types of equity we can use in an acquisition. You have traditional Class A shares that the UPST organization we can issue in an acquisition is part of a transaction. Those can be used for any size deal.

Speaker Change: Okay, got it, thanks, and then switching gears.

Speaker Change: Can you give us a sort of a tax refresher just in terms of how you can leverage your obscene structure in M&A. And is that only valuable for larger, perhaps, transformational type fields?

Speaker Change: So the UPSC structure provides us with two different types of equity we can use in an acquisition.

Speaker Change: You have traditional class A shares that the UPSI organization we can issue in acquisition as far as a transaction, those can be used for any size deal.

Janis Weenie: This increase is due mainly to higher premium rates, business growth, increased retention, and continued grow out of our book of business acquisitions in 2023 into the current period. Organic revenues increased $5.7 million or $13.8% to $47.5 million driven by strong retention increases in premium rates and helping new business growth.

Gordy Bunch: The LLC units that are part of our TRA, those would be one spared for larger transformation or founder led low cost basis, large organizations that would be benefiting from the TRA agreement where they would then participate in the out years with those TRA payments, which makes that equity worth, you know, more than say, just a Class A share that doesn't have that TRA benefit. There are a number of founder-led larger organizations where that would make sense. And so I would use it sparingly for the right opportunities, for the right partners. That is an advantage we saw BRP being able to attract some very nice acquisitions through that UPST LLC unit TRA share class.

Speaker Change: The Up

Speaker Change: LLC Units

Speaker Change: that are part of our PRA, those would be one spared for larger transformational foundered led.

Speaker Change: low-cost basis, large organizations that would.

Speaker Change: The benefiting from the TRA agreement that were they would then participate in the out yours with those TRA payments, which makes that equity more than say just a class issue that doesn't have that TRA benefit.

Janis Weenie: Turning to expenses, note that expense comparisons to prior periods mainly commission expense and salary and employee benefits are skewed given the acquisition of nine of our independent branches in January 2024, which in prior years were operated as agencies in a box and have now been converted to corporate stores. The commission expense associated with the branch conversions decreased while salary and benefits increased compared to prior periods. Commission expense increased $1.1 million or $3.5% over the prior year period to $32 million.

Speaker Change: There are a number of founder-led.

Speaker Change: larger organizations where that would make sense.

Speaker Change: And so, I would use it sparingly for the right opportunities for the right partners.

Speaker Change: That is an advantage we solve, BRP, being able to track some very nice.

Speaker Change: at positions through that UPSC LLC unit TRA share class. And it's a tool and our kit, one that we will retain for the highest quality, most creative opportunities.

Gordy Bunch: And it's a tool in our kit, one that we will retain for the highest quality, most accretive opportunities.

Janis Weenie: Commission expense increased due to the technical growth of the period by $4.2 million offset by a decrease of $3.2 million related to the branch conversions with an offsetting increase in salary and employee benefits at $2.2 million. Total salary and employee benefits increased by $3.4 million or $102.3% over the prior year period to $6.8 million. As mentioned above, $2.2 million of the increase was related to the branch conversion and $1.1 million of the increase with due to corporate store asset acquisition.

Tommy McJoint: Thanks, appreciate it, Andrea. Sure.

Speaker Change: Thank you. Thank you.

Brian Meredith: And the next question comes from Brian Meredith with UBS; your line is open. Hey, thanks. A couple of me are pretty good. Given the profitability, talking about it, some of your carriers and what do you think right now is for contingent income company. And should we see that start to improve here as a percentage of premium? Let me give you a hint of a percentage of commissioning. So in our model, we had I think 33 basis points of contingent revenue relative to premium. And as the loss ratios improve across a number of the contingent paying markets, there could be some upside to that in 24.

Speaker Change: See you.

Speaker Change: And the next question comes from Brian Meredith with UBS, your line is open.

Brian Meredith: A thanks a couple of me for your questions. Give it a profit ability, talking about it, some of your carriers. And what do you think? The great knowledge for contingent income coming in. Should we see that start to improve here as a percentage of premium? Let me be able to handle with this.

Janis Weenie: Other administrative expenses increased $1 million or $37% over the prior year period to $3.7 million due to the continued growth in the business and the sorrows of public company costs. Emeritization and depreciation expenses increased $1.8 million or $162% over the prior year period to $3 million due to the compensation of intangibles associated with our branch conversions in the 2023 acquisition. Net income for the quarter decreased 0.2 million or 2.1% over the prior period to 6.9 million and adjusted net income increased 1.5 million or 18.1% over the prior period to 9.8 million due mainly to the addback of increased organization expenses associated with our branch conversions earlier this year and the 2023 petitions.

Speaker Change: I'm going to talk to you about the conversation.

Speaker Change: ...to the world.

Speaker Change: So, in our model, we had a 33 basis point of contingent revenue relative to pre-in.

Speaker Change: As the loss ratios improve across the number of the continued paying markets, there could be some upside to that in 24. We really are not targeting for that in 24 because as rates come in, they have to earn through the portfolio.

Gordy Bunch: We really are not targeting for that in 24 because, as rates come in, they have to earn through the portfolio. So there is a little bit of a timing of one of the rate actually hits the bottom of the loss ratio. But in 2025, you should have the full effect of rate adequacy after multiple years of pricing, underwriting adjustments. And that should be the year that contingencies get back to more of the 40 basis points of premium versus the low 30s. So we're always going to be conservative and how we view contingency, given the volatility of the payout structures.

Speaker Change: So there is a little bit of a timing of what the rate actually hits the bottom of the lost ratio.

Speaker Change: But in 2025, you should have the full effect of radiatic with the after multiple years of pricing under any adjustments and that should be the year that

Janis Weenie: Both EBITDA and adjusted EBITDA for the quarter were 10.8 million representing 28.5% and 25.8% growth respectively. Our adjusted EBITDA margin was 20.2% in the second quarter versus 18.8% in the prior period. The margin expansion was driven by branch conversions, corporate locations required last year, and economies of scale offset somewhat by public company costs, which we expect to continue to ramp into our run rate expense base over the next several quarters.

Speaker Change: Continuities get back to more of the 40 basis points of free new versus the low-perities.

Speaker Change: So we're always going to be conservative and how we view contingency and give them the volatility of the...

Gordy Bunch: So they're loss ratio sensitive; they're growth sensitive. So there's the various components, and they're not all the same. Every carrier addresses it slightly differently. So even if you have loss ratio improvements and say a said market, if they had a growth trigger component of that and they've been closed for new business, you may not realize the same benefit you would have with that loss ratio in a growth mode. So what we put into our model is what we're still projecting. And if things materially change as we get into the end of the third quarter, going into the fourth quarter, we'll make adjustments.

Speaker Change: Payout structures, so they're lost ratio sensitive, they're growth sensitive, so there's the various components, and they're not all the same, and we carry addresses that slightly differently.

Gordy Bunch: With that, I'll turn it back to 40. Thanks, Janice. In summary, this will be solid second quarter and we are pleased with results. I want to remind analysts and investors that we were not public in the second quarter and we are now incurring public company expenses that will impact our quarterly results going forward. We anticipate providing 20.25 guidance later this year when we have a clear line of sight into our public company expenses.

Speaker Change: So, even if you have lost racial improvements and say a said market, if they had a growth trigger component of that and they'd been close for new business, you may not realize the same benefit you would have with that loss ratio in a growth mode.

Speaker Change: So what we put into our model is what we're still projecting and if things materially change as we get into the end of the third quarter, you know, the fourth quarter will make that adjustments.

Gordy Bunch: We do get lock-in opportunities from some of our markets. Those generally come in the middle of October, and that's an opportunity for us to lock in that actual contingency. There's a discount to your payout. If you take the lock in, then we do look at those as they come in. If there's something close to being out of the money, we'll probably lock in the bonus and take the discount. So throughout certainty. And if we're in the money and going, we'll let that one slide. The fourth quarter tends to be a low and loss ratio of quarter for us.

Operator: With that, we would like to open the call for questions.

Speaker Change: We do get locked in opportunities from some of our markets.

Operator: Michelle? Thank you.

Operator: As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again, one moment for the first question.

Speaker Change: Those generally come in.

Speaker Change: My middle of October

Speaker Change: And that's an opportunity for us to lock in that actual contingency.

Speaker Change: There's a discount to your pay on if you take the lock in.

Speaker Change: And then we do look at those as they come in, if there's something close to being out of the money, we're probably blocking the phone as it will take the discount so we're out certainty.

Michael Zorinsky: And the first question comes from Michael Zorinsky with BMO. Your line is now open. Hey, good morning and congrats on your first quarter out. I guess my first question is on M&A and it's maybe a bit high level, but I wanted to see if you'd be willing to kind of offer what you think is a suitable kind of long term. That's an EBITDA ratio level that you think is realistic or that you're seeking to get you over time.

Speaker Change: and if we're in the money and growing, we'll let that go in the 90s.

Speaker Change: You know, four-quarter tends to be a low and loss ratio, quarter-four, you know, given most of our loss ratios, whether driven, marsh through hurricane season. So, hope that helps.

Gordy Bunch: You know, given most of our loss ratios, whether driven, march through hurricane season. So hope that helps.

Speaker Change: That's what's going to be serious when you convert.

Speaker Change: One of your ADC box to full collaboration through an acquisition is that creative to even better even that margin and whole your own cooperation versus an ADC at the box org.

Michael Zorinsky: Maybe it's dependent on whether to transform M&A takes place or doesn't, but any color around whether you just expect some small tuck-ins or it could be lumpy and we could really see some leverage being deployed over time. Thanks. Yeah, thanks Mike. So as we mentioned, we did shut down M&A leading into the IPO. We did still continue to have conversations. We're happy to be back in the M&A game. We do have a good pipeline.

Janis Weenie: So I can ask some comments about that. So when you look at the nine independent branches that we converted in January 2024 and the shift from not paying the Christian friends to salary and wages, you're looking at roughly a two-point benefit to our margins on the corporate on the branch conversion. So we likely would keep if we have more acquisitions with that are corporate stores that you'll have a creative margin as well.

Speaker Change: Thank you very much.

Speaker Change: So I can ask you how to do that. So when you look at that

Speaker Change #100: [inaudible] not my inhibition experience to a separate way, just you're looking at.

Speaker Change #101: I've roughly at two point benefits to our margins on the corporate, on the branch conversion. So we likely to keep if we have more acquisitions with better corporate stores that you'll have a creative margin as well.

Michael Zorinsky: There are some larger, lumpier opportunities that were currently just now in the beginning phases of entertaining. As far as, you know, IPO proceeds, we have plenty of the cash on hand, we have equity and currency, and we do have our credit facility we can draw on. If we deployed all that capital and drew all of our credit facility, we still wouldn't have much of a debt to EBITDA ratio.

Pablo Sincson: And our next question comes from Pablo Sincson with JP Morgan. Your line is now open. Hi, good morning. First question. So expansion outside of Texas and Louisiana is obviously good from a diversification standpoint. But the revenues per policy tend to be lower in less cal exposed states because average payments are just lower.

Speaker Change #101: And our next question comes from Pablo Sinczen with JP Morgan. Your line is now open.

Pablo Sinczen: Hi, good morning. First question. So expansion outside of Texas and Louisiana is obviously good from a diversification standpoint.

Gordy Bunch: I think when we had our conversations during the road show, we indicated that for transformational opportunities, things that make really good long term sense, you know, one to three times that EBITDA ratio would be where we have comfort. I don't see us there in the near term given the capital on hand, the free cash that we have, and the credit facilities that we can draw down on current. Okay, that's helpful. Maybe pivoting to the, in the release, and I think you touched on it during the prepared remarks, Gordy, you talked about in the first half of the year, so not too cute, but the first half, hiring 44 experienced folks from captives. Can you give us just a flavor of what the base is so we can kind of better understand that how those 44 could provide a potential lift to organic growth over time?

Gordy Bunch: So, with that in mind, how are you planning to manage your expansion right by the through M&A or organic vis-a-vis the good margins you are producing on your current footprint? Yeah, so you're correct: average premiums and less cal exposed states do run at a lower average premium. There's an offset of that. Many of these lower-cat states are still paying prior levels of commissions. So, as we're looking at M&A in new geography, some of those less-cat prone states have average commissions that are higher because then say Louisiana or coastal exposed states. So your average commission may get close based on just as differential on how commissions are paid in the lower-cat geographies.

Pablo Sinczen: But the Revenants Propulsive Center be lower in less-cathes exposed states, because average demons are just lower, right? So with that in mind, how are you planning to manage your expansion right, whether through M&A or organic vis-a-vis the good margins you are producing on your current footprint?

Speaker Change #103: I'm sorry.

Speaker Change #104: Yeah, so you're correct average premiums in the less cat exposed states.

Speaker Change #105: Do run at a lower average premium. There's an offset to that. Many of these lower cap states.

Gordy Bunch: Sure, and I'll clarify, the 44 new branches were just in the second quarter. So all 44 were onboarded April through June. If they're prior captive agents, they're multi-line, good mix of personal commercial lines. As we launched new agency, these are agencies not producers, so they have additional staff within their own locations. We have always made sure that we communicated that these are starting from scratch. They don't have any enforced business. It takes a while for us to get them through the transitional training of how to be independent agents, how to utilize independent technology, how to access the broader independent markets that we bring to fair, working with our marketing team on rebranding and deploying in their communities.

Speaker Change #105: are still paying prior levels of commissions.

Speaker Change #105: So, you know, as we're looking at M&A in New Geography, some of those less cat-prone states, they have average commissions that are higher, because then say Louisiana or coastal states, so

Speaker Change #105: Your average commission may get close, based on just a differential in how commissions are paid in the lower cap geographies.

Gordy Bunch: So, as far as we look at how our business works, if we have like we have these new startup agencies in Ohio, those folks that are bearing the brick and mortar in the local labor expenses, their revenue passing through our agency and box business model is the same revenue we would have coming through any other state. So the margin coming out the back is agnostic to what state the revenue is being derived in.

Speaker Change #105: So as far as us, if we look at how our business works

Speaker Change #105: If we have, like, we have these new startup agencies in Ohio.

Speaker Change #105: those folks that are pairing the brick and mortar in the local labor expenses.

Speaker Change #105: Their revenue passing through our 18-inch box business model is the same revenue we would have coming to your any other state. So the margin coming out the fact is diagnostic to what state the revenue is being derived in.

Gordy Bunch: I do think we're looking at it from a corporate own location; that's where you have a little more sensitivities to labor costs and brick-and-mortar costs, and that's where the average premium and low potential overall commission per transaction comes into play.

Speaker Change #106: I do think it we're looking at it from a corporate on a location. That's where you have a little more sensitivities to labor costs and working more to cost. And that's where the average freeing in the low potential overall commission for transaction comes into play.

Pablo Sincson: What we are seeing is a pretty decent consistency of, there's higher commissions in those. Okay, and then second question for me, under related topics. So I think some of your MJ contracts change from a percentage of commissions based as a flat piece beginning this year. Can you talk about how that's impacting on growth? And I'm particularly thinking about three you where I think there could be a step down from the first half of this year. Thank you. So Dover Bay was the only program that had a change in its piece structure. That went to a flat, fixed rate.

Speaker Change #106: When we are seeing a pretty decent consistency of their higher commissions in those lower cat states offsetting the fact that their lower average free is.

Gordy Bunch: They'll have some production, but nothing that's going to drive the needle in the near term. They do become beneficial to us in the long term as helping us sustain those low-to-mid-team organic growth rates. So we're very happy to have added them. We're starting to see some traction that we wanted to get from the IPO, the awareness of our operands, and so we're starting to see some improvements, great to see that we have end bound activity pre-IPO. So we hope that's helpful, Mike.

Speaker Change #106: Okay.

Speaker Change #107: And then second question for me, under the data topic, so I think some of your MGA contracts change from a percentage of commercial bases to flat feet beginning this year. Can you talk about how that's impacting I'm going to grow with, and I'm particularly thinking about three key where I think there could be a step down from the first half of this year. Thank you.

Speaker Change #108: So dover Bay was the only program that had a change in its piece structure.

Gordy Bunch: And so it also gets adjusted annually upward based on the training 12 months. And that will take effect in January at 25. So that actual impact us was really affecting, you know, first quarter or second quarter. As we get in the third and fourth quarter, we'll be getting the same level revenue that we received in those higher premium months. So actually it'll show a little bit of an improvement as the third and fourth quarter are lower premium months for that program. We do have the benefit of knowing exactly what we're going to get paid on that program for this calendar year.

Speaker Change #109: That went to a flat fixed rate. And so.

Gordy Bunch: If we get a little bit more inside on that as we come towards the end of the year, we'll be happy to share more details. Okay, well, I'll just use my follow-up. It's just about that recording. So it's the 44 to be clear, is that on a base of about 400 prior as of 1Q? Yeah, I don't remember the actual 1Q number, but that's about right. I think it's 410 or 411, and now we're over 4.

Speaker Change #110: It also gets adjusted annually, support based on the training 12 months, and that will take effect in January of 25.

Speaker Change #110: So that actual impact us was really affecting first quarter, second quarter. As we get into the third and fourth quarter, we'll be getting the same level revenue that received in those higher premium months.

Speaker Change #110: So actually it'll show a little bit of an improvement as the third and fourth quarter or lower three in months for that program.

Gordy Bunch: Okay, and then just so just to be clear on, so you've had nice margin improve, but there's been some, you know, there's a number of, I think, drivers of that, but are the, if you can remind us as you add, you know, if you keep up with this cadence of, you know, hiring, let's just, you know, tend, you know, a decent chunk of unproductive producers. So that have a material impact in your margins or not really the way your business model works.

Speaker Change #110: We do have the benefit of

Gordy Bunch: And as we end 2024, we'll get the increase to that flat fee for all 2025. And so that year-over-year comparison becomes a little bit more normal for that particular program. It did see growth this year. So that's going to give us a bump in that revenue screen in 2025. But we'll have consistent revenue from that program in the quarter and fourth quarter. We won't have the volatility of the production drop-off in the last two quarters. Thank you.

Speaker Change #110: Knowing exactly what we're going to get paid on that program for this calendar year. And as we end 2020, four, we'll get the increase to that flat fee for all 2025. And so that year over year comparison becomes a little bit more normal for that particular program.

Speaker Change #110: It did see growth this year, so that's going to give us a bump in that revenue stream in 2025. But what I've consisted of these from that program is third quarter and fourth quarter. We won't have the volatility of the production drop off in the last two quarters.

Gordy Bunch: Yeah, it's a good question. So I'll add some further clarification. These are recruited 1099, agency in a box, branches. So we have no salary and wages, brick and mortar expenses attached to these new 440k. The prior capped in principles that will be operating in these retail branches will bear the expense of the local onboarding. We have some minimal expenses onboarding them with the training and information that we provide to them. The websites we set up, the initial collateral for launch, but that's not going to have a meaningful impact to our expenses. So no, there's not like a drag. It's not like I hired a producer who's not going to produce and I'm paying them a salary. They're bearing that local expense. And so hopefully that's that's a clearer.

Operator: Thank you.

Scott Kelly: And the next question comes from Scott, Kelly, Nick with RBC Capital Markets. Your line is open. Yeah, thanks. Good morning. First question is just you mentioned you added a fair amount of captive agents in the quarter, the 44 number.

Speaker Change #110: Thank you.

Speaker Change #110: And the next question comes from Scott. Heli, neck with RBC Capital Markets. Your line is open.

Scott Heli: Yeah, thanks for the first question, you mentioned you added a fair amount of captive agents in the quarter of the 44 number.

Gordy Bunch: Any thoughts you can share on the second half of the year or in 2025, how you're thinking about adding additional agents? It sounds like that there's more interest in terms of just correctly if I'm wrong, but the comment, so since you've gone public, there's more interest in potential joiners and just how are you thinking about that, just particularly if you added a fair amount in the second quarter? Yeah, I think that we're continuing to see interest and expanded interest from the IPO awareness. We are getting inbound inquiries from marketing we've had in place for a significant period of time.

Speaker Change #112: Any thoughts you can share on second half of the year or in the 2025, how you're thinking about adding additional agents? It sounds like there's more interest in terms of just correctly far wrong, but the comments, since you've gone public, there's more interest in potential joiners.

Speaker Change #113: Just how are you thinking about that, just particularly after you added a firm out in the second quarter?

Paul Newsom: And our next question comes from Paul Newsom with Piper Sandler. Your line is now open. Good morning. Congratulations on the call. I was hoping you could give us just your most updated thoughts on the environment, particularly in Texas and how that, you know, move on. My de facto might not affect the outlook for organic organic growth, obviously, the fast, changing, personalized market at the moment. So, you know, Texas for us is our core state.

Speaker Change #114: Yeah, I think that we're continuing to see interest.

Speaker Change #115: In an expanded interest from the IPO on this, we are getting involved in worries, you know, from marketing we've had in place for a significant period of time, and now we're getting involved in marketing.

Gordy Bunch: And now that marketing plus the awareness of the IPO, we actually had a prospect say, "I'm calling you because I saw the IPO and then I saw this ad, and this ad did in place for a long period of time and one of the insurance trades." And now I think you guys might be the right fit. We also had an M&A broker call us and tell us that the specific client and theirs that they representing wanted us to be in the queue for their M&A initiative and are selecting us as a preferred buyer proactively. So we do think we're going to get more traction with all the offerings we have based on the awareness and exposure from the IPO.

Speaker Change #115: The awareness of the IPO, we actually had a prospect say I'm calling you because, you know, I saw the IPO and then I saw this ad and this ad didn't place for a long period of time in one of the insurance trades. And now I think you guys might be the right fit.

Speaker Change #115: We also had an eminent broker call us and tell us that the specific client of theirs that they're representing wanted us to be in the queue for their eminent aid.

Paul Newsom: We also have our own proprietary property program that goes through our MTA. That's actually fostering growth in the current period. And so for us, Texas continues to see growth. We're able to effectively add new locations in Texas. We're able to obtain the carrier access that is necessary for those to be viable and successful. Barrel that did come in, that was in the third quarter. You know, it did have some disruption into production for early part of July.

Speaker Change #115: initiative and are still letting us as a preferred buyer proactively. So we do think we're going to get more traction with all the offerings we have based on the awareness and exposure from the IPO.

Gordy Bunch: Obviously, the 44 we added in the second quarter were not IPO-related initiatives. There is disruption in the marketplace across the country where carriers are choosing their personal line strategy. And as captive carriers constrict or eliminate some of their personal line products, that's going to open up more captive agents looking for their next home.

Speaker Change #115: You know, obviously the 44 we added in the second quarter or not IPO related initiatives.

Speaker Change #116: There is disruption in the marketplace across the country where carriers are choosing their personal line strategy and as captive carriers can strict or eliminate some of their personal lines and products.

Paul Newsom: Most of that is when any time a hurricane enters the Gulf through the E20 parallel, binding is suspended. When the hurricane comes through and make line fallen past, depending on the path of the storm, certain geography remains closed for a period of time. Once carriers have done assessing post landfall damage, then they reopen binding. So, the state is fully reopened for business. I would say the areas along Barrel's path were closed for about a week.

Speaker Change #116: That's going to open up more captive agents looking for their next home. And so our objective is to cast a wide net, make sure we have awareness.

Gordy Bunch: And so our objective is to cast a wide net, make sure we have that awareness to the captive distribution channel so that they know that we have the offerings that can help them relaunch their careers and what we think is a more effective I know you kind of described that as sort of one time ahead of the IPO and you had given the agents the decision to be able to do that, but do you expect to see more of those in the coming quarters as there are some that may have changed their mind and would like to convert and how are you thinking about the company's willingness to do those over time?

Speaker Change #116: to be captain distribution channel so that they know that we have the offerings that can help them relaunch their careers and what we think is more effective to this model.

Paul Newsom: After that week, the new business resumed. We really haven't had any new carriers put in restrictions post barrel. So for us, we continue to grow in Texas. I think that carriers are looking at refining, refining their pricing and methodology of where they want to grow in the state. I think most of you I shared with our program that we operate through our MGA does have a non structural hail endorsement that helps mitigate the frequency of severe convective storm losses.

Speaker Change #117: Great. That's helpful detail. I just had one other one too just on the

Speaker Change #118: The branch conversions, which you did earlier, I know you kind of described that as sort of one time ahead of the IPO and you had given the...

Speaker Change #119: The agency is a decision to be able to do that. But do you expect to see more of those in the coming quarters, is there some that may have changed their mind and would like to convert? And how are you thinking about the company's willingness to do those over time?

Gordy Bunch: Yeah, so I think that we won't have any in the near-term quarters that I'm wherever the moment. We did have some not joining the club or Morse from those that were at scale that would have made sense to convert but chose not to, that are interested in revisiting that conversation. But, you know, they're going to have to be larger over 1 billion in revenue locations in order to be viable for locations. The ones that are smaller and we're going to continue to look for them to transact and then work with an existing branch for any new branch principal coming into their role.

Speaker Change #120: Yeah, so I think that we won't have any in the near term quarters, that I'm wherever the moment we did have some not joining the club or more.

Paul Newsom: And that's providing us an outlet to write preferred homeowners across the state, where other carriers are still working through how to address that issue that's been causing a pause and underwriting by tomorrow. So if I talk about the broader country-wide appetite, even California is starting to soften our largest trading partners, progressive and American mercury, have both opened back up more for new business. I'm not going to say that they are back to pre-personal and hard markets levels of growth initiatives, but each of our top two markets are back into accepting business, writing business, looking for growth, looking for growth in smart geography, and smart locations.

Speaker Change #120: from those that were at scale that would have made sense to convert, but chose not to that are interested in revisiting that conversation.

Speaker Change #120: But you know, if they're going to have to be larger, over a full million in revenue, locations, in order to be viable for locations, the ones that are small, and we're going to continue to look for them to transact and work with an existing branch.

Speaker Change #120: for a community branch principal coming into their window there.

Speaker Change #120: Nothing in the near term, but there will be, in my opinion, opportunities for us for the larger ones, when they make sense on their timing, not ours.

Speaker Change #120: to entertain additional branch conversions, which as Jan's mention is

Gordy Bunch: So we're getting our arms around the nine we converted in January, and as we continue to live through their first year as a corporate location, we will be open to additional branch conversions in the years to come. Thanks for the answers.

Jan: Acredive to our market.

Speaker Change #122: So we're getting our arms around the nine week and learning in January and as we continue to live through their first year as a corporate location, we will be open to additional branch conversions in the years to come.

Paul Newsom: And so I do think that we lose the call. Oh, okay. Sorry, we have a flashing on my screen, so I want to make sure that we lose it. So California is emerging. I'm not going to call it wide open growth there. Other states, less wildfire exposed, less cat exposed, are starting to get back to three personal and smart market growth initiatives. And so as we meet with our top trading partners, we look for those states where they have wide open capacity at appetite to appoint new distribution points and to put in growth initiatives for us to grow that need geography.

Michael Zaremsky: As a reminder, to ask a question, please press star 111 on your telephone keypad, and the next question comes from Michael Zaremsky with BMO. Your line is now open. Great. Thanks. Just a quick follow-up on the F-44 new hires; just want to make sure it seems like a really strong number. So if I'm looking at the S1 back in 2022, your end, there were about 391 total branches, corporate plus 99, and then that grew in 23 by about 20 year on year.

Speaker Change #123: Thanks for the answers.

Speaker Change #124: Yep, jump on the ground.

Speaker Change #125: As a reminder to ask the question, please press star 1-1 on your telephone keypad. And the next question comes from Michael Zerimski with BMO. Your line is now open.

Paul Newsom: So the balance of the country not cat exposed and not wildfire exposed is getting back to three personal and smart market levels. The rates have come through, the lost ratios have improved, and so the balance of the country is essentially wide open. And some of those harder market states, state-by-state new initiatives are coming in, and they'll start to follow. We think in 2025, outside of California, and maybe like a New York, the rest of the state should be back to a three-yard market more.

Michael Zerimski: Great, thanks, just a quick follow-up.

Gordy Bunch: Very much appreciate it, Hill. Thank you.

Speaker Change #127: On the F44 new hires

Michael Zerimski: So I want to make sure, I'm taking a really strong number. So if I'm looking at the S1 back in 2022 year end, I think there are about 391.

Michael Zerimski: um

Speaker Change #128: The total branch is corporate plus 99 and then that grew in 23 by about 20 year or year. So it's going to make sure that the 44, the added, that's a, if we analyze that growth rate, that's about a 40.

Michael Zaremsky: So I want to make sure that the 44 you add is that if we analyze that growth rate, that's about a 40% plus annualized growth rate in number of total branches. Is that the right way to think about it? Is that kind of a sustainable near term level or is it just kind of a much higher level just near recently because of the IPO kind of press. Thanks. Sure. Thanks, Mike. So no, the 44 is, yes, it's a significant growth over the prior near-term years of additional branches. It's really tied to a captive curator choosing to non-renew their personal property portfolios, leaving these agents with no product or a lesser than good opportunity.

Speaker Change #129: percent plus annualized growth rate in number of total branches is that the right way to think about it is that kind of a sustainable near-term level or is it just kind of a much higher level just near-refully because of the IPO kind of press thanks.

Mike: Sure, thanks Mike. So now the 44 is, yes, it's a significant growth over the prior near-term years, this will branches.

Bob Jen Wong: And the next question comes from Bob Jen Wong with Morgan Stanley. Your line is open. Hi, good morning.

Speaker Change #130: It's really tied to a captive carrier choosing to non-renew, there.

Gordy Bunch: Maybe this is sort of a follow-up on the M&A side, on the growth side. In terms of expansion into the newer states, so outside the Texas California, Louisiana, can you maybe talk about how much of the future growth in the newer states will likely be driven by M&A? Is M&A really the bigger focus there rather than the Texas in California, or would you say M&A is more balanced across all states? And just curious as to how you think about the M&A side, when it comes to the newer states?

Speaker Change #130: Personal property portfolios leaving these agents with no product or a lesser than a good opportunity. And that capsid carrier allowing the agents to no longer be capsid.

Gordy Bunch: And that captive carrier allowing the agents to no longer be captive. So it's an opportunistic timing for us to step into that point, utilize the platform we have to put them in a better position to retain their clientele and to, you know, regrow their business with a much broader personal lines focused agency and box business model. There are a lot of smaller national carriers that are exiting personal lines. And that's that, leading the void in many marketplaces. So as we get through 2024, you know, that near-term disruption to some of those captives that are in that position, you know, it's the right time.

Speaker Change #130: So, it's an opportunistic timing for us to step into that point. You utilize the platform we have to put in the better position to retain their clientele and to regrow their business.

Speaker Change #130: with a much broader personal line of focus agency embossed to this model. There are a lot of smaller national carrier that are exiting personal lines and that's that leading the whole way to the many marketplaces.

Speaker Change #130: So, as we get through 2024, you know, that near-term disruption to some of those captives that are in that...

Gordy Bunch: Area dislocation mode. We'll see a little bit higher than average recruiting year in 2024. That will be IP related. That will be optimistic timing based on a third party's decision to non-renew their whole personal life portfolio, at least a property portion of the personal life portfolio. We are still seeing inbound agents that are joining us that are not related to that activity. As I mentioned, we have the increasing inbound inquiry post IPO that would then be attributable to the IPO initiatives. We're going to get it from both.

Gordy Bunch: Then we look at how do we expand from that initial acquisition into recruiting and developing branches and expanding the M&A in that same state. So I'll use Ohio as an example when we made our acquisition in Ohio two years ago. We have the first one and now we have recruited into the state new scratch retail branches. So I look at the M&A for geographical expansion as kind of like a front-running establishing a camp that then we can build off of a base of strength and deploy the balance of our offerings into that new geography having added the right carrier components in order to make that successful.

Speaker Change #130: Terrier Dislocation mode will see a little bit higher than average recruiting year in 2024.

Speaker Change #130: That will be IP related, that will be optimistic timing based on a third party's decision to non-renewited our whole personalized portfolio, at least a property portion of the personalized portfolio.

Speaker Change #130: We are still seeing inbound, you know, engines that are joining us that are not related to that activity. And as I mentioned, we have the increasing inbound increase, post-itio that would then be attributable to the IPL Act, the initial.

Michael Zaremsky: And then once we get through 24 near-term optimistic onboarding, we'll see what the new cadence looks like on a post IPO basis and kind of share that towards the end of the calendar year. That's great color.

Speaker Change #130: So we're going to get it from both and then, you know, once we get through 24 near-term up-premise state, on mornings we'll see what the new cadence looks like on a post-IPO-based system, kind of share that towards the end of the calendar.

Michael Zaremsky: I guess just staying on the same topic of competitors. I'm not going to name any names, but there's a large captive. Maybe the second largest in the United States that has been slowly moving to a lower commission structure and forcing some agencies, not most, but some, to move all their customer service to the back office, which is the opposite business model that you will allow your branches to be able to do all the servicing themselves. I'm just curious how you are hearing or seeing any agents come to you because there's one large carrier that's maybe pushing them to this new business model or that's not something that you're seeing as a tailwind other than I know you just gave us some color on a completely not-renew from a carrier.

Speaker Change #131: Okay, that's that's that's great color and I guess just staying on this it's the same topic of competitors, I'm not gonna name any names but there's a large

Gordy Bunch: So we are going to expand into new geography via recruiting as well. So our geographical expansion will not be solely M&A focused and so we will have new geography open up purely from our agency box recruiting initiatives as that talent aligns to our platform. Okay, got it. Really appreciate that. Thank you. That's all I got. Thank you, Bob.

Speaker Change #131: captive, maybe the second largest in the United States, that has been slowly moving to kind of...

Speaker Change #132: A lower commission structure at enforcing some agencies, not most, but some to move all there.

Speaker Change #133: They're customer service to the, you know, the back office, which is the kind of the opposite business model that that you all run right, you will allow your branches to be able to do all the servicing themselves. I'm just curious how you, I hear in your seeing any agents come to you because

Tommy McJoint: And our next question comes from Tommy Mcjoint with KBW. Your line is open. Hey guys, good morning. When we think about the puts and takes that drove the 13.8% organic growth in the quarter, is there a way to quantify the tailwind from REIT and then perhaps conversely the headwind from customer shopping, hurting retention? Any way to put some numbers around those two figures? I would put it on. We had higher premium retention than our historical norms, which on balance gave us a lower percentage of new business contributing towards the organic revenue.

Speaker Change #134: There's one large carrier that's maybe pushing them to this new business model, or that's not something that you're seeing as a tailwind other than I know you just gave us some color on a complete knot or a new from a carrier.

Gordy Bunch: Sure. So yes, every time a captive carrier changes the terms and conditions of operating their captive agency, those agents reevaluate whether or not that's where they want to spend a meaningful number of years of their career at that organization. And so we do get a lot of them bound inquiry every time, you know, those initiatives are rolled out. One of that be the lowering of commissions or the restructuring of commissions to make it harder to earn the same commission level they had in the prior year. And or the forcing of the sales of specific products that may or may not be in the interest of the client, all those things trigger agent dissatisfaction with their current relationships.

Speaker Change #135: Sure, so yes, every time a captive carrier changes

Speaker Change #136: The terms and conditions of operating their captive agency, those agents re-evaluate.

Speaker Change #137: Whether or not that's where they want us to be.

Speaker Change #138: I'm feeling good.

Speaker Change #138: You know, no more views of their career at that organization.

Speaker Change #138: And so we do get a lot of inbound inquiry every time, you know, those initiatives are all about one of that beef, the lowering of commissions or the restructuring of commissions to make it harder to earn the same commission level they had in the prior year.

Tommy McJoint: And as the market starts to normalize, I won't say software yet, although with normalize, then you'll see a eventual shifting of the organic revenue from retention, trickling down towards our historical average retention rates and our new business as a percentage of total organic revenue is trickling back up. So for us, as we looked at it in the rear, we're getting to the same low to mid teens organic revenue growth and the components of premium retention versus new business, new customers.

Speaker Change #138: And, or the forcing of the sales of specific products that may or may not be in the test interests of the client, all those things trigger agent dissatisfaction with their current relationships.

Gordy Bunch: And so we are getting in bounds from a number of different carriers, different captive companies because they all have their own different deals. When you think about the number of captive carriers that are reevaluating their property initiatives, they could still have the same commission levels, they could still have the same relationships that are good, but it's the market says we're no longer going to be adding additional property to our portfolio. So that really limits that captive agents' ability to grow and sustain customers and the long term viable. So commission changes, product accessibility, all those are issues that drive captive agents into the independent space.

Speaker Change #138: And so we are getting in bounds from a number of different carriers, different captain companies, and they all have their own different deals.

Speaker Change #138: When you think about, you know, the number of Catholic carriers that are reevaluating their property initiatives.

Tommy McJoint: It just, it just adds who flows depending on what part of the cycle we're in, but we're landing at the same number. So I'd say in the current period, you're going to see because of the higher premium retention, or that came from rate during that period, as we shift back into normal, normalcy, you'll see that less of it will be rate and more will be new business to apply at. Okay, got it. Thanks.

Speaker Change #138: They could still have the same commission levels, they could still have, you know, the same relationships that are good, but if the market says, we're no longer going to be adding additional, you know, property to our portfolio, that really limits that captive agents ability to grow and sustain customers and be, you know, long-term viable. So, commission changes, product accessibility, almost, are issues that thrive.

Gordy Bunch: And then switching gears, can you give us a sort of a tax refresher just in terms of how you can leverage your upcy structure and M&A? And is that only valuable for larger perhaps transformational type fields? So the UPST structure provides us with two different types of equity we can use in an acquisition. You have traditional class A shares that the UPST organization we can issue in an acquisition is part of a transaction.

Operator: Thank you.

Speaker Change #138: It will captivate us into the independent space.

Operator: I show no for the questions at this time.

Speaker Change #139: Thank you.

Gordy Bunch: I would now like to turn the call back over to Gordy Bunch for closing remarks. Well, I definitely appreciate everybody's thoughtful questions. We are excited to have been able to file or report our first public company quarter.

Speaker Change #139: I show no further questions at this time. I would now like to turn the call back over to Gordon Bunch for closing remarks.

Gordon Bunch: Well, I definitely appreciate everybody's thoughtful questions. We are excited to have been able to file or report our first public company quarter. Janis, would you like to say anything while we're here? Yeah, it's Jan now.

Gordy Bunch: Those can be used for any size deal. The LLC units that are part of our TRA, those would be one spared for larger transformation or founder led low cost basis, large organizations that would be benefiting from the TRA agreement where they would then participate in the out years with those TRA payments, which makes that equity worth, you know, more than say, just a class A share that doesn't have that TRA benefit.

Janis Weenie: Janice, would you like to say anything while we're here? Yeah, it's been a lot of fun. We are excited about the next quarter coming up and the future. We have some really positive views and ideas, and it's great to hear and be part of this.

Jan: It's been a lot of fun. And we are excited about the next four coming up and the future. So we have to really positive views. And ideas and it's great to be here and be part of this.

Gordy Bunch: Thank you to everyone who attended the call. Thank you for all the questions. We look forward to our next earnings call. And again, I appreciate hearing that was with the public. It was a great deal. We are excited for our future.

Jan: So, thank you to everyone who attended the call. Thank you for all the questions. We look forward to our next earnings call. And again, appreciate the...

Gordy Bunch: There are a number of founder led larger organizations where that would make sense. And so I would use it sparingly for the right opportunities for the right partners. That is an advantage we saw BRP being able to attract some very nice acquisitions through that UPST LLC unit TRA share class. And it's a tool in our kit, one that we will retain for the highest quality, most accretive opportunities. Thanks, appreciate it, Andrea. Sure.

Speaker Change #141: here in the house with a public.

Speaker Change #142: I mean, it was a great era, I'll see that. I did a performance teacher.

Operator: This does conclude today's conference call. Thank you for participating.

Speaker Change #143: This does conclude today's conference call. Thank you for participating. You may now disconnect.

Operator: You may now disconnect. Thank you very much. Thank you.

Brian Meredith: And the next question comes from Brian Meredith with UBS, your line is open. Hey, thanks, a couple of me are pretty good. Given the profitability, talking about it, some of your carriers and what do you think right now is for contingent income company. And should we see that start to improve here as a percentage of premium? Let me give you a hint of a percentage of commissioning. So in our model, we had I think 33 basis points of contingent revenue relative to premium.

Brian Meredith: And as the loss ratios improve across a number of the contingent paying markets, there could be some upside to that in 24. We really are not targeting for that in 24 because as rates come in, they have to earn through the portfolio. So there is a little bit of a timing of one of the rate actually hits the bottom of the loss ratio. But in 2025, you should have the full effect of rate adequacy after multiple years of pricing, underwriting adjustments.

Brian Meredith: And that should be the year that contingencies get back to more of the 40 basis points of premium versus the low 30s. So we're always going to be conservative and how we view contingency given the volatility of the payout structures. So they're loss ratio sensitive, they're growth sensitive. So there's the various components and they're not all the same every carrier addresses it slightly differently. So even if you have loss ratio improvements and say a said market, if they had a growth trigger component of that and they've been closed for new business, you may not realize the same benefit you would have with that loss ratio in a growth mode.

Brian Meredith: So what we put into our model is what we're still projecting. And if things materially change as we get into the end of the third quarter, going into the fourth quarter, we'll make adjustments. We do get lock in opportunities from some of our markets. Those generally come in middle of October, and that's an opportunity for us to lock in that actual contingency. There's a discount to your payout. If you take the lock in, then we do look at those as they come in.

Brian Meredith: If there's something close to being out of the money, we'll probably lock in the bonus and take the discount. So throughout certainty. And if we're in the money and going, we'll let that one slide. The fourth quarter tends to be a low and loss ratio of quarter for us. You know, given most of our loss ratios, whether driven, march through hurricane season.

Janis Weenie: So hope that helps. So I can ask some comments about that. So when you look at the nine independent branches that we converted in January 2024 and the shift from not paying the Christian friends to salary and wages you're looking at roughly a two-point benefit to our margins on the corporate on the branch conversion. So we likely would keep if we have more acquisitions with that are corporate stores that you'll have a creative margin as well.

Pablo Sincson: And our next question comes from Pablo Sincson with JP Morgan. Your line is now open. Hi, good morning.

Gordy Bunch: First question. So expansion outside of Texas and Louisiana is obviously good from a diversification standpoint. But the revenues per policy tend to be lower in less cal exposed states because average payments are just lower. So with that in mind, how are you planning to manage your expansion right by the through M&A or organic vis-a-vis the good margins you are producing on your current footprint? Yeah, so you're correct average premiums and less cal exposed states do run at a lower average premium.

Gordy Bunch: There's an offset of that. Many of these lower-cat states are still paying prior levels of commissions. So as we're looking at M&A in new geography, some of those less-cat prone states, they have average commissions that are higher because then say Louisiana or coastal exposed states. So your average commission may get close based on just as differential on how commissions are paid in the lower-cat geographies. So as far as we look at how our business works, if we have like we have these new startup agencies in Ohio, those folks that are bearing the brick and mortar in the local labor expenses, their revenue passing through our agency and box business model is the same revenue we would have coming through any other state.

Gordy Bunch: So the margin coming out the back is agnostic to what state the revenue is being derived in. I do think we're looking at it from a corporate own location, that's where you have a little more sensitivities to labor costs and brick and mortar costs, and that's where the average premium and low potential overall commission per transaction comes into play.

Gordy Bunch: What we are seeing a pretty decent consistency of, there's higher commissions in those Okay, and then second question for me, under related topics. So I think some of your MJ contracts change from a percentage of commissions based as a flat piece beginning this year. Can you talk about how that's impacting on growth? And I'm particularly thinking about three you where I think there could be a step down from the first half of this year.

Gordy Bunch: Thank you. So Dover Bay was the only program that had a change in its piece structure. That went to a flat, fixed rate. And so it also gets adjusted annually upward based on the training 12 months. And that will take effect in January at 25. So that actual impact us was really affecting, you know, first quarter or second quarter. As we get in the third and fourth quarter, we'll be getting the same level revenue that we received in those higher premium months.

Gordy Bunch: So actually it'll show a little bit of an improvement as the third and fourth quarter are lower premium months for that program. We do have the benefit of knowing exactly what we're going to get paid on that program for this calendar year. And as we end 2024, we'll get the increase to that flat fee for all 2025. And so that year over year comparison becomes a little bit more normal for that particular program.

Gordy Bunch: It did see growth this year. So that's going to give us a bump in that revenue screen in 2025. But we'll have consistent revenue from that program in the quarter and fourth quarter. We won't have the volatility of the production drop off in the last two quarters. Thank you.

Scott Kelly: And the next question comes from Scott, Kelly, Nick with RBC capital markets. Your line is open. Yeah, thanks.

Gordy Bunch: Good morning. First question is just you mentioned you added a fair amount of captive agents in the quarter, the 44 number. Any thoughts you can share on second half of the year or in the 2025, how you're thinking about adding additional agents? It sounds like that there's more interest in terms of just correctly if I'm wrong, but the comment, so since you've gone public, there's more interest in potential joiners and just how are you thinking about that, just particularly if you added a fair amount in the second quarter?

Gordy Bunch: Yeah, I think that we're continuing to see interest and expanded interest from the IPO awareness. We are getting inbound inquiries from marketing we've had in place for a significant period of time. And now that marketing plus the awareness of the IPO, we actually had a prospect say, I'm calling you because I saw the IPO and then I saw this ad and this ad did in place for a long period of time and one of the insurance trades.

Gordy Bunch: And now I think you guys might be the right fit. We also had an M&A broker call us and tell us that the specific client and theirs that they representing wanted us to be in the queue for their M&A initiative and are selecting us as a preferred buyer proactively. So we do think we're going to get more traction with all the offerings we have based on the awareness and exposure from the IPO.

Gordy Bunch: Obviously the 44 we added in the second quarter were not IPO related initiatives. There is disruption in the marketplace across the country where carriers are choosing their personal line strategy. And as captive carriers constrict or eliminate some of their personal line products, that's going to open up more captive agents looking for their next home. And so our objective is to cast a wide net, make sure we have that awareness to the captive distribution channel so that they know that we have the offerings that can help them relaunch their careers and what we think is a more effective I know you kind of described that as sort of one time ahead of the IPO and you had given the agents the decision to be able to do that, but do you expect to see more of those in the coming quarters as there are some that may have changed their mind and would like to convert and how are you thinking about the company's willingness to do those over time?

Gordy Bunch: Yeah, so I think that we won't have any in the near-term quarters that I'm wherever the moment. We did have some not joining the club or Morse from those that were at scale that would have made sense to convert but chose not to, that are interested in revisiting that conversation, but you know, they're going to have to be larger over over 1 billion in revenue locations in order to be viable for locations, the ones that are smaller and we're going to continue to look for them to transact and then work with an existing branch for any new branch principal coming into their role.

Gordy Bunch: Nothing in the near term, but there will be, in my opinion, opportunities for us for the larger ones when they make sense on their timing, not ours, to entertain additional branch conversions which, as Janice mentioned, is accretive to our margin. So we're getting our arms around the nine we converted in January and as we continue to live through their first year as a corporate location, we will be open to additional branch conversions in the years to come.

Gordy Bunch: Thanks for the answers. As a reminder, to ask a question, please press star 111 on your telephone keypad and the next question comes from Michael Zaremsky with BMO. Your line is now open. Great. Thanks. Just a quick follow-up on the F-44 new hires, just want to make sure it seems like a really strong number. So if I'm looking at the S1 back in 2022, your end, there were about 391 total branches, corporate plus 99, and then that grew in 23 by about 20 year on year.

Gordy Bunch: So I want to make sure that the 44 you add is that if we analyze that growth rate, that's about a 40% plus annualized growth rate in number of total branches, is that the right way to think about it is that kind of a sustainable near term level or is it just kind of a much higher level just near recently because of the IPO kind of press. Thanks. Sure. Thanks, Mike. So no, the 44 is, yes, it's a significant growth over the prior near term years of additional branches.

Gordy Bunch: It's really tied to a captive curator choosing to non-renew their personal property portfolios, leaving these agents with no product or a lesser than good opportunity. And that captive carrier allowing the agents to no longer be captive. So it's an opportunistic timing for us to step into that point, utilize the platform we have to put them in a better position to retain their clientele and to, you know, regrow their business with a much broader personal lines focused agency and box business model.

Gordy Bunch: There are a lot of smaller national carrier that are exiting personal lines. And that's that leading the void in many market places. So as we get through 2024, you know, that near term disruption to some of those captives that are in that[inaudible] area dislocation mode. We'll see a little bit higher than average recruiting year in 2024. That will be IP related. That will be optimistic timing based on a third party's decision to non-renew their whole personal life portfolio, at least a property portion of the personal life portfolio.

Gordy Bunch: We are still seeing inbound agents that are joining us that are not related to that activity. As I mentioned, we have the increasing inbound inquiry post IPO that would then be attributable to the IPO initiatives. We're going to get it from both. And then once we get through 24 near-term optimistic onboarding, we'll see what the new cadence looks like on a post IPO basis and kind of share that towards the end of the calendar year.

Gordy Bunch: That's great color. I guess just staying on the same topic of competitors. I'm not going to name any names but there's a large captive. Maybe the second largest in the United States that has been slowly moving to a lower commission structure and forcing some agencies, not most, but some to move all their customer service to the back office, which is the opposite business model that you will allow your branches to be able to do all the servicing themselves.

Gordy Bunch: I'm just curious how you are hearing or seeing any agents come to you because there's one large carrier that's maybe pushing them to this new business model or that's not something that you're seeing as a tailwind other than I know you just gave us some color on a completely not-renew from a carrier. Sure. So yes, every time a captive carrier changes the terms and conditions of operating their captive agency, those agents reevaluate whether or not that's where they want to spend a meaningful number of years of their career at that organization.

Gordy Bunch: And so we do get a lot of them bound inquiry every time, you know, those initiatives are rolled out. One of that be the lowering of commissions or the restructuring of commissions to make it harder to earn the same commission level they had in the prior year. And or the forcing of the sales of specific products that may or may not be in the interest of the client, all those things trigger agent dissatisfaction with their current relationships.

Gordy Bunch: And so we are getting in bounds from a number of different carriers, different captive companies because they all have their own different deals. When you think about the number of captive carriers that are reevaluating their property initiatives, they could still have the same commission levels, they could still have the same relationships that are good, but it's the market says we're no longer going to be adding additional property to our portfolio. So that really limits that captive agents ability to grow and sustain customers and the long term viable. So commission changes, product accessibility, all those are issues that drive captive agents into the independent space.

Operator: Thank you. I show no for the questions at this time.

Gordy Bunch: I would now like to turn the call back over to Gordy Bunch for closing remarks.

Gordy Bunch: Well, I definitely appreciate everybody's thoughtful questions. We are excited to have been able to file or report our first public company quarter.

Gordy Bunch: We look forward to our next earnings call. And again, I appreciate hearing that was with the public. It was a great deal. We are excited for our future.

Operator: This does conclude today's conference call. Thank you for participating. You may now disconnect. Thank you very much. Thank you.

Q2 2024 TWFG Inc Earnings Call

Request a DemoDemo

TWFG

Earnings