TWFG, Inc.TWFG
TWFG, Inc. Fair Value Disclosure
FAIR VALUE MEASUREMENTS
ASC Topic 820, Fair Value Measurement (“Topic 820”) established a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy under Topic 820 are described below:
Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
Level 2: Inputs to the valuation methodology are quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The fair value measurement level for assets and liabilities within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The carrying value of cash and cash equivalents, accrued interest, all current receivable and all payable accounts approximate their fair values because of the short maturity or duration of these instruments.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis within each level of the fair value hierarchy (in thousands):
| Fair Value Hierarchy | |||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||
| Years Ended December 31, | Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||||||||||||
| 2025 | 2024 | 2025 | 2024 | 2025 | 2024 | ||||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||
Interest rate swap(1) | $ | — | $ | — | $ | 116 | $ | 312 | $ | — | $ | — | |||||||||||||||||||||||
| Total assets measured at fair value | $ | — | $ | — | $ | 116 | $ | 312 | $ | — | $ | — | |||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||
Contingent Considerations(2) | $ | — | $ | — | $ | — | $ | — | $ | 7,052 | $ | — | |||||||||||||||||||||||
| Total liabilities measured at fair value | $ | — | $ | — | $ | — | $ | — | $ | 7,052 | $ | — | |||||||||||||||||||||||
(1)See Note 6 Derivatives for additional information related to the interest rate swap.
(2)The future contingent considerations are recorded in the current and non-current Deferred Acquisition Payables accounts of the Consolidated Balance Sheet.
Contingent Considerations
Level 3 fair value measurements rely on limited unobservable inputs, which may not reflect net realizable value or future fair values. Although the Company believes its valuation methods align with market practices, different assumptions or methodologies could lead to varying fair value results at the reporting date.
The fair value of contingent consideration liabilities is based on projected performance of the acquired entities, which are reassessed each reporting period. Based on the Company’s ongoing assessment of the fair value of its contingent consideration, the Company recorded a net increase in the estimated fair value of liabilities of $7.1 million and none for the years ended December 31, 2025 and 2024, respectively. The Company has assessed the most likely exposure to the contingent consideration to be $7.1 million at December 31, 2025.
The following table sets forth a summary of the changes in the fair value of the Company’s future contingent considerations, which are measured at fair value on a recurring basis utilizing Level 3 assumptions in their valuation (in thousands):
| Year Ended December 31, | ||||||||||||||
| 2025 | ||||||||||||||
| Carrying Value | Fair Value | |||||||||||||
| Balance at beginning of year | — | — | ||||||||||||
| Change in fair value of contingent consideration | — | — | ||||||||||||
| Fair value of current contingent consideration issuances | 1,912 | 1,912 | ||||||||||||
| Fair value of long-term contingent consideration issuances | 6,140 | 5,910 | ||||||||||||
| Less: settlement of contingent considerations | (1,000) | (1,000) | ||||||||||||
| Balance at end of year | $ | 7,052 | $ | 6,822 | ||||||||||
There were no transfers in or out of the Level 3 hierarchy.
Fair value information about financial instruments not measured at fair value
The following table presents the Company’s debt that is not measured at fair value on a recurring basis:
| Year Ended December 31, | |||||||||||||||||||||||||||||
| 2025 | 2024 | ||||||||||||||||||||||||||||
| Fair Value Hierarchy | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||||||||
| Bank debt: | |||||||||||||||||||||||||||||
| Current bank debt | Level 2 | $ | 1,972 | $ | 1,972 | $ | 1,912 | $ | 1,912 | ||||||||||||||||||||
Long-term bank debt(1) | Level 2 | $ | 2,035 | $ | 2,035 | $ | 4,007 | $ | 4,007 | ||||||||||||||||||||
Deferred Acquisition Payables- notes(2): | |||||||||||||||||||||||||||||
| Current Deferred Acquisition Payables- notes | Level 2 | $ | 593 | $ | 593 | $ | 601 | $ | 601 | ||||||||||||||||||||
| Long-term Deferred Acquisition Payables- notes | Level 2 | $ | 529 | $ | 529 | $ | 1,122 | $ | 1,068 | ||||||||||||||||||||
(1)The carrying value of the Company’s borrowings under various credit agreements approximates its fair value due to the variable interest rate based upon adjusted SOFR.
(2) The Deferred Acquisition Payables- notes are cash payments that are due to the seller paid out over a future period. The fair value of Deferred Acquisition Payables- notes are based on current market rates for similar types of financing arrangements.About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.