Good morning. My name is Josh, and I will be your conference operator today. At this time, I would like to welcome everyone to the TWFG Third Quarter 2024 Conference Call. [Operator Instructions] This call is being recorded and will be available for replay on the company's website. Before we begin, let me remind you that today's discussion may contain forward-looking statements and actual results may differ materially from those discussed. For more information regarding forward-looking statements, please refer to the company's press releases and SEC filings. Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. The company has posted reconciliations of the non-GAAP financial measures discussed during this call in the tables accompanying the company's earnings press release located in the Investors section of the company's website at www.twfg.com. It is now my pleasure to introduce Mr. Gordy Bunch, Founder, Chairman and CEO of TWFG. Sir, the floor is yours.

Thank you, operator. Good morning, everyone, and thank you for taking time to join us today to discuss our third quarter 2024 results. Joining me on the call is Janice Zwinggi, our Chief Financial Officer. After my opening remarks, Janice will review our financial results and then we will take your questions. I would like to start off every call to take time to thank all of our employees, carriers, agents, clients and vendors that continue to partner with us to achieve our goals. We have a great team working every day to create one of the fastest-growing independent insurance distribution platforms in the country. This quarter highlighted our team's resiliency as we started July with Hurricane Beryl rolling over our home office, knocking out power and internet for several days. Our home office team executed our business continuity plan, bringing our temporary location online the day after landfall. Knowing we had a tremendously talented team capable of addressing the challenges from Beryl allowed us to continue launching our IPO road show the same day. We completed our IPO in July, raising $192.9 million in net proceeds through the issuance of 12,650,000 shares of Class A common stock at a $17 per share price. Hurricanes Francine, Helene and Milton further tested our resiliency across Louisiana, North Carolina and Florida locations. TWFG agencies have been through numerous catastrophic events over our 24 years and have contingency plans in place to address the safety of our agents and staff. TWFG offices can work remotely as needed to continue supporting our clients in their time of need. Our Policy is Caring is not just a tagline. It comes to life and is most visible during these catastrophic events. I couldn't be prouder of our agents, employees, carriers and the first responders answering the…

Thank you, Gordy, and good morning to everyone on the call. Starting with the top line, written premium increased $46 million or 13% over the prior year period to $400.1 million. Under our primary offerings, insurance services grew $40.5 million or 13.5% and TWFG MGA grew $5.5 million or 10% over the prior year period. The increase in written premium was driven by an acceleration in new business and normalizing retention levels. Carriers have begun to open up for new business across geographies where they had previously restricted growth and consumers have more choices in the marketplace today compared to prior periods. As a result, we saw a shift in our book with new business premiums increasing 39% or $25 million compared to a decrease of 20.1% or $16.1 million in the same period in the prior year and premium retention normalizing to 88% from 97% in the third quarter of '24. Total revenue increased $6.9 million or 14.5% over the prior year period to $54.6 million, which was driven by accelerating new business activity, rate increases, healthy economic growth in our core states, higher investment income and moderating retention levels. Commission income increased $4.2 million or 9.7% over the prior year period to $48.2 million. This increase is due mainly to higher premium rates, new business growth and continued rollout of our Book of Business acquisitions in the 2023 into the current period. Fee income increased $0.8 million or 37.2% over the prior year period to $2.9 million due mainly to an increase in policy fee income driven by higher policy count in our TWFG MGA offering. In addition, branch fee income increased $0.3 million or 42.2% over the prior year period to $1.2 million due to an increased branch fee rates. Other income increased $1.6 million or 270%…

Thank you, Janice. In summary, this was a solid third quarter. Our recruiting and M&A pipeline continue to build, when we anticipate opportunities to deploy some of our $191 million unrestricted cash and $50 million undrawn revolver capacity in the months and quarters ahead. With that, we'd like to open the call for questions. I'll now turn it over to the operator.

[Operator Instructions] Our first question comes from Michael Zaremski with BMO.

This is [ Charlie ] on for Mike. Can you update us on the number of agencies Woodlands has by distribution channel and whether the recent pace of growth is sustainable? To clarify, I think you reported 86 new agencies added in the quarter. Then I think you said 44 experienced agent hires from captives last quarter. So we're just trying to understand the comparability and the sustainability of that growth.

Thanks, Charlie. Yes, we ended the calendar year '23 with a little over 400 locations. And throughout this calendar year, we've added close to 135, 140 new offices. So total office count right now would be north of 500. And we're seeing other changes in the marketplace that is still giving us a good pipeline flow. We did, in the last quarter, talk about a specific carrier taking action on their distribution that gave us outsized recruiting results for the second quarter that has bled into the third quarter. Most of that has already kind of played through. We did expect more exposure from the IPO and get more attention from prospective independent agencies and existing captive agencies looking to adopt our agency-in-a-box model as well as partner with our MGA programs. And so in the agency-in-a-box category, that's about 520-plus locations. In the MGA, it's over 2,000. And in our pipeline as far as inquiries coming in, we still have a lot of activity coming in for new potential agency-in-a-box recruits. So we do want to caution that, yes, the second quarter and third quarter were above historical averages. But even looking at what's in our pipeline, we see that there will be a continuation of above our average, but probably not at the same extreme that we saw in, say, the third quarter.

Got it. That's helpful. On the contingents in the quarter, if we look at it as a percentage of revenue that ticked up, was there anything onetime in that figure? Or is this the right run rate ratio to think about going forward? And is there upside should home insurance loss ratios continue to improve in the coming years?

Yes. So we'll have some adjustments in the fourth quarter when we get closer to seeing the year-end results. I think when you look at the prior periods where you had auto loss ratios for personal lines and homeowners loss ratios elevated in the prior calendar years, that had taken us to a historical low. And as we are starting to see the results of improved loss ratios across both lines of business, we're starting to see the contingencies coming towards more to a normalized level. This is still below the peak contingency revenue ratios that we've seen in the past. But so far, everything is looking good for the back half of '24, which we think will continue on in '25.

Our next question comes from Paul Newsome with Piper Sandler.

I was hoping you could give us a little bit more color about the change in the customer retention as it relates to the opening of the various states for new business. It sounds like there's a little bit of a push and pull with the new business helping, but the retention offsetting that. And I was wondering if that is behavior you think will continue or if there's some sort of differences in how those 2 work together?

Yes. Thanks, Paul. I think there's a couple of things occurring when you look at the premium retention. One, more markets have opened up to accept new business across a larger geography in the third quarter than was present in the first and second quarter. That's providing our agents and our customers alternatives for their insurance that's renewing. It's also giving us more opportunities to write new business in areas that previously were restricted for new business. And so it's not that a customer is being lost or going elsewhere. It could be that the renewal premium or the expiring premium would say, travelers might have been $2,000 a year. But now that there's 2 or 3 new markets that have opened up, that travelers renewal may come in at $2,500, but we have 2 or 3 alternative markets that will offer same and similar coverage for, say, $1,800 or $1,900. So the customers are having some options on where they want to place their renewals. And similarly, customers even in areas that are still hard that have less options, they're making coverage decisions where the renewal for their premium may come in at plus 15%, 20%, they'll work with their agent on how do they mitigate that increase. And so many customers are opting to increase their deductibles or alter their coverages to help lower their rates to make their premiums more affordable. So that's part of what you're seeing in the premium retention. And then, yes, new business has escalated as our agents are able to secure insurance across a broader portfolio. We indicated last quarter that we saw signs that the market was starting to head towards normalization. I would say that, that trend line continues. We expect it to become fully normalized in the private passenger auto side through '25. There are still some states that are working through rate filings and rate adequacy. But for the most part, there's -- all of our major markets are signaling positivity towards '25 and being more broadly open and looking to reinitiate growth initiatives. So good tailwinds in that manner.

Our next question comes from Tommy McJoynt with KBW.

This is Dean Criscitiello on for Tommy. You guys called out a change in the fee commission structure of one of the MGA programs being like a headwind to organic growth this quarter. Is there any way to quantify that impact? And then also, would you expect some modest headwinds in like the fourth quarter or the first quarter of next year as well?

So referring to the MGA program for Dover Bay, we did see and we projected as well to -- we had a decline of $1 million for the quarter. So that -- we expect to see that when we compare next year, we won't have this anomaly. But that is -- we have a flat fee now, but it was -- the $1 million was the effect for the quarter of less fee income.

Yes. And Dean, so to answer your question about will you see that next year, we should not see that next year given that we have a 5-year agreement. We have a flat fee with a reset annually. So this was a -- this was the most acute quarter. We knew that this was going to occur. We included that in our analyst models and it played through exactly as expected, but should not be a reoccurrence in '25, given that we would have lived through the first year of that transition of the agreement.

Okay. That makes sense. And then my next one, could you guys just remind us of what goes into that other income line? I know it ticked up a bit year-over-year. I think you mentioned it in your prepared remarks, but can you just remind us about that? And then how we should think about like a run rate going forward?

So that -- the other income, 95% of that is interest investment income and it's increased because we have more cash, obviously, from the IPO proceeds. So we will -- you'll see that in our projections going forward to be increased based on our -- depending on when M&A falls into place. But yes, you'll see that rate go up.

Our next question comes from Brian Meredith with UBS.

Gordy, I was hoping you could talk a little bit more about the M&A pipeline. Do you think you might see some land here in the fourth quarter? I know original expectation is probably not till next year. And has being a public company helped at all as far as things you're getting to look at?

So first question, right now we do have signed LOIs out with 2 acquisitions that we anticipate closing January 1 for simplicity, so not in the fourth quarter, in line with what we provided in our projections in the analyst model. As far as are we seeing significant activity lift from the awareness of the IPO? Yes. I would qualify that as substantial. Our pipeline is robust and it spans retail, MGA programs. We are seeing things internationally, not that we're chasing anything outside the country. We are getting a lot of looks coming our way from a number of investment banks, M&A brokers and honestly, some agencies that are reaching out to us proactively, knowing that we are a buyer in the space and they have familiarity with our organization and are actually seeking us out as potential preferred buyers. So we do have a good pipeline. We do anticipate meeting what we provided in the analyst model, which, if you recall, had a year-end convention of revenue and EBITDA that we provided to you. And we will looking at closing those transactions 1/1. So instead of 12/31, it would be 1/1 and that just gives us a clean cut for the employees of the acquiring targets and for us to live launch with those folks beginning of the calendar year.

Appreciate that. Makes it easy for us, too. And then second thing, wholesaler. Could you talk a little bit about kind of flow of business into your wholesaler? What are you seeing as maybe the markets are opening up a little bit here? Or is it still a lot of business flowing that way?

Our program side is seeing an influx of activity. The market in our core states is still relatively hard on the property side. So we are getting increased volume in our programs, which is doing homeowners insurance across the state of Texas as well as high-value home programs across the country. So as that property segment remains hard or fragmented, we are seeing more engagement in the wholesale side. So our GA showed positive growth in the quarter. A lot of that was driven through our programs business.

Our next question comes from Scott Heleniak with RBC Capital Markets.

Just wondering if you could talk about market conditions and capacity opening up. I know you kind of referenced that in auto and talking about some normalization. But I wonder if you could talk about home, particularly in Texas. I know that, that continues to be kind of a more difficult challenging state given what's happened with catastrophe losses. But what are you seeing out there? And do you expect to see normalization in Texas in most places of homeowners in 2025 at some point?

So with auto, I think auto will be a different story than home. Auto seems to achieve rate adequacy and most of the national underwriters are projecting confidence in rate. Many are starting to institute new business incentives, which is the signal that we like to see as they're committed to the growth. On the property side, I'm sure you saw the announcement from Progressive on being more selective. That restricted underwriting guideline that they're looking for bundled packages and some of the less appetite for cat-exposed geography, that's going to create a pretty decent void in the marketplace. That marketplace void will get filled by regional markets, new start-ups, programs. And so our job is to make sure we're aligning our distribution up with the available capacity that exists across a span of carriers, including our own programs. So in Texas, specifically, Scott, our homeowners program has seen tremendous growth starting back in April when Progressive first announced their restricted underwriting guidelines. We do see a couple of the national carriers that are signaling that they have more confidence in their roof age scheduling for coverage reductions and underwriting guidelines and pricing that they're going to be more open for property. So I think it's going to be a combination of a shrinking national market and an expanding regional, superregional and new programs that come to fruition that prop up the property side.

Okay. That's definitely helpful color. The other thing I want to ask you is just, is there any way you can quantify what the new public company expenses were in the quarter and how you see that trending over the next few quarters? I mean, you just went public. So obviously, there's a little more to come, but anything you can point to on either of those?

Well, I know my audit expenses are significantly higher as in the case of [ CAB ] audit. My legal fees are significantly higher than a private company. Maybe when we have our one-on-one, we'll give you more granular detail. I don't have that number top of mind. We do know and hopefully, you picked it up in our language that we do anticipate additional public company expenses coming in through the next several quarters. We have some open positions, more SEC-related experienced roles that we're looking to fill. Those aren't in our current actuals, but they are in our forecast budgets. So even though we're achieving our EBITDA is higher than we projected in this quarter, we want to make sure that we're consciously conveying that we will have some hires that will bleed into the actual results going forward, but they are in our projections. And when we provide updated projections, we'll include those.

Okay. And then just lastly, the retention rate, do you expect that to kind of stay normalized in the high 80s? I know it had been in the 90s, but is that -- do you kind of expect that to -- that run rate to be kind of the new run rate? Or could it go back to the 90s next year?

Yes. So Scott, our actual longer-term historical averages has been 88%. And I think when we did the analyst model back in the spring, we showed 88% in the model, even though we were currently in the 90s. So we expected this normalization of the market, the customer behavior to self-advocate rate down to get us back to where we're at on this 88% projectile.

[Operator Instructions] Our next question comes from Pablo Singzon with JPMorgan.

So most of my questions have been asked, so I'll probably just ask more follow-ups here. So first, just on expenses. Given the ramp-up in public expenses, how much higher do you think the quarterly G&A will run from here? I think the quarter was $4.8 million, but how much higher can it go from there?

What, you said G&A?

Yes.

Yes. G&A. Yes.

Oh, it's $4.8 million, yes, for the quarter. So we're up $2 million from prior year. And going back to the question that you had on the professional fees, roughly of that $2 million, we've got $500,000 as in professional fees that have increased. And we are expecting -- we've got the fees from mainly audit and legal is going to be the big guys and then the salaries. So I would say roughly 15% to 20% is what we have in our projections for next year increasing.

Yes. So there's -- I don't know if you heard that, Pablo, but half of the increase is legal and audit and we still have legal estimates to come in, which may spike higher. But then we have open positions, which will be new salaries related to being public. That could be another $0.5 million to $1 million that's not currently in the actuals. So as we live into those new hires, new roles, we'll keep updating, but we're anticipating at least another $1 million of salary and possibly $1.2 million, somewhere in that range.

Got it. And the $1 million is on an annual basis, Gordy, or on a quarterly basis?

No, $1 million would be on an annual basis. $1 million, $1.2 million, yes.

Got you. And then second follow-up. So the topic of retention had come up, I think, once or twice on the call already. But I guess just to follow up on one question about the retention headwind from new agents rolling their books into broader markets available on your platform. So as you continue to experience above average growth over the next several quarters here, is there a risk of the company falling below the normal 88% retention, right, just as you're experiencing this above-normal growth?

Well, the retention is on prior year actual business. So agents that may have joined us that are bringing in customers from prior relationships, those show up in the new business category. So we're looking at that 88% retention has been the long-term average. And I don't expect that the agents that are bringing in portfolio or rewriting accounts from outside are going to impact that 88%. We think that's a pretty good long-term number.

Okay. And then last for me. So income tax expense booked on a GAAP basis is lower than the taxes you show for adjusted net income. What's the reason for that gap? And is that a real cash benefit to the company?

So the tax expense you're seeing is just on the PubCo income, their pro rata share, which is roughly 24%, 25%. So it's 21% to 22% tax rate. So that's why you see a much lower -- we don't have -- on the LLC side, there's no -- it's a partnership, so you don't have taxes associated with that. It's just on the PubCo and it's their percentage interest.

Our next question comes from Michael Zaremski with BMO.

This is Charlie again. Just one follow-up. Can you update us, please, on the run rate for stock comp from here?

So right now stock comp for the quarter was really amortization of the RSU units from the IPO grants. There were a little over $7 million at IPO granted that will vest over a 2.5-year period. So those will amortize in throughout those quarters. Our comp committee will be approving the stock comp or equity comp plan for '25 and the awards for '24 in December. We had in the analyst model an annual stock comp of around $4 million as a placeholder. So once we get through the comp committee's recommendations and the Board's ultimate selection of '24 awards and '25 incentives, we'll normalize whatever that total amount is. But right now $4 million a year was a good placeholder.

At this time, there are no further questions. I will now turn the call back over to Mr. Bunch.

Thank you, Josh. Thank you, all, who attended this morning's call. We look forward to continuing to provide information on our company's growth and prospects going forward. I know we have a number of follow-up calls with many of you and we look forward to getting into more details and answering more of your questions. Again, we had a great third quarter in line with what we provided in our projections and the analyst models and we look forward to continue to execute against our plans. And looking at current year-end guidance would be the same as we provided in the analyst model. We are seeing things that are playing out the way we had projected. So I appreciate everybody on the call and look forward to reporting full year, our fourth quarter information here coming up in the first quarter of 2025. Thank you.

Thank you. And that concludes today's conference. Thank you all for participating. You may now disconnect.