TWFG, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our consolidated financial statements and the related notes in the IPO Prospectus. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed below and in the IPO Prospectus particularly in the sections entitled “Risk factors” and “Special note regarding forward-looking statements”. The following discussion contains commentary on the financial results derived from the unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2024 and 2023 of TWFG, Inc. Overview We are a leading, high-growth, independent distribution platform for personal and commercial insurance in the United States. We are pioneers in the insurance industry, developing an agency model built on innovation and experience with what we believe is a more flexible approach than traditional distribution models. Our offerings are fulsome and flexible in that we offer all lines of insurance, multiple distribution contract options, M&A services, proprietary virtual assistants, proprietary technology, proprietary premium financing, unlimited continuing education, recognition programs, co-op funding, marketing support and overall lower costs to operate. Since our founding in 2001 by our Chief Executive Officer, Richard F. (“Gordy”) Bunch III, we have established a track record of creating solutions for independent agents, insurance carriers and our Clients, with sustainable growth regardless of economic and P&C pricing cycles. We embrace a simple philosophy: “Our Policy is Caring,” which is more than a motto. This philosophy informs the way we interact with all of our stakeholders and the communities in which they live and work. We seek to attract partners who come in every day with the commitment to making a difference in the lives of the people and communities we interact with. We treat our Clients, employees and stakeholders like family. Factors affecting our results of operations We believe that the most significant factors affecting our results of operations include: Attracting and retaining experienced agents. Our long-term growth and success will depend, in large part, on our continued ability to attract new agents. Our growth strategy focuses on attracting experienced end of career and retiring agents that come to us with an existing Book of Business and become Branch principals within our system. Our value proposition resonates with agents as they have succession planning options built into their contracts. To facilitate succession planning, we offer independent agents the ability to sell their Books of Business to TWFG, enabling a smooth handover of Client relationships and operational responsibilities. Branch principals also have a high degree of autonomy in which to operate their business and expand their footprint. Branches use our comprehensive technology and agency management system, benefiting from enterprise group rates that we believe are typically lower than agents would receive on their own or from leading agency management system vendors. Insurance carrier relationships. Our growth and success are dependent on, in large part, our relationship with insurance carriers. We specialize in creating innovative insurance products that address the specific needs of Clients, a strategy that ultimately benefits our insurance carriers. Our deep understanding of market trends and consumer demands enables us to develop tailored and forward-thinking solutions that turn into high-growth and profitable lines of business for insurance carriers. Insurance carriers reward our performance with additional access to business over time. Additionally, we provide insurance carriers with cost-effective and rapid access to new markets, leveraging our expansive network and market insights. This approach not only extends the insurance carriers’ reach into diverse Client segments but also enhances their market presence. Our role as an intermediary ensures a broad and varied range of insurance products are available to our Clients, meeting their diverse needs. This symbiotic relationship with insurance carriers not only broadens their Books of Business but also ensures our Clients have 29 Table of Contents access to comprehensive, customized insurance options, increasing retention of the business we place for insurance carriers and cementing our role as a pivotal facilitator in the insurance industry. Reliance on insurance intermediaries . Our growth and success are dependent, in part, on the financial strength of the insurance carriers we work with and our ability to distribute differentiated insurance products in the market. If insurance intermediaries or insurance carriers experience liquidity problems, insolvency or other financial difficulties, or do not timely provide required information or payments to us, we could encounter delays in payments owed to us, the loss of insurance carrier appointments, E&O claims and difficulty collecting receivables owed to us by insurance carriers. The capacity of our insurance products may be subject to restrictions placed by parties outside our control, such as reinsurers, insurance intermediaries, insurance carriers and state regulators. These conditions may adversely affect our revenue and make it difficult for us to accurately predict our future results, which could harm our business, financial condition and results of our operations. Investment in technology. Our continued growth and success depend, in part, on our ability to invest in technology to drive scalability and efficiency. Agents use our comprehensive technology package that includes an agency management system that is customizable. Our technology facilitates the sales process, and includes integrated technology features like electronic signatures, personal lines rating and commonly used insurance forms. It also provides dynamic reporting on retention, renewal and marketing. We leverage technology to help our agents acquire new Clients with social media, email marketing and text message integration within our agency management system. We also leverage technology to enhance the Client experience with our proprietary mobile application that allows Clients to access their ID cards and easily communicate with their agents. Our carrier administration system is equipped for underwriting and policy administration for both admitted and non-admitted programs in multiple states. Strategic asset acquisitions. We supplement our organic growth (including the addition of independent branches into our network) and add capabilities through strategic asset acquisitions. Through strategic asset acquisitions, we have acquired agencies, Books of Business, MGAs, insurance networks and renewal rights across a range of specialties and geographies. Our acquisition strategy entails crafting a compelling value proposition for acquisition targets including a robust operational backbone, a wide array of insurance products and markets, a collaborative culture and the opportunity for long-term growth. We also prioritize a transparent and equitable transaction process to help ensure a good relationship and alignment from the beginning, and have implemented a systematic and disciplined integration playbook. In 2023, we completed five asset acquisitions with annual revenue in excess of $0.5 million for a total purchase price of $19.4 million and acquisition-related expenses of $0.2 million. In January 2024, we acquired the assets of nine of our independent branches and converted them to Corporate Branches for a total purchase price of $40.8 million. In addition, in January 2024, we acquired the remaining interests in the assets of our partially owned Corporate Branches for a total purchase price of $5.2 million, converting them to wholly owned Corporate Branches. The valuations of these asset acquisitions were based substantially on the size, growth, loss ratios and pro forma EBITDA of their Books of Business. See Note 4, “Intangible Assets” to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for information regarding the accounting for these acquired assets and their impact on our unaudited condensed consolidated financial condition. See “—Consolidated Results of Operations” for the impact of these acquisitions on our results of operations. Insurance industry pricing trends and the effect of natural and man-made disasters. We generate most of our revenues through commissions, which are calculated as a percentage of the total insurance premium. A softening of the insurance market or the lines of business we serve, characterized by a period of declining premium rates, could negatively impact our profitability. Additionally, insurance carrier losses from natural or man-made disasters could impact our contingent income, which is primarily driven by insurance carrier underwriting results and, to a lesser extent, the volume of business we place with them. Macroeconomic trends. Macroeconomic factors, including the recent resurgence of inflation and interest rate increases, and the risk that the U.S. economy will decelerate into a recession, affect the financial services industry and may reduce demand for our services or depress pricing for those services, which could have a material adverse effect on our costs and results of operations. During higher inflationary periods, our rent expenses may also increase significantly, which may adversely affect our business, financial condition, results of operations and cash flows. Furthermore, during inflationary periods, interest rates have historically increased, which would have a direct 30 Table of Contents effect on interest expense if we decide to refinance our existing long-term borrowings or incur any additional indebtedness. These macroeconomic trends are partially offset by increased commissions due to increased premiums and increases in interest income from interest rate increases and, as a result, we have grown our business and profitability through multiple economic cycles. Cost of being a public company. To operate as a public company, we are required to continue to implement changes in certain aspects of our business and develop, manage, and train management level and other employees to comply with ongoing public company requirements. We will also incur new expenses as a public company, including public reporting obligations, proxy statements, stockholder meetings, stock exchange fees, transfer agent fees, SEC and FINRA filing fees, and offering expenses. Our corporate structure TWFG, Inc. was incorporated on January 8, 2024 for the purpose of completing the IPO and other related reorganization transactions (the “Reorganization Transactions”) that were completed on July 19, 2024. Following a reorganization into a holding company structure as part of the Reorganization Transactions, TWFG, Inc. is a holding company and its sole material asset is a controlling ownership interest in TWFG Holding Company, LLC. All of our business is conducted through TWFG Holding Company, LLC and its consolidated subsidiaries, and the financial results of TWFG Holding Company, LLC and its consolidated subsidiaries are included in the unaudited condensed consolidated financial statements of TWFG, Inc. TWFG Holding Company, LLC has been treated as a pass-through entity for U.S. federal and state income tax purposes and accordingly has not been subject to U.S. federal or state income tax. After the IPO, TWFG Holding Company, LLC continues to be treated as a partnership for U.S. federal and state income tax purposes. Accordingly, because of our ownership of the non-voting common interest units of TWFG Holding Company, LLC (the “LLC Units”), we are subject to U.S. federal, state and local income taxes with respect to our allocable share of any net taxable income of TWFG Holding Company, LLC and are taxed at the U.S. federal income tax rates applicable to corporations. In addition to tax expenses, we also incur expenses related to our operations and we are required to make payments under the Tax Receivable Agreement entered into in connection with the IPO (the “TRA”). We intend to cause TWFG Holding Company, LLC to make distributions in an amount sufficient to allow us to pay our tax obligations and operating expenses, including distributions to fund any ordinary course payments due under the TRA. See “—Tax Receivable Agreement” for additional information regarding this arrangement. Certain income statement line items Revenues Commission income. We derive commission income from the placement of insurance contracts between insurance carriers and Clients. Our commissions are established by the agency agreement between the Company and the insurance carrier and are calculated as a percentage of premiums for the underlying insurance contract. Commission rates vary across insurance carriers, states and lines of business and typically range from 7% to 22%. Our average commission rate for 2023 was approximately 12%. Our main obligation under our agency agreements with the insurance carriers is selling insurance contracts to our Clients. Each underlying insurance contract is a separate and distinct contract between the Client and the insurance carrier. Our Clients are not obligated to keep the insurance contract for the full term or renew it with the insurance carrier beyond its initial term. We are required to try to resell the insurance contract to our Client at the expiration of each policy term or shop for alternatives if our Client decides to terminate its existing insurance contract. We recognize commission income when the performance obligation of placing the insurance contract between our Client and the insurance carrier has been met and the insurance contract is in effect, based on its effective date. Our agency agreements with the insurance carriers are non-exclusive and can typically be terminated unilaterally by either party. Additionally, either party can agree to amend the provisions of the agency agreements, which may affect our future commission income. Contingent income. We may earn contingent income from insurance carriers. Contingent income is highly variable and based primarily on underwriting results and, to a lesser extent, volume. 31 Table of Contents Fee income. Fee income is comprised primarily of policy fees, branch fees, license fees and third-party administrator (“TPA”) fees. The Company receives policy fees as compensation for administrative services performed in connection with the placement and issuance of certain policies that are in addition to and separate from commissions paid by the insurance carriers. Branch fees include the monthly recurring fees assessed for the ongoing Client service and back-office support provided to independent branches operating exclusively through the Company pursuant to an exclusive Branch agreement and a one-time branch onboarding fee. License fees are usage-based fees assessed by the Company for the use of its proprietary applications. TPA fees are related to services performed based on service agreements with the insurance carriers. Other income. Other income is comprised primarily of interest income, income earned for facilitating premium financing arrangements, fees assessed for agent conventions and other miscellaneous income. The following table sets forth our revenues by amount and as a percentage of our revenues for the periods indicated (dollar amounts in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Amount % of Total Amount % of Total Amount % of Total Amount % of Total Commission income $ 48,240 88 % $ 43,993 92 % $ 139,447 91 % $ 122,451 92 % Contingent income 1,383 3 1,035 2 3,717 2 3,023 2 Fee income 2,890 5 2,107 5 7,811 5 6,343 5 Other income 2,127 4 575 1 3,244 2 1,125 1 Total revenues $ 54,640 100 % $ 47,710 100 % $ 154,219 100 % $ 132,942 100 % Expenses Commission expense. Commission expense is our largest expense, representing the consideration paid to our agents for producing and retaining business. We expect our commission expense to continue to increase in line with our expected business growth. Salaries and employee benefits. Salaries and employee benefits consist of base compensation and any bonuses, equity compensation and benefits paid and payable to employees. We operate in competitive markets and expect to continue to experience a general rise in compensation and benefits expense commensurate with expected growth in headcount, geographic expansion and the creation of new products and services. Other administrative expenses. Other administrative expenses include technology costs, legal and professional fees, office expenses and other costs associated with our operations. Fluctuations in other administrative expenses are relative to the overall scale of our business operations. Depreciation and amortization. Depreciation and amortization are primarily comprised of the amortization of intangible assets recognized from our strategic asset acquisitions. As we continue to pursue strategic asset acquisitions, we expect our amortization expenses to increase. 32 Table of Contents Consolidated results of operations The following is a discussion of our consolidated results of operations for the periods presented. This information is derived from our accompanying unaudited condensed consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The following table summarizes our results of operations for the periods presented (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Amount % of Total Amount % of Total Amount % of Total Amount % of Total Revenues: Commission income $ 48,240 88 % $ 43,993 92 % $ 139,447 91 % $ 122,451 92 % Contingent income 1,383 3 1,035 2 3,717 2 3,023 2 Fee income 2,890 5 2,107 5 7,811 5 6,343 5 Other income 2,127 4 575 1 3,244 2 1,125 1 Total revenues 54,640 100 % 47,710 100 % 154,219 100 % 132,942 100 % Operating expenses: Commission expense 30,766 66 % 32,461 82 % 89,171 68 % 90,853 81 % Salaries and employee benefits 8,331 18 3,390 8 21,401 16 10,096 9 Other administrative expenses 4,813 10 2,812 7 11,687 9 8,043 7 Depreciation and amortization 2,985 6 1,145 3 8,966 7 3,340 3 Total operating expenses 46,895 100 % 39,808 100 % 131,225 100 % 112,332 100 % Operating income 7,745 7,902 22,994 20,610 Other non-operating income (expense) Interest expense (411) (295) (2,125) (553) Other non-operating income (expense), net (4) 1 8 (10) Income before tax 7,330 7,608 20,877 20,047 Income tax expense 437 — 437 — Net income from continuing operations 6,893 7,608 20,440 20,047 Net income from discontinued operation, net of tax — — — 834 Net income $ 6,893 $ 7,608 $ 20,440 $ 20,881 Comparison of the Three Months Ended September 30, 2024 and 2023 Total revenues The following table presents the disaggregation of our revenues by offerings (in thousands): Three Months Ended September 30, 2024 2023 Amount % of Total Amount % of Total Insurance Services Agency-in-a-Box $ 34,000 63 % $ 35,895 75 % Corporate Branches 9,234 17 1,755 4 Total Insurance Services 43,234 80 37,650 79 TWFG MGA 9,490 17 9,538 20 Other 1,916 3 522 1 Total revenues $ 54,640 100 % $ 47,710 100 % Total revenues for the three months ended September 30, 2024 increased by $6.9 million, or 14.5%, compared to the same period in the prior year. The increase was primarily due to a $4.2 million, or 9.7%, increase in commission income driven primarily by higher premium rates, new business growth and continued rollout of commission 33 Table of Contents income from our Book of Business acquisitions completed in 2023 into the current period. Also contributing to the increase in total revenues were the $0.8 million, or 37.2%, increase in fee income, $0.3 million, or 33.6%, increase in contingent income, and $1.6 million, or 269.9%, increase in other income. See discussions below for additional information about the changes in our revenues. Commission income The following table presents the disaggregation of our commission income by offerings (in thousands): Three Months Ended September 30, 2024 2023 Amount % of Total Amount % of Total Insurance Services Agency-in-a-Box $ 31,543 65 % $ 34,255 78 % Corporate Branches 9,300 19 1,770 4 Total Insurance Services 40,843 84 36,025 82 TWFG MGA 7,397 16 7,968 18 Total commission income $ 48,240 100 % $ 43,993 100 % Commission income for the three months ended September 30, 2024 increased by $4.2 million, or 9.7%, compared to the same period in the prior year. Higher premium rates, new business growth, and continued rollout of commission income from our Book of Business acquisitions in 2023 into the current period were the primary drivers of the increase in our commission income. Commission income for Insurance Services grew by $4.8 million, or 13.4%, for the three months ended September 30, 2024 compared to the same period in the prior year. However, during the current period the components shifted between Agency-in-a-Box and Corporate Branches. Agency-in-a-Box commission income for the three months ended September 30, 2024 decreased by $2.7 million, or 7.9%, compared to the same period in the prior year. The decrease was mainly attributable to our acquisition of nine of our independent branches (which were previously operated as Agencies-in-a-Box) and their subsequent conversion to Corporate Branches in January 2024. The branch conversions resulted in a $5.9 million decrease in the Agency-in-a-Box commission income during the third quarter of 2024. Insurance Services Corporate Branches commission income for the three months ended September 30, 2024 increased by $7.5 million, or 425.4%, compared to the same period in the prior year. The increase was primarily driven by the aforementioned branch conversions. In addition, Corporate Branches commission income for the three months ended September 30, 2024 included increases from our Book of Business acquisitions in 2023, while the same period in the prior year did not reflect the impact of the acquisitions completed in the fourth quarter of 2023. TWFG MGA commission income for the three months ended September 30, 2024 decreased by $0.6 million, or 7.2%, compared to the same period in the prior year. A decrease of $1.0 million, or 65.6%, was due to the amendment to the MGA agreement with one of our insurance carriers. Effective January 1, 2024, the MGA agreement with one of our insurance carriers was renegotiated and amended, which shifted our volume-based commission to a flat monthly fee. The switch capped the income we earned at a maximum monthly amount. The decrease was partially offset by an increase in commission income of $0.4 million, or 5.9%, driven by higher new business written premiums in our TWFG MGA offering driven by market activities, which created opportunities for us to gain new business. See “—Key Performance Indicators” below for additional information related to our written premiums. Contingent income Contingent income for the three months ended September 30, 2024 was $1.4 million, reflecting a $0.3 million, or 33.6%, increase compared to the same period in the prior year. The increase in contingent income was primarily due to underlying carrier profitability and growth in our business. Contingent income is unpredictable and dependent upon the target financial and performance metrics established by the insurance carriers. 34 Table of Contents Fee income The following table presents the disaggregation of our fee income by major sources (in thousands): Three Months Ended September 30, 2024 2023 Amount % of Total Amount % of Total Policy fees $ 1,064 37 % $ 580 28 % Branch fees 1,172 40 824 39 License fees 495 17 555 26 TPA fees 159 6 148 7 Total fee income $ 2,890 100 % $ 2,107 100 % Fee income for the three months ended September 30, 2024 increased by $0.8 million, or 37.2%, compared to the same period in the prior year. Changes to individual components of fee income are discussed in detail below: • Policy fees for the three months ended September 30, 2024 increased by $0.5 million, or 83.4%, compared to the same period in the prior year. The increase in policy fees was primarily due to higher policy count in our TWFG MGA offering. The increase in policy count was driven primarily by new business growth. • Branch fees for the three months ended September 30, 2024 increased by $0.3 million, or 42.2%, compared to the same period in the prior year. The increase in branch fees was primarily due to increased branch fee rates to cover technology-based user fees. • License fees for the three months ended September 30, 2024 decreased by $0.1 million, or 10.8%, compared to the same period in the prior year. The decrease in license fees was primarily due to the amendment to the licensing agreement with one of our customers effective January 1, 2024 to switch from usage-based fees to fixed monthly fees. The switch capped the fees we earned at a maximum monthly amount. • TPA fees for the three months ended September 30, 2024 was comparable to the same period in the prior year. Other income Other income for the three months ended September 30, 2024 was $2.1 million compared to $0.6 million in the same period in the prior year, reflecting an increase of $1.6 million, or 269.9%. The increase in other income was primarily due to an increase in interest income on bank deposits, including the $192.9 million of net proceeds received from the IPO. Expenses Commission expense The following table presents the disaggregation of our commission expense by offerings (in thousands): Three Months Ended September 30, 2024 2023 Amount % of Total Amount % of Total Insurance Services Agency-in-a-Box $ 25,092 82 % $ 27,297 84 % Corporate Branches 1,304 4 209 1 Total Insurance Services 26,396 86 27,506 85 TWFG MGA 4,346 14 4,937 15 Other 24 — 18 — Total commission expense $ 30,766 100 % $ 32,461 100 % Commission expense for the three months ended September 30, 2024 decreased by $1.7 million, or 5.2%, compared to the same period in the prior year. The decrease was primarily due to the lower commission expenses 35 Table of Contents in Insurance Services of $1.1 million, or 3.4%, of the total decrease, driven by the previously discussed branch conversions and a decrease in our TWFG MGA offering of $0.6 million, or 1.8%, of the total decrease in commission expense. See commission income discussion above for additional information regarding the driver of changes. Insurance Services Agency-in-a-Box commission expense for the three months ended September 30, 2024 decreased by $2.2 million, or 8.1%, compared to the same period in the prior year. The decrease was primarily due to the branch conversions resulting in a decrease of $4.8 million offset by an increase in commission expense related to the growth of the business of $2.6 million. The expenses of our Branches are primarily commission expense, which is determined as a percentage of commission income. The profitability of our Branches, as determined by the difference between commission income and commission expense, is consistent. Insurance Services Corporate Branches commission expense for the three months ended September 30, 2024 increased by $1.1 million, or 523.9%, compared to the same period in the prior year. The increase was primarily due to the branch conversions, as previously discussed, and the Book of Business acquisitions in 2023. The expenses of our Corporate Branches are mainly salaries and benefits, and are primarily fixed expenses, which are not directly related to commission income. The profitability of our Corporate Branches varies mainly based on changes in commission income. In addition, since the commission expense of our Corporate Branches represents a smaller percentage of their operating expenses, we expect revenue growth, both organic and through future acquisitions, to positively impact our operating income in the future. TWFG MGA commission expense for the three months ended September 30, 2024 decreased by $0.6 million, or 12.0%, compared to the same period in the prior year. The higher percentage decrease in TWFG MGA commission expense compared to the percentage decrease in the related commission income was primarily driven by the shift in the business mix. As discussed above, TWFG MGA commission income was impacted by the renegotiation of the MGA agreement with one of our insurance carriers. Such renegotiation reduced commission income in the current period but did not result in a corresponding reduction in commission expense. Salaries and employee benefits Salaries and employee benefits for the three months ended September 30, 2024 was $8.3 million compared to $3.4 million in the same period in the prior year, reflecting an increase of $4.9 million, or 145.8%. The increase was primarily due to the branch conversions contributing an increase of approximately $2.4 million, and a $1.0 million increase from the asset acquisitions in 2023, a $1.0 million increase in stock-based compensation from the issuance of restricted stock units in July 2024, and a $0.5 million increase due to our continued growth and new roles created in connection with our IPO. Other administrative expenses Other administrative expenses for the three months ended September 30, 2024 was $4.8 million compared to $2.8 million in the same period in the prior year, reflecting an increase of $2.0 million, or 71.2%. The increase was primarily due to a $0.7 million increase in consultant and professional fees, a $0.3 million increase in IT costs, a $0.4 million increase in underwriting expenses, and a $0.6 million increase in other expenses. The increase in consultant and professional fees was primarily attributable to the increased ongoing costs of becoming a public company. The increase in our IT costs was primarily due to additional cloud computing costs. The increase in our underwriting expenses was driven primarily by higher policy count in our TWFG MGA offering. The increase in other expenses was due primarily to higher rent and office expenses driven by our Book of Business acquisitions in 2023 and branch conversions in 2024. Depreciation and amortization Depreciation and amortization for the three months ended September 30, 2024 was $3.0 million compared to $1.1 million in the same period in the prior year, reflecting an increase of $1.9 million, or 160.7%. The increase was primarily due to the amortization of intangible assets from our recent asset acquisitions and branch conversions. Other non-operating income (expense) Other non-operating expense for the three months ended September 30, 2024 was $0.4 million compared to $0.3 million for the same period in the prior year, reflecting an increase of $0.1 million, or 41.2%. 36 Table of Contents Income tax expense Income tax expense for the three months ended September 30, 2024 was $0.4 million compared to zero for the same period in the prior year as after consummation of the Reorganization Transactions and IPO, the Company became subject to U.S. federal, state, and local income taxes with respect to its allocable share of taxable income of TWFG Holding Company, LLC assessed at the prevailing corporate tax rates. Comparison of the Nine Months Ended September 30, 2024 and 2023 Total revenues The following table presents the disaggregation of our revenues by offerings (in thousands): Nine Months Ended September 30, 2024 2023 Amount % of Total Amount % of Total Insurance Services Agency-in-a-Box $ 100,418 65 % $ 102,539 77 % Corporate Branches 25,861 17 4,259 3 Total Insurance Services 126,279 82 106,798 80 TWFG MGA 25,213 16 24,417 19 Other 2,727 2 1,727 1 Total revenues $ 154,219 100 % $ 132,942 100 % Total revenues for the nine months ended September 30, 2024 increased by $21.3 million, or 16.0%, compared to the same period in the prior year. The increase was primarily due to a $17.0 million, or 13.9%, increase in commission income driven primarily by higher premium rates, new business growth and continued rollout of commission income from our Book of Business acquisitions completed in 2023 into the current period. Also contributing to the increase in total revenues were the $1.5 million, or 23.1%, increase in fee income, $0.7 million, or 23.0%, increase in contingent income, and $2.1 million, or 188.4%, increase in other income. See discussions below for additional information about the changes in our revenues. Commission income The following table presents the disaggregation of our commission income by offerings (in thousands): Nine Months Ended September 30, 2024 2023 Amount % of Total Amount % of Total Insurance Services Agency-in-a-Box $ 93,702 67 % $ 98,245 80 % Corporate Branches 25,962 19 4,255 4 Total Insurance Services 119,664 86 102,500 84 TWFG MGA 19,783 14 19,951 16 Total commission income $ 139,447 100 % $ 122,451 100 % Commission income for the nine months ended September 30, 2024 increased by $17.0 million, or 13.9%, compared to the same period in the prior year. The increase was primarily due to higher premium rates, new business growth and continued rollout of commission income from our Book of Business acquisitions completed in 2023 into the current period. See “—Key Performance Indicators—Total Written Premium” for additional information related to our written premiums. Commission income for Insurance Services grew by $17.2 million, or 16.7%, for the nine months ended September 30, 2024 compared to the same period in the prior year. However, during the current period the components shifted between Agency-in-a-Box and Corporate Branches. Agency-in-a-Box commission income for the nine months ended September 30, 2024 decreased by $4.5 million, or 4.6%, compared to the same period in the prior year. The decrease was mainly attributable to the acquisition of the assets of nine of our independent branches 37 Table of Contents (which were previously operated as Agencies-in-a-Box) and their conversion to Corporate Branches in January 2024. The branch conversions resulted in a $16.3 million decrease in the Agency-in-a-Box commission income for the nine months ended September 30, 2024. Insurance Services Corporate Branches commission income for the nine months ended September 30, 2024 increased by $21.7 million, or 510.2%, compared to the same period in the prior year. The increase was primarily driven by the branch conversions as previously described. In addition, Corporate Branches commission income for the nine months ended September 30, 2024 included the full period increases from the Book of Business acquisitions in 2023, while the same period in the prior year reflected partial period increases. TWFG MGA commission income for the nine months ended September 30, 2024 decreased by $0.2 million, or 0.8%, compared to the same period in the prior year. A decrease of $2.2 million, or 59.2%, was due to the amendment to the MGA agreement with one of our insurance carriers, as previously discussed, offset by an increase in commission income of $2.0 million or 12.4% by higher new business written premiums in our TWFG MGA offering. Contingent income Contingent income increased by $0.7 million, or 23.0%, to $3.7 million for the nine months ended September 30, 2024 from $3.0 million in the same period in the prior year. The increase in contingent income was driven by underlying carrier profitability and growth in our business. Changes in contingent income are unpredictable and dependent upon the target financial and performance metrics established by the insurance carriers. Fee income The following table presents the disaggregation of our fee income by major sources (in thousands): Nine Months Ended September 30, 2024 2023 Amount % of Total Amount % of Total Policy fees $ 2,510 32 % $ 1,656 26 % Branch fees 3,523 45 2,134 34 License fees 1,454 19 2,090 33 TPA fees 324 4 463 7 Total fee income $ 7,811 100 % $ 6,343 100 % Fee income for the nine months ended September 30, 2024 increased $1.5 million, or 23.1% compared to the same period in the prior year. Changes to individual components of fee income are discussed in detail below: • Policy fees for the nine months ended September 30, 2024 increased by $0.9 million, or 51.6%, compared to the same period in the prior year. The increase in policy fees was primarily due to higher policy count in our TWFG MGA offering. The increase in policy count was driven primarily by market activities, which created opportunities for us to gain new business. • Branch fees for the nine months ended September 30, 2024 increased by $1.4 million, or 65.1%, compared to the same period in the prior year. The increase in branch fees was primarily due to increased branch fee rates and the impact of the distribution of our equity interest in Evolution Agency Management LLC (“EVO”) in May 2023 to our owners. Branch fees earned for the nine months ended September 30, 2023 included the elimination of fees paid to EVO for the first four months of 2023, while the current period did not. • License fees for the nine months ended September 30, 2024 decreased by $0.6 million, or 30.4%, compared to the same period in the prior year. The decrease in license fees was primarily due to the previously discussed distribution of EVO equity interests and the amendment to the licensing agreement. License fees earned for the current period excluded revenues from EVO’s operation, while license fees earned for the prior period included four months of EVO’s revenues. In addition, the amendment to the licensing agreement with one of our customers switched from usage-based fees to fixed monthly fees, which capped the fees we earned at a maximum monthly amount. 38 Table of Contents • TPA fees for the nine months ended September 30, 2024 decreased by $0.1 million, or 30.0%, compared to the same period in the prior year. The decrease in TPA fees was primarily due to a lower level of TPA services provided by the Company for the nine months ended September 30, 2024 compared to the same period in the prior year. Other income Other income for the nine months ended September 30, 2024 was $3.2 million, compared to $1.1 million in the same period in the prior year, reflecting an increase of $2.1 million, or 188.4%. This increase was primarily due to an increase in interest income on bank deposits, including the $192.9 million of net proceeds received from the IPO. Expenses Commission expense The following table presents the disaggregation of our commission expense by offerings (in thousands): Nine Months Ended September 30, 2024 2023 Amount % of Total Amount % of Total Insurance Services Agency-in-a-Box $ 72,649 81 % $ 77,873 85 % Corporate Branches 3,422 4 569 1 Total Insurance Services 76,071 85 78,442 86 TWFG MGA 13,039 15 12,363 14 Other 61 — 48 — Total commission expense $ 89,171 100 % $ 90,853 100 % Commission expense for the nine months ended September 30, 2024 decreased by $1.7 million, or 1.9%, compared to the same period in the prior year. The decrease was primarily due to the lower commission expense in Insurance Services of $2.4 million, or 2.6%, of the total decrease driven by the previously discussed branch conversions, offset by an increase in our TWFG MGA offering of $0.7 million, or 0.7%, of the total decrease in commission expense. See “—Consolidated Results of Operations—Commission Income” for additional information regarding the driver of the changes. Insurance Services Agency-in-a-Box commission expense for the nine months ended September 30, 2024 decreased by $5.2 million, or 6.7%, compared to the same period in the prior year. The decrease was primarily due to the branch conversions resulting in a decrease of $11.6 million, and the one-time favorable accrual adjustment related to the converted branches of $1.5 million, offset by an increase in commission expense related to the growth of the business of $7.9 million. In January 2024, nine of our Branches converted to Corporate Branches. Upon conversion, agents of the newly converted Corporate Branches became employees and received salaries, employee benefits, and bonuses for services rendered instead of commissions. As result, we released a portion of the unpaid commissions related to the converted branches that we no longer are required to settle, which resulted in the aforementioned one-time favorable accrual adjustment. Insurance Services Corporate Branches commission expense for the nine months ended September 30, 2024 increased by $2.9 million, or 501.4%, compared to the same period in the prior year. The increase was primarily due to the branch conversions, as previously discussed, and the Book of Business acquisitions in 2023. TWFG MGA commission expense for the nine months ended September 30, 2024 increased by $0.7 million, or 5.5%, compared to the same period in the prior year. The increase was primarily due to higher new business written premiums, as previously discussed. The higher percentage increase in TWFG MGA commission expense compared to the percentage decrease in the related commission income was primarily driven by the shift in the business mix. As discussed above, TWFG MGA commission income was impacted by the renegotiation of the MGA agreement with one of our insurance carriers. Such renegotiation reduced commission income in the current period but did not result in a corresponding reduction in commission expense. 39 Table of Contents Salaries and employee benefits Salaries and employee benefits for the nine months ended September 30, 2024 was $21.4 million, compared to $10.1 million in the same period in the prior year, reflecting an increase of $11.3 million, or 112.0%. This increase was primarily attributable to the branch conversions contributing an increase of approximately $6.5 million, a $3.0 million increase from the asset acquisitions in 2023, a $1.0 million increase in stock-based compensation from the granting of restricted stock units in July 2024 and a $1.2 million increase due to our continued growth and new roles created in conjunction with our IPO. Partially offsetting these increases was a decrease driven by the distribution of our equity interest in EVO in May 2023 to our owners. Salaries and employee benefits for the nine months ended September 30, 2023 included approximately $0.5 million compensation attributable to EVO’s operations, while the same period in 2024 did not. Other administrative expenses Other administrative expenses for the nine months ended September 30, 2024 was $11.7 million, compared to $8.0 million in the same period in the prior year, reflecting an increase of $3.6 million, or 45.3%. This increase was primarily attributable to a $1.2 million increase in IT costs, a $1.0 million increase in consultant and professional fees, a $0.7 million increase in underwriting expenses, and a $0.7 million increase in other expenses. The increase in our IT costs was primarily due to additional cloud computing costs, and 2024 included fees paid to EVO, while in 2023, fees paid to EVO were eliminated upon consolidation. The increase in our underwriting expenses was driven primarily by the increased business in our MGA offering. The increase in consultant and professional fees was primarily attributable to the increased ongoing costs of becoming a public company. The increase in other expenses was due primarily to higher rent and office expenses driven by our Book of Business acquisitions in 2023 and branch conversions in 2024, partially offset by a reduction in administrative expenses related to the previously discussed distribution of our equity interest in EVO. Depreciation and amortization Depreciation and amortization for the nine months ended September 30, 2024 was $9.0 million compared to $3.3 million in the same period in the prior year, reflecting an increase of $5.6 million, or 168.4%. This increase was primarily attributable to the amortization of intangible assets from our recent intangible asset acquisitions and branch conversions. Other non-operating income (expense) Other non-operating expense for the nine months ended September 30, 2024 was $2.1 million compared to $0.6 million in the same period in the prior year, reflecting an increase of $1.6 million or 276.0%. The increase was primarily attributable to higher interest expense driven by the increase in our total debt. In 2023, we increased our borrowings to fund our asset acquisitions in 2023 and branch conversions in 2024. The increase was partially offset by the repayment of the outstanding balances under the Term Loan B as defined in the section - “ Liquidity and capital resources ” and the Revolving Facility in July 2024 and August 2024, respectively. Income tax expense Income tax expense for the nine months ended September 30, 2024 was $0.4 million compared to zero for the same period in the prior year as after consummation of the Reorganization Transactions and IPO, the Company became subject to U.S. federal, state, and local income taxes with respect to its allocable share of taxable income of TWFG Holding Company, LLC assessed at the prevailing corporate tax rates. Key Performance Indicators Total Written Premium Total Written Premium represents, for any reported period, the total amount of current premium (net of cancellation) placed with insurance carriers. We utilize Total Written Premium as a key performance indicator when planning, monitoring and evaluating our performance. We believe Total Written Premium is a useful metric because it is the underlying driver of the majority of our revenue. 40 Table of Contents The following table presents the disaggregation of Total Written Premium by offerings, business mix and line of business (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Amount % of Total Amount % of Total Amount % of Total Amount % of Total Offerings: Insurance Services Agency-in-a-Box $ 261,560 65 % $ 284,442 80 % $ 736,699 66 % $ 761,260 80 % Corporate Branches 77,636 20 14,286 4 213,689 19 35,156 4 Total Insurance Services 339,196 85 298,728 84 950,388 85 796,416 84 TWFG MGA 60,903 15 55,361 16 164,612 15 150,233 16 Total written premium $ 400,099 100 % $ 354,089 100 % $ 1,115,000 100 % $ 946,649 100 % Business Mix: Insurance Services Renewal business $ 265,026 66 % $ 242,258 68 % $ 739,624 66 % $ 623,773 66 % New business 74,170 19 56,470 16 210,764 19 172,643 18 Total Insurance Services 339,196 85 298,728 84 950,388 85 796,416 84 TWFG MGA Renewal business 46,075 11 47,818 14 125,364 11 127,552 14 New business 14,828 4 7,543 2 39,248 4 22,681 2 Total TWFG MGA 60,903 15 55,361 16 164,612 15 150,233 16 Total written premium $ 400,099 100 % $ 354,089 100 % $ 1,115,000 100 % $ 946,649 100 % Written Premium Retention: Insurance Services 89 % 98 % 93 % 96 % TWFG MGA 83 88 83 90 Consolidated 88 97 91 95 Line of Business: Personal lines $ 327,159 82 % $ 289,032 82 % $ 904,372 81 % $ 758,297 80 % Commercial lines 72,940 18 65,057 18 210,628 19 188,352 20 Total written premium $ 400,099 100 % $ 354,089 100 % $ 1,115,000 100 % $ 946,649 100 % Comparison of the Three Months Ended September 30, 2024 and 2023 Total Written Premium for the three months ended September 30, 2024 increased by $46.0 million, or 13.0%, compared to the same period in the prior year. Drivers of the increase in our Insurance Services offering include higher premium rates, written premiums from our 2023 acquisitions rolling into the current period, and new business growth. This increase was offset by a decline in retention as carriers are now opening up for new business after a period of restricting capacity, which had the effect in the prior year of increased retention and slowing new business growth. As previously discussed, in January 2024, nine of our independent branches converted to Corporate Branches, which shifted approximately $49.8 million of written premiums for the three months ended September 30, 2024 from Agency-in-a-Box to Corporate Branches. The increase in our TWFG MGA offering was primarily attributable to new business growth and higher premium rates, partially offset by lower premium retention as carriers have opened up for new business which allows agents to shop favorable pricing for our Clients. For the three months ended September 30, 2024 and 2023, our consolidated written premium retention was 88% and 97%, respectively. For the three months ended September 30, 2024, the composition of our renewal and new business mix shifted under our two product offerings as follows: Insurance Services renewal business as a percentage of the total written premium, decreased to 66% compared to 68% in the same period of the prior year. As a result, premium retention decreased to 89% from 98%, resulting in renewal premium growth of 9.4%, or $22.8 million, compared to the same period of the prior year. Insurance Services new business, as a percentage of total written premium, increased to 19% from 16%, resulting in a new business growth of 31.3%, or $17.7 million, compared to the same period in the prior year. The shift in Insurance Services new and renewal business 41 Table of Contents reflects more carriers seeking new business growth after a period of retrenchment designed to restore carrier profitability. As carriers look to grow after a period of reducing capacity by raising rates and slowing new business growth, consumers and their agents have more choices in terms of carriers and coverage. TWFG MGA renewal business, as a percentage of the total written premium, decreased to 11% compared to 14% in the same period of the prior year. As a result, premium retention decreased to 83% from 88%, resulting in a decrease in renewal business of 3.6%, or $1.7 million, compared to the same period in the prior year. TWFG MGA new business, as a percentage of total written premium, increased to 4% from 2%, resulting in a new business growth of 96.6%, or $7.3 million, compared to the same period in the prior year. The shift in TWFG MGA new and renewal business reflects more carriers seeking new business growth after a period of retrenchment designed to restore carrier profitability. Comparison of the Nine Months Ended September 30, 2024 and 2023 Total Written Premium for the nine months ended September 30, 2024 increased by $168.4 million, or 17.8%, compared to the same period in the prior year. Drivers of the increase in our Insurance Services offering are attributable to higher premium rates, written premiums from our 2023 acquisitions rolling into the current period, and new business growth. This increase was offset by a decline in retention as carriers are now opening up for new business after a period of restricting capacity, which had the effect in the prior year of increasing retention and slowing new business growth. As previously discussed, in January 2024, the branch conversions shifted approximately $136.1 million of written premiums for the nine months ended September 30, 2024 from Agency-in-a-Box to Corporate Branches. The increase in our TWFG MGA offering was primarily attributable to new business growth and higher premium rates, partially offset by lower premium retention as carriers have opened up for new business which allows consumers and agents to shop favorable pricing for our Clients. For the nine months ended September 30, 2024 and 2023, our consolidated written premium retention was 91% and 95%, respectively. For the nine months ended September 30, 2024, the composition of our renewal and new business mix shifted under our two product offerings as follows: Insurance Services renewal business, as a percentage of the total written premium, was 66% which was consistent with the same period of the prior year and premium retention decreased to 93% from 96%, resulting in renewal premium growth of 18.6%, or $115.9 million, compared to the same period of the prior year. Insurance Services new business, as a percentage of total written premium, increased to 19% from 18%, resulting in a new business growth of 22.1%, or $38.1 million, compared to the same period in the prior year. The shift in Insurance Services new and renewal business reflects more carriers seeking new business growth after a period of retrenchment designed to restore carrier profitability. As carriers look to grow after a period of reducing capacity by raising rates and slowing new business growth, consumers and their agents have more choices in terms of carriers and coverage. TWFG MGA renewal business, as a percentage of the total written premium, decreased to 11% compared to 14% in the same period of the prior year. As a result, premium retention decreased to 83% from 90%, resulting in a decrease in renewal business of 1.7%, or $2.2 million, compared to the same period in the prior year. TWFG MGA new business, as a percentage of total written premium, increased to 4% from 2%, resulting in a new business growth of 73.0%, or $16.6 million, compared to the same period in the prior year. The shift in TWFG MGA new and renewal business reflects more carriers seeking new business growth after a period of retrenchment designed to restore carrier profitability. Non-GAAP Financial Measures Organic Revenue. Organic Revenue is total revenue (the most directly comparable GAAP measure) for the relevant period, excluding contingent income, fee income, other income and those revenues generated from acquired businesses with over $0.5 million in annualized revenue that have not reached the twelve-month owned mark. Organic Revenue Growth. Organic Revenue Growth is the change in Organic Revenue period-to-period, with prior period results adjusted to include revenues that were excluded in the prior period because the relevant acquired businesses had not reached the twelve-month-owned mark but have reached the twelve-month owned mark in the current period. We believe Organic Revenue Growth is an appropriate measure of operating performance because it eliminates the impact of acquisitions, which affects the comparability of results from period to period. 42 Table of Contents A reconciliation of Organic Revenue and Organic Revenue Growth Rate to Total Revenue and Total Revenue Growth Rate, the most directly comparable GAAP measures, for each of the periods indicated is as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Total revenues $ 54,640 $ 47,710 $ 154,219 $ 132,942 Acquisition adjustments (1) (898) (1,153) (3,582) (2,648) Contingent income (1,383) (1,035) (3,717) (3,023) Fee income (2,890) (2,107) (7,811) (6,343) Other income (2,127) (575) (3,244) (1,125) Organic Revenue $ 47,342 $ 42,840 $ 135,865 $ 119,803 Organic Revenue Growth (2) $ 3,349 $ 5,048 $ 14,206 $ 12,986 Total Revenue Growth Rate (3) 14.5 % 16.5% 16.0% 13.6% Organic Revenue Growth Rate (2) 7.6 % 13.4% 11.7% 12.2% (1) Represents revenues generated from the acquired businesses during the first 12 months following an acquisition. (2) Organic Revenue for the three months ended September 30, 2023 and 2022, and for the nine months ended September 30, 2023 and 2022, used to calculate Organic Revenue Growth for the three months ended September 30, 2024 and 2023, and for the nine months ended September 30, 2024 and 2023, was $44.0 million, $37.8 million, $121.7 million and $106.8 million, respectively, which is adjusted to reflect revenues from acquired businesses with over $0.5 million in annualized revenue that reached the twelve-month owned mark during the year ended December 31, 2023 and 2022, respectively. Organic Revenue Growth Rate represents the period-to-period change in Organic Revenue divided by the total adjusted Organic Revenue in the prior period. (3) Represents the period-to-period change in total revenues divided by the total revenues in the prior period. Comparison of the Three Months Ended September 30, 2024 and 2023 Revenue growth rate, representing the year-over-year change in total revenues, was 14.5% for the three months ended September 30, 2024 compared to the same period in 2023 and 16.5% for the three months ended September 30, 2023 compared to the same period in 2022. Revenue growth for both periods reflected the impact of higher premium rates, growing Books of Business and the mix of the new and renewal businesses. Revenue growth for the three months ended September 30, 2024 compared to the same period in 2023 included the impact of the continued rollout of commission income from our Book of Business acquisitions in 2023 into the current period, higher fee income and higher interest income on bank deposits, including the $192.9 million of net proceeds received from the IPO. See “—Consolidated Results of Operations” for additional discussions regarding the changes in our revenues. Organic Revenue Growth Rate was 7.6% for the three months ended September 30, 2024 compared to the same period in 2023 and 13.4% for the three months ended September 30, 2023 compared to the same period in 2022. Organic Revenue Growth for both periods reflects ongoing, but normalizing rate increases being implemented by carriers, the underlying growth of our business, and healthy economic growth offset by a decrease in commission income in our MGA offering. Effective January 1, 2024, the MGA agreement with one of our insurance carriers was renegotiated and amended, which shifted our volume based commission to a flat monthly fee. The switch capped the income we earned at a maximum monthly amount. See “—Consolidated Results of Operations—Commission Income” for additional discussions regarding the changes in our commission income. In addition, revenue growth and Organic Revenue Growth for the three months ended September 30, 2023 compared to the same period in 2022 reflected the impact of enhanced data collected from external sources, which improved our assumptions for estimating revenues starting in 2022. Applying the use of enhanced data consistently throughout the prior periods, revenue growth rate for the three months ended September 30, 2023 compared to the same period in 2022 would have been 17.4%, and Organic Revenue Growth Rate for the three months ended September 30, 2023 compared to the same period in 2022 would have been 14.3%. 43 Table of Contents Comparison of the Nine Months Ended September 30, 2024 and 2023 Revenue growth rate, representing the year-over-year change in total revenues, was 16.0% for the nine months ended September 30, 2024 compared to the same period in 2023 and 13.6% for the nine months ended September 30, 2023 compared to the same period in 2022. Revenue growth for both periods reflected the impact of higher premium rates, growing Books of Business and the mix of the new and renewal businesses. Revenue growth for the nine months ended September 30, 2024 compared to the same period in 2023 included the impact of the continued rollout of commission income from our Book of Business acquisitions in 2023 into the current period, higher fee income and higher interest income on bank deposits, including the $192.9 million of net proceeds received from the IPO. Organic Revenue Growth Rate was 11.7% for the nine months ended September 30, 2024 compared to the same period in 2023 and 12.2% for the nine months ended September 30, 2023 compared to the same period in 2022. Organic Revenue Growth for both periods reflects ongoing, but normalizing, rate increases being implemented by carriers, the underlying growth of our business, and healthy economic growth offset by a decrease in commission income in our MGA offering. Effective January 1, 2024, the MGA agreement with one of our insurance carriers was renegotiated and amended, which shifted our volume based commission to a flat monthly fee. The switch capped the income we earned at a maximum monthly amount. Applying the use of enhanced data consistently throughout the prior periods, revenue growth rate for the nine months ended September 30, 2023 compared to the same period in 2022 would have been 16.4%, and Organic Revenue Growth Rate for the nine months ended September 30, 2023 compared to the same period in 2022 would have been 15.7%. Adjusted Net Income. Since the second quarter of 2024, we have used the revised calculation methodology for Adjusted Net Income, which includes amortization expenses among the add-back adjustments to our net income when calculating our Adjusted Net Income. Our legacy calculation methodology reflected the impact of intangible asset amortization as a reduction to our Adjusted Net Income. The revised calculation methodology excludes the effect of the intangible asset amortization when calculating our Adjusted Net Income by reflecting it among the add-back adjustments to our net income. We believe that the revised calculation of Adjusted Net Income is more consistent with the method and presentation used by most of our peers and will allow management to better evaluate our performance relative to our peer companies. We believe that the revised calculation more effectively represents what our stakeholders consider useful in assessing our performance. Adjusted Net Income is a supplemental measure of our performance and is defined as net income (the most directly comparable GAAP measure) before amortization, non-recurring or non-operating income and expenses, including equity-based compensation, adjusted to assume a single class of stock (Class A) and assuming noncontrolling interests do not exist. We believe Adjusted Net Income is a useful measure because it adjusts for the after-tax impact of significant one-time, non-recurring items and eliminates the impact of any transactions that do not directly affect what management considers to be our ongoing operating performance in the period. These adjustments generally eliminate the effects of certain items that may vary from company to company for reasons unrelated to overall operating performance. We are subject to U.S. federal income taxes, in addition to state, and local taxes, with respect to our allocable share of any net taxable income of TWFG Holding Company, LLC. Adjusted Net Income pre-IPO did not reflect adjustments for income taxes since TWFG Holding Company, LLC is a limited liability company and is classified as a partnership for U.S. federal income tax purposes. Post-IPO, the calculation will incorporate the impact of federal and state statutory tax rates on 100% of our adjusted pre-tax income as if the Company owned 100% of TWFG Holding Company, LLC. Adjusted Net Income Margin . Adjusted Net Income Margin is Adjusted Net Income divided by total revenues. We believe that Adjusted Net Income Margin is a useful measurement of operating profitability for the same reasons we find Adjusted Net Income useful and also because it provides a period-to-period comparison of our after-tax operating performance. 44 Table of Contents A reconciliation of Adjusted Net Income and Adjusted Net Income Margin to Net income and Net income margin, the most directly comparable GAAP measures, for each of the periods indicated is as follows (in thousands): Revised Calculation Methodology Applied to Current Period Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Total revenues $ 54,640 $ 47,710 $ 154,219 $ 132,942 Net income $ 6,893 $ 7,608 $ 20,440 $ 20,881 Acquisition-related expenses — — — 168 Restructuring and related expenses — — — 17 Discontinued operation income — — — (834) Equity-based compensation 1,012 — 1,012 — Other non-recurring items (1) — — (1,477) — Amortization expense 2,920 1,078 8,771 3,143 Adjusted income before income taxes 10,825 8,686 28,746 23,375 Adjusted income tax expense (2) (2,482) — (6,591) — Adjusted Net Income $ 8,343 $ 8,686 $ 22,155 $ 23,375 Net Income Margin 12.6 % 15.9 % 13.3 % 15.7 % Adjusted Net Income Margin 15.3 % 18.2 % 14.4 % 17.6 % Legacy Calculation Methodology Applied to Current Period Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Total revenues $ 54,640 $ 47,710 $ 154,219 $ 132,942 Net income $ 6,893 $ 7,608 $ 20,440 $ 20,881 Acquisition-related expenses — — — — — 168 Restructuring and related expenses — — — — — 17 Discontinued operation income — — — — — (834) Equity-based compensation 1,012 — — 1,012 — — Other non-recurring items (1) — — — (1,477) — — Adjusted income before income taxes 7,905 7,608 19,975 20,232 Adjusted income tax expense (2) (1,813) — (4,580) — Adjusted Net Income $ 6,092 $ 7,608 $ 15,395 $ 20,232 Net Income Margin 12.6 % 15.9 % 13.3 % 15.7 % Adjusted Net Income Margin 11.2 % 15.9 % 10.0 % 15.2 % (1) Represents a one-time adjustment reducing commission expense, which resulted from the branch conversions. In January 2024, nine of our Branches converted to Corporate Branches. Upon conversion, agents of the newly converted Corporate Branches became employees and received salaries, employee benefits, and bonuses for services rendered instead of commissions. As a result, we released a portion of the unpaid commissions related to the converted branches that we no longer are required to settle. (2) Post-IPO, we are subject to United States federal income taxes, in addition to state, local, and foreign taxes, with respect to our allocable share of any net taxable income of TWFG Holding Company, LLC. For the three and nine months ended September 30, 2024, the calculation of adjusted income tax expense is based on a federal statutory rate of 21% and a blended state income tax rate of 1.93% on 100% of our adjusted income before income taxes as if we owned 100% of the TWFG Holding Company, LLC. Adjusted Diluted Earnings Per Share. Adjusted Diluted Earnings Per Share is Adjusted Net Income divided by diluted shares outstanding after adjusting for the effect of (i) the exchange of 100% of the outstanding Class B common stock of the Company (the “Class B Common Stock”) and Class C common stock of the Company (the “Class C Common Stock”) (together with the related LLC Units) into shares of Class A common stock of the Company (“Class A Common Stock”) and (ii) the vesting of 100% of the unvested equity awards and exchange 45 Table of Contents into shares of Class A Common Stock. This measure does not deduct earnings related to the noncontrolling interests in TWFG Holding Company, LLC for the period of time prior to July 19, 2024 when we did not own 100% of the business. The most directly comparable GAAP financial metric is diluted earnings per share. We believe Adjusted Diluted Earnings Per Share may be useful to an investor in evaluating our operating performance and efficiency because this measure is widely used by investors to measure a company’s operating performance without regard to items excluded from the calculation of such measure, which can vary substantially from company to company depending upon acquisition activity and capital structure. This measure also eliminates the impact of expenses that do not relate to core business performance, among other factors. A reconciliation of Adjusted Diluted Earnings Per Share to diluted earnings per share, the most directly comparable GAAP measure, for each of the periods indicated is as follows: Three Months Ended September 30, Nine Months Ended September 30, 2024 2024 Earnings per share of common stock – diluted $ 0.08 $ 0.08 Plus: Impact of all LLC Units exchanged for Class A Common Stock (1) 0.04 0.29 Plus: Adjustments to Adjusted net income (2) 0.03 0.03 Adjusted Diluted Earnings Per Share $ 0.15 $ 0.40 Weighted average common stock outstanding – diluted 14,890,382 14,890,382 Plus: Impact of all LLC Units exchanged for Class A Common Stock (1) 41,171,461 41,171,461 Adjusted Diluted Earnings Per Share diluted share count 56,061,843 56,061,843 (1) For comparability purposes, this calculation incorporates the net income that would be distributable if all shares of Class B Common Stock and Class C Common Stock, together with the related LLC Units, were exchanged for shares of Class A Common Stock. For the three and nine months ended September 30, 2024, this includes $5.7 million and $19.3 million of net income, respectively, on 56,061,843 weighted-average shares of common stock outstanding - diluted, for both the three and nine months ended September 30, 2024. For both the three and nine months ended September 30, 2024, 41,171,461 weighted average outstanding Class B Common Stock and Class C Common Stock were considered dilutive and included in the 56,061,843 weighted-average shares of common stock outstanding - diluted within diluted earnings per share calculation. See Note 13, “Earnings Per Share” to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information about the earnings per share. (2) Adjustments to Adjusted Net Income are described in the footnotes of the reconciliation of Adjusted Net Income to Net Income in “Adjusted Net Income and Adjusted Net Income Margin”, which represent the difference between Net Income of $6.9 million and $20.4 million and Adjusted Net Income of $8.3 million and $22.1 million for the three and nine months ended September 30, 2024, respectively. For the three and nine months ended September 30, 2024, Adjusted Diluted Earnings Per Share include adjustments of $1.4 million and $1.7 million to Adjusted Net Income, respectively, on 56,061,843 weighted-average shares of common stock outstanding - diluted for both periods presented. Adjusted EBITDA. Adjusted EBITDA is a supplemental measure of our performance and is defined as EBITDA adjusted to exclude equity-based compensation and other non-operating items, including, certain nonrecurring or non-operating gains or losses, including equity-based compensation. EBITDA is defined as net income (the most directly comparable GAAP measure) before interest, income taxes, depreciation and amortization. We believe that Adjusted EBITDA is an appropriate measure of operating performance because it adjusts for significant one-time, non-recurring items and eliminates the ongoing accounting effects of certain capital spending and acquisitions, such as depreciation and amortization, that do not directly affect what management considers to be our ongoing operating performance in the period. These adjustments generally eliminate the effects of certain items that may vary from company to company for reasons unrelated to overall operating performance. Adjusted EBITDA Margin . Adjusted EBITDA Margin is Adjusted EBITDA divided by total revenue. We believe that Adjusted EBITDA Margin is a useful measurement of operating profitability for the same reasons we find Adjusted EBITDA useful and also because it provides a period-to-period comparison of our operating performance. 46 Table of Contents A reconciliation of Adjusted EBITDA and Adjusted EBITDA Margin to Net income and Net income margin, the most directly comparable GAAP measures, for each of the periods indicated is as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Total revenues $ 54,640 $ 47,710 $ 154,219 $ 132,942 Net income $ 6,893 $ 7,608 $ 20,440 $ 20,881 Interest expense 411 295 2,125 553 Depreciation and amortization 2,985 1,145 8,966 3,340 Income tax expense 437 — 437 — EBITDA 10,726 9,048 31,968 24,774 Acquisition-related expenses — — — 168 Restructuring and related expenses — — — 17 Equity-based compensation 1,012 — 1,012 — Discontinued operation income — — — (834) Other non-recurring items (1) — — (1,477) — Adjusted EBITDA $ 11,738 $ 9,048 $ 31,503 $ 24,125 Net Income Margin 12.6 % 15.9 % 13.3 % 15.7 % Adjusted EBITDA Margin 21.5 % 19.0 % 20.4 % 18.1 % (1) Represents a one-time adjustment reducing commission expense, which resulted from the branch conversions. In January 2024, nine of our Branches converted to Corporate Branches. Upon conversion, agents of the newly converted Corporate Branches became employees and received salaries, employee benefits, and bonuses for services rendered instead of commissions. As a result, we released a portion of the unpaid commissions related to the converted branches that we no longer are required to settle. Adjusted Free Cash Flow. Adjusted Free Cash Flow is a supplemental measure of our performance. We define Adjusted Free Cash Flow as cash flow from operating activities (the most directly comparable GAAP measure) less cash payments for tax distributions, purchases of property, plant, and equipment and acquisition-related costs. We believe Adjusted Free Cash Flow is a useful measure of operating performance because it represents the cash flow from the business that is within our discretion to direct to activities including investments, debt repayment, and returning capital to stockholders. A reconciliation of Adjusted Free Cash Flows to Cash flow from Operating Activities, the most directly comparable GAAP measures, for each of the periods indicated is as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Cash Flow from Operating Activities $ 11,725 $ 7,394 $ 28,879 $ 24,103 Purchase of property and equipment (233) (163) (280) (217) Tax distribution to members (1) — (2,599) (6,104) (9,526) Acquisition-related expenses — — — 168 Net cash flow provided by operating activities from discontinued operation — — — (839) Adjusted Free Cash Flow $ 11,492 $ 4,632 $ 22,495 $ 13,689 (1) Tax distributions to members represents the amount distributed to the members of TWFG Holding Company, LLC in respect of their income tax liability related to the net income of TWFG Holding Company, LLC allocated to its members. Organic Revenue, Organic Revenue Growth, Adjusted Net Income, Adjusted Net Income Margin, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Free Cash Flow and Adjusted Diluted Earnings Per Share are not measures of financial performance under GAAP and should not be considered substitutes for GAAP measures, including revenues (for Organic Revenue and Organic Revenue Growth), net income (for Adjusted Net Income, Adjusted Net 47 Table of Contents Income Margin, Adjusted EBITDA and Adjusted EBITDA Margin), cash flow from operating activities (for Adjusted Free Cash Flow) and diluted earnings per share (for Adjusted Diluted Earnings Per Share), which we consider to be the most directly comparable GAAP measures. These non-GAAP financial measures have limitations as analytical tools, and when assessing our operating performance, you should not consider these non-GAAP financial measures in isolation or as substitutes for revenues, net income, operating cash flow or other consolidated financial statement data prepared in accordance with GAAP. Other companies may calculate any or all of these non-GAAP financial measures differently than we do, limiting their usefulness as comparative measures. Liquidity and capital resources Historical liquidity and capital resources We have managed our historical liquidity and capital requirements primarily through the receipt of revenues from our operations. Prior to the IPO, our primary cash flow activities involved: (1) generating cash flow from our operations; (2) making strategic acquisitions; (3) making distributions to GHC Woodlands Holdings, LLC, Bunch Family Holdings, LLC, RenaissanceRe Ventures U.S. LLC, and TWFG, Inc. (collectively, and together with each of their permitted transferees, the “Pre-IPO LLC Members”); and (4) making borrowings, interest payments and repayments under our Credit Agreements. On July 19, 2024, we completed the IPO of 11,000,000 shares of Class A Common Stock at an IPO price of $17.00 per share. On July 23, 2024, the underwriters purchased an additional 1,650,000 shares of Class A Common Stock in connection with the underwriters’ full exercise of their option to purchase additional shares. We received approximately $192.9 million of net proceeds from the IPO, including from the full exercise of the underwriters’ option, after deducting underwriting discounts and commissions and related offering expenses. As of September 30, 2024, and December 31, 2023, our cash and cash equivalents were $191.2 million , and $39.3 million, respectively. We have used cash flow from operations primarily to pay compensation and related expenses, general, administrative and other expenses, debt service and distributions to our owners. Credit agreements On June 5, 2017, TWFG Holding Company, LLC, as borrower, entered into a credit agreement (as subsequently amended, the “Term Loan Credit Agreement”) with PNC Bank, National Association, as lender. On July 30, 2019, TWFG Holding Company, LLC entered into a third amendment to the Term Loan Credit Agreement pursuant to which it borrowed $4.0 million pursuant to a Term Loan B and used these proceeds for permitted acquisitions. On December 4, 2020, TWFG Holding Company, LLC entered into a fifth amendment to the Term Loan Credit Agreement pursuant to which it borrowed an additional $13.0 million pursuant to a Term Loan C and used these proceeds for permitted acquisitions (such amount, together with the amount borrowed on July 30, 2019, the “Term Loans”). On May 23, 2023, TWFG Holding Company, LLC entered into a ninth amendment to the Term Loan Credit Agreement to, among other things, provide additional flexibility under the covenants contained therein. The Term Loan B was fully repaid by its maturity on July 30, 2024. The aggregate principal amounts of the Term Loan C as of September 30, 2024 is $6.4 million as follows (in thousands): Remainder of 2024 $ 469 Year ended December 31, 2025 1,912 Year ended December 31, 2026 1,972 Year ended December 31, 2027 2,034 Total $ 6,387 On May 23, 2023, TWFG Holding Company, LLC, the guarantors party thereto, the lenders party thereto, PNC Bank, National Association and PNC Capital Markets LLC entered into a credit agreement that provides a revolving credit facility to the Company, with commitments in an aggregate principal amount not to exceed $50.0 million (as amended on June 20, 2024, the “Revolving Facility,” and together with the Term Loan Credit Agreement, the “Credit Agreements”). The Revolving Facility provides for a revolving credit facility to TWFG Holding Company, LLC, in an aggregate principal amount not to exceed $50.0 million that matures on May 23, 2028. The proceeds from borrowings under the Revolving Facility have been used for permitted acquisitions, and may in the future be used for acquisitions, working capital and general corporate purposes. On August 5, 2024, we repaid the outstanding balance of the Revolving Facility amounting to $41.0 million using a portion of the net proceeds from the IPO. As of September 30, 2024, there was no outstanding balance under the Revolving Facility. 48 Table of Contents The Credit Agreements contain covenants that, among other things and subject to certain exceptions, restrict our ability to make restricted payments, incur additional debt, engage in asset sales, mergers, acquisitions or similar transactions, create liens on assets, engage in transactions with affiliates, change our business or make investments. We may voluntarily prepay in whole or in part the outstanding principal under our Term Loans at any time prior to the maturity date. In addition, the Credit Agreements contain financial covenants that require us, subject to certain exceptions, to maintain a Consolidated Debt Service Coverage Ratio (as defined in the Credit Agreement) of at least 1.50 to 1.00 and a Consolidated Leverage Ratio (as defined in the Credit Agreement) of not more than 2.00 to 1.00, in each case, calculated as of the end of each fiscal quarter for the four fiscal quarters then ended, and as of September 30, 2024, we are in compliance with each such covenant. Pursuant to the Credit Agreements, a change of control default will be triggered if: (i) any person or group (other than the Pre-IPO LLC Members or Richard F. (“Gordy”) Bunch III and his affiliates) acquires beneficial ownership (within the meaning of Rule 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) of more than 35% of the total voting power represented by our outstanding voting stock, (ii) we cease to be the managing member of TWFG Holding Company, LLC, (iii) any person (other than us, the Pre-IPO LLC Members or Richard F. (“Gordy”) Bunch III and his affiliates) owns more than 35% of the membership interests of TWFG Holding Company, LLC or (iv) TWFG Holding Company, LLC shall cease to own, free and clear of all liens or other encumbrances (other than Permitted Liens as defined in our Credit Agreements), 100% of the outstanding voting equity interests of each guarantor (other than us) on a fully diluted basis, except as a result of a merger, consolidation or disposition permitted under the Credit Agreement. Such a default could result in the acceleration of repayment of our and our subsidiaries’ indebtedness, including borrowings under our Term Loan Credit Agreement (as defined below) and any amounts then outstanding under the Revolving Facility if not waived by the lenders under our Credit Agreements. Such a default could result in the acceleration of repayment of our and our subsidiaries’ indebtedness, including borrowings under the Term Loan Credit Agreement if not waived by the lenders thereunder. Interest on Term Loan B and Term Loan C accrue at Daily Simple SOFR plus the Benchmark Replacement Adjustment of 0.11448%, 0.26161%, or 0.42826% for the one-month, three-month, or six-month borrowing periods, respectively. At our option, the revolving credit facility under the Revolving Facility accrues interest on amounts drawn at the Term SOFR Rate or Daily SOFR plus the SOFR Adjustment of 0.10% and Applicable Margin of 2.00% to 2.75%, each as defined in the Revolving Facility. The Term Loans and the Revolving Facility are collateralized by substantially all the Company’s assets, which includes rights to future commissions. Comparative cash flows The following table summarizes our cash flows from operating, investing and financing activities for the periods indicated (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net cash provided by operating activities from continuing operations $ 11,725 $ 7,394 $ 28,879 $ 23,264 Net cash used in investing activities from continuing operations (366) (766) (21,589) (6,006) Net cash provided by (used in) financing activities from continuing operations 153,033 (2,651) 147,147 (6,086) Net change in cash, cash equivalents and restricted cash from continuing operations 164,392 3,977 154,437 11,172 Cash, cash equivalents and restricted cash from continuing operations, beginning of period 36,513 37,457 46,468 30,262 Cash, cash equivalents and restricted cash from continuing operations, end of period $ 200,905 $ 41,434 $ 200,905 $ 41,434 Cash paid during the period for interest $ 405 $ 159 $ 2,298 $ 328 Comparison of the Three Months Ended September 30, 2024 and 2023 Operating activities Operating activities from continuing operations provided $11.7 million and $7.4 million of cash for the three months ended September 30, 2024 and 2023, respectively. The increase in net cash provided by operating activities from continuing operations was primarily attributable to the $6.9 million increase in total revenues, decrease in commission expense amounting to $1.7 million, and approximately $2.1 million in net inflows from the changes in our net working capital between periods, partially offset by the increases in salaries and employee benefits and 49 Table of Contents other administrative expenses amounting to $4.9 million and $2.0 million, respectively. See “—Consolidated Results of Operations” above for additional information regarding the results of our operations. Investing activities Investing activities from continuing operations used $0.4 million and $0.8 million of cash for the three months ended September 30, 2024 and 2023, respectively. Our net investing outflows decreased primarily due to the lower level of intangible asset acquisitions in the current period of $0.2 million compared to $0.6 million in the prior period. See Note 4, “Intangible Assets” to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding our asset acquisitions. Financing activities Financing activities from continuing operations provided $153.0 million of cash for the three months ended September 30, 2024 and used $2.7 million of cash for the three months ended September 30, 2023. Our net financing inflows increased primarily due to $200.7 million in proceeds from the IPO, net of underwriting costs, and no cash distributions in the current period compared to $2.6 million cash distributions the prior period. These changes were partially offset by the repayment of the outstanding balance of the Revolving Facility amounting to $41.0 million using a portion of the net proceeds from the IPO and repayment of the term loans amounting to $0.6 million in the current period while the prior period had repayment of $0.7 million, $1.9 million in net outflows from the change in carrier liabilities in the current period compared to $0.7 million inflows in the prior period, and the $3.9 million and $0.2 million in payments of deferred offering costs and deferred acquisition payable, respectively, in the current period while the prior period had $0.1 million and none, respectively. Comparison of the Nine Months Ended September 30, 2024 and 2023 Operating activities Operating activities from continuing operations provided $28.9 million and $23.3 million of cash for the nine months ended September 30, 2024 and 2023, respectively. The increase in net cash provided by operating activities from continuing operations was primarily attributable to the $21.3 million increase in total revenues and the decrease in commission expense amounting to $1.7 million, partially offset by the increases in salaries and employee benefits, other administrative expenses and interest expense amounting to $11.3 million, $3.6 million, $1.6 million, respectively, and approximately $1.6 million in net outflows from the changes in our net working capital between periods. See “—Consolidated Results of Operations” for additional information regarding the results of our operations. Investing activities Investing activities from continuing operations used $21.6 million and $6.0 million of cash for the nine months ended September 30, 2024 and 2023, respectively. Our net investing outflows increased primarily due to the higher level of intangible asset acquisitions in the current period of $21.4 million compared to $6.3 million in the prior period. In January 2024, we acquired the assets of nine of our independent branches for a total purchase price of $40.8 million, of which approximately $20.4 million was paid in cash, with the remainder settled through the issuance of Class A common units. In addition, the Company purchased customer lists intangible assets totaling $0.9 million, of which approximately $0.4 million was paid in cash, for the nine months ended September 30, 2024 representing purchases of assets with annualized revenues less than $0.5 million. The prior period included three customer list acquisition transactions representing purchases of assets with annualized revenues greater than $0.5 million. See Note 4, “Intangible Assets” to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding our asset acquisitions. Financing activities Financing activities from continuing operations provided $147.1 million and used $6.1 million of cash for the nine months ended September 30, 2024 and 2023, respectively. Our net financing inflows increased primarily due to $200.7 million in proceeds from the IPO, net of underwriting costs, the $8.3 million lower cash distributions in the current period compared to the prior period, and $3.1 million in higher net inflows from the change in carrier liabilities in the current period compared to the prior period. These changes were partially offset by the decrease of $10.0 million in proceeds from the drawdown of the Revolving Facility in the prior period while the current period has none, repayment of the outstanding balance of the Revolving Facility amounting to $41.0 million using a 50 Table of Contents portion of the net proceeds from the IPO and repayment of the term loans amounting to $2.0 million in the current period while the prior period had repayment of $2.0 million, and the $7.1 million and $0.8 million in payments of deferred offering costs and deferred acquisition payable, respectively, in the current period while the prior period had $0.1 million and none, respectively. Future sources and uses of liquidity Our sources of liquidity will be (1) cash on hand, (2) net working capital, (3) cash flows from operations and (4) borrowings on our Credit Agreements. We expect that our primary liquidity needs will comprise cash to (1) provide capital to facilitate the organic growth of our business, (2) pay operating expenses, including cash compensation to our independent agents and our employees, (3) make payments under the TRA, (4) fund acquisitions, (5) pay interest and principal due on borrowings under our Credit Agreements and (6) pay income taxes. We expect to have sufficient financial resources to meet our business requirements in the next 12 months and in the long term, including the ability to service our debt and contractual obligations, finance capital expenditures and make distributions, including tax distributions, to our stockholders. Although cash from operations is expected to be sufficient to service these activities, we have the ability to borrow under our Credit Agreements to accommodate any timing differences in cash flows. Additionally, we may in the future access the capital markets to obtain equity or debt financing, if needed, including to pursue acquisition opportunities. We have certain obligations related to debt maturities and operating leases. As of September 30, 2024, we had $1.1 million of non-cancelable operating lease obligations for the next 12 months. For the periods following the next 12 months, we have an additional $1.4 million of non-cancelable operating lease obligations. See Note 5, “Operating Leases,” to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information . In addition, as of September 30, 2024, we had $2.4 million of debt maturities for the next 12 months comprised of $1.9 million of the remaining balance under the Term Loan C, and $0.5 million in acquisition-related notes. For the periods following the next 12 months, we have an additional $5.4 million of debt maturities representing $4.5 million under the Term Loan C, and $0.9 million in acquisition-related notes. As of September 30, 2024, there was no outstanding balances under our Revolving Facility. Any outstanding balances under our Revolving Facility, if any, will become due and payable during 2028. Annual interest rates on the acquisition-related notes are 3.75% and 5.0%, and our effective interest rates on the Term Loan C for the three and nine months ended September 30, 2024 were both 3.06%. As of September 30, 2024, we have an interest rate swap agreement associated with the Term Loan C, which converted the floating interest rates on these loans to fixed interest rates. See Note 6 “Derivatives” and Note 8, “Debt” to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information. Tax receivable agreement As a result of our ownership of LLC Units in TWFG Holding Company, LLC, we are now subject to U.S. federal, state and local income taxes with respect to our allocable share of any taxable income of TWFG Holding Company, LLC and are taxed at the prevailing U.S. federal income tax rates applicable to corporations. In addition to tax expenses, we also incur expenses related to our operations and we are required to make payments under the TRA. Due to the uncertainty of various factors, we cannot precisely quantify the likely tax benefits we will realize as a result of LLC Unit exchanges and the resulting amounts we are likely to pay out to holders of LLC Units pursuant to the TRA; however, we estimate that such tax benefits and the related TRA payments may be substantial. We expect that, as a result of the increases in the tax basis of the tangible and intangible assets of TWFG Holding Company, LLC attributable to taxable redemptions, exchanges or purchases of LLC Units from any of the Pre-IPO LLC Members, the payments that we may make to the Continuing Pre-IPO LLC Members could be substantial. For example, if we acquired all of the LLC Units of the Continuing Pre-IPO LLC Members in taxable transactions as of the IPO, at the IPO price of $17.00 per share based on certain assumptions, including that (i) there are no material changes in relevant tax law and (ii) we earn sufficient taxable income in each year to realize on a current basis all tax benefits that are subject to the TRA, we expect that the resulting reduction in tax payments for us, as determined for purposes of the TRA, would aggregate to approximately $182.4 million, substantially all of which would be realized over the next 15 years, and we would be required to pay the Continuing Pre-IPO LLC Members 85% of such amount, or $155.1 million, over the same period. The actual increases in tax basis with respect to future taxable redemptions, exchanges or purchases of LLC Units, as well as the amount and timing of any payments we are required to make under the TRA in respect of future taxable redemptions, exchanges or purchases of LLC Units, may differ materially from the amounts set forth above because the potential future reductions in our tax payments, as determined for purposes of the TRA, and the payments we will be required to make under the 51 Table of Contents TRA, will each depend on a number of factors, including the market value of our Class A Common Stock at the time of purchase, redemption or exchange, the prevailing U.S. federal income tax rates applicable to us over the life of the TRA (as well as the assumed combined state and local tax rate), the amount and timing of the taxable income that we generate in the future and the extent to which future redemptions, exchanges or purchases of LLC Units are taxable transactions. Payments under the TRA are not conditioned on the Continuing Pre-IPO LLC Members’ continued ownership of us. There may be a material negative effect on our liquidity if, as described below, the payments under the TRA exceed the actual benefits we receive in respect of the tax attributes subject to the TRA and/or distributions to us by TWFG Holding Company, LLC are not sufficient to permit us to make payments under the TRA. The TRA acceleration event provisions in the TRA may result in situations where the Continuing Pre-IPO LLC Members have interests that differ from or are in addition to those of our other stockholders. Finally, because we are a holding company with no operations of our own, our ability to make payments under the TRA depends on the ability of TWFG Holding Company, LLC to make distributions to us. To the extent that we are unable to make payments under the TRA for any reason, such payments will be deferred and will accrue interest until paid, which could negatively impact our results of operations and could also affect our liquidity in periods in which such payments are made. Off-balance sheet arrangements We do not invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support, or engage in any activities that expose us to any liability that is not reflected in our unaudited condensed consolidated financial statements. Critical accounting estimates We prepare our unaudited condensed consolidated financial statements in accordance with GAAP. In applying many of these accounting principles, we need to make assumptions, estimates or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our unaudited condensed consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates or judgments, however, are both subjective and subject to change, and actual results may differ from our assumptions and estimates. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. We believe our significant accounting policies could potentially produce materially different results if we were to change underlying assumptions, estimates or judgments. The accounting policies that we believe reflect our more significant estimates, judgments and assumptions that are most critical to understanding and evaluating our reported financial results are: revenue recognition, intangible assets, leases and acquisitions. Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our IPO Prospectus. There have been no material changes to our critical accounting policies and estimates disclosed in our IPO Prospectus. See Note 2, “Summary of Significant Accounting Policies,” to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a summary of our significant accounting policies. Recent accounting pronouncements For a description of our recently adopted accounting pronouncements and recently issued accounting standards not yet adopted, see Note 2, “Summary of Significant Accounting Policies,” to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Emerging growth company We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and we may remain an emerging growth company for up to five years following the IPO. For so long as we remain an emerging growth company, we are permitted and intend to rely on certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation, and exemptions from the 52 Table of Contents requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued after the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with certain new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.