Q2 2022 Goosehead Insurance Inc Earnings Call
Thank you for standing by this is the conference operator, welcome to the <unk> insurance second quarter 2022 earnings call.
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I would now like to turn the conference over Dan Farrell VP capital markets. Please go ahead.
Thank you and good afternoon before we begin our formal remarks I need to remind everyone that part of our discussion. Today may include forward looking statements, which are based on the expectations estimates and projections of management as of today forward looking statements in our discussion are subject to various assumptions risks uncertainties and other factors that are difficult to predict and which could cause.
The actual results to differ materially from those expressed or implied in the forward looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them.
We refer all of you to our recent SEC filings for a more detailed discussion of the risks and uncertainties that could impact our future operating results and financial condition of <unk> insurance, we disclaim any intentions or obligations to update or revise any forward looking statements except to the extent required by applicable law I would also like.
To point out that during this call we will discuss certain financial measures that are not prepared in accordance with GAAP management uses these non-GAAP financial measures when planning monitoring and evaluating our performance. We consider these non-GAAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons from period to period by.
Alluding potential differences caused by various variations in capital structure tax position depreciation amortization and certain other items that we believe are not representative of our core business for more information regarding the use of non-GAAP financial measures, including reconciliations of these measures to the most comparable GAAP financial measures. We refer you to today's <unk>.
Earnings release. In addition, this call is being webcast an archived version will be available. Shortly after the call ends on the Investor Relations portion of the company's website at you said insurance dot com with that I'd like to turn the call over to our CEO Mark Jones.
Thanks, Dan and welcome to our second quarter 2022 results call I will provide a summary of our key results from our second quarter and well discuss some strategic initiatives. We have underway that we believe will drive continued strong revenue and earnings growth over time as well as some high level thoughts on our longer term sustainable.
Run rate for growth.
Chief Operating officer, Mark Miller will then discuss some of our operational and technology enhancements during the quarter. Our CFO Mark Colby will then go into greater detail on the financials and our outlook for the remainder of 2022.
I'd like to start by welcoming Mark Miller, our new President and Chief operating officer to his first earnings call with us.
Members of our management team.
I've known Mark for 25 years since I was a partner at Bain <unk> company and Mark was the CFO at Sabre Holdings.
He has served on our board for the last four years and brings enormous financial and operational experience will be critical to our success as we scale from a middle market to a large company I look forward to partnering with Mark and benefiting from his extensive knowledge dedication and insight as we continue our path.
Awards industry leadership, and I'm delighted to have him on our team.
Before discussing this quarter's accomplishments I'd like to be clear about our strategic priorities.
<unk> growth that maximizes our competitive strength and long term economics, we are not a growth at all cost company.
And we are in an enviable place and our company's lifecycle, where we can better leverage the strategic assets, we've been able to accomplish these priorities, particularly with our corporate channel, which I'll discuss in a few minutes.
We ultimately believe we can continue with strong premium growth of 30% to 35% and expanding margins during these difficult economic times and for many years to come.
Some of the highlights of our most recent quarter include continued strong premium revenue growth notwithstanding the slowdown in the housing market.
Other macro challenges.
This was driven by strong referral partner activations, coupled with gains in client retention.
We delivered seven points of margin expansion, excluding contingencies as investments we've made over the past few years start to scale.
We began the transition to rebalance our business with more focus on the faster growing more profitable franchise channel.
We have recalibrated, our hiring in the corporate channel for the back half of 2022 with.
With the objective of maintaining our capabilities as opposed to adding bulk in that channel.
Causes margin compression.
This transition process will be evolutionary as opposed to revolutionary to ensure we protect the strategic asset we built in our corporate agency, but it will be deliberate and should enhance our efforts to expand margins.
We also continued to develop our digital agent capabilities.
We are leveraging our digital agenda to drive client referrals and cross sales and are seeing accelerating momentum through the first half of the year around these efforts.
Work continues on our pilot partnerships as we develop our value proposition for embedded insurance.
We're working with several carriers on integrations for direct quote to issue that we expect to begin launching later this year and through 2023.
Let's get into some details.
We delivered a very strong second quarter. Despite continued macro challenges further demonstrating our powerful and durable competitive moat.
Our total written premiums the key leading indicator of future revenue growth increased 42%, while total revenue and core revenue were both up 39%.
The second quarter produced strong profit growth with EBITDA up 85% to $12 $5 million.
Operating margin, excluding contingent commissions was $10 6 million up 109% year over year, representing margin expansion of seven points.
Our entire organization has a determined focus on delivering strong revenue and earnings growth over time, regardless of external conditions.
The current macro environment remains a net headwind for our business, we remain confident in our ability to deliver four agents clients partners and shareholders.
We continue to focus on improving performance on our three key drivers of growth client retention new biz.
Productivity and producer and particularly franchisee growth.
I remain encouraged by the current underlying trends, we're observing client retention rate remains strong in the quarter at 89% and improved 35 basis points.
I will point out that we focus on client retention as opposed to premium retention, thereby excluding any benefits from hardening insurance rates are.
Every point of retention has a meaningful impact on the economics of our business and despite our already high level of retention, we continue to see potential for improvement in this area as we further enhance the overall client experience.
We continue to rollout new technologies, including artificial intelligence tools to provide real time feedback and support to our service team members.
As they interact with clients.
It's also important to remember that given our high rates of growth. Our overall client retention is significantly muted by new business bias as retention of newer clients.
It's retention of our clients greater than one year is several points higher than for new clients.
When a client has renewed their policy once the likelihood they'll renew again is materially higher.
Turning to productivity, we continue to see momentum in cross selling and other referral efforts leveraging the digital agent across our sizable book of almost 700000 households. These efforts are in the early stages, but are already providing tangible benefit to growth as we have seen sequential monthly improvement in <unk>.
Area over the first six months of the year.
Second given our still tiny share of the market with just over 3% of mortgage transactions and roughly 50 basis points of U S. Premium we continue to have meaningful opportunities to gain share through new referral partner relationships.
Our technology now maps, the entire U S real estate market for mortgage lenders realtors title companies and homebuilders.
During the quarter, we activated 23% more new referral partner relationships.
Prior year against a particularly strong comparison year for new referral partner Activations.
Additionally, our reactivation rate of referral partners that hadn't sent us leaning over 90 days.
It was over two five times the prior year.
Encouragingly.
Our more tenured franchises are seeing year over year same store sales growth as they improve their productivity and higher producers.
At corporate we continue to provide valuable resources on management recruiting and training as these tenured franchise owners scale, they're already highly successful operations.
Moving to producer Count total franchises increased 30% and operating franchises grew 25% in the quarter Frank.
Franchise launches showed strength with growth of 31% for the quarter, a strong improvement over the trend during the last nine months and against the challenging year ago comparison of 80% launch growth in the second quarter of 2021.
We're also seeing early third quarter data on franchise signings and scheduled trainings that imply continued momentum.
Including 70% launch growth in July over the prior year.
During the Covid pandemic, we softened our standards for terminating underperforming franchises. We have now again began to hold them accountable to our historical standards.
During the quarter, we terminated or transferred the contracts for 65 franchises or 5% of the operating franchises with which we began the quarter.
As a reminder, these nonperforming franchises account for less than 1% of new business that consumes a significantly larger percentage of our management time and corporate resources.
The quality of our signed pipeline also improved and we are once again seeing a shortening of time between contract signings and launch in Q2 and throughout the remainder of 2022.
We're reviewing and terminating contracts were signed but unlikely to launch franchises in our pipeline.
Our franchise signings remain strong and are trending toward faster launch rates.
We have also implemented franchise trainings and regional offices outside of DFW to help reduce cost and minimize complexity for new franchisees to attend training and facilitate more rapid launches.
We believe recent changes in franchise recruiting and Onboarding will begin to drive faster operating franchise growth as we progress throughout the year.
We have now achieved a scale on our corporate agency that is more than sufficient to fully support our franchise network with product and process R&D training resources and agency support manpower as I've stated previously this gives us the opportunity for strategic resource allocation to be more skewed.
Toward our faster growing and higher margin franchise channel and to more actively manage corporate channel profitability.
Corporate agent growth in the quarter was up 11% to 503, we.
We expect annual corporate agent growth to moderate and slow over time as we're now in a position to fully leverage the scale of our corporate team.
Additionally over time, we will more actively look to identify strong corporate managers and producers that we feel could be exceptional owners and operators of franchises and that would be well suited to build their own sales teams. This will provide another attractive career path and financial reward for our developing corporate H.
Once this.
This will not have a material impact on 2022, but should provide greater efficiency and fuel profitable growth over time.
Let me take a moment to discuss our intermediate and longer term growth runway. We continue to have the ability to drive significant growth for many years to come given our small market share in the U S personal lines market and competitive moat.
Looking past 2022, we believe we can sustain premium growth levels in the low to mid thirties for many years. This assumes a continued challenging housing market and our planned efforts to optimize our mix of business between our corporate and franchise channels.
Given the manner in which we earned franchise revenue of 20% of new business and 50% of renewals core revenue growth will likely trend a few points lower than premium growth. However, given the higher margin profile of our franchise business. We expect these mix optimization efforts will drive further operating leverage.
In the intermediate term.
Given this and any normalization of contingent commissions, we believe that EBITDA margin margins can migrate well into the mid twenty's over the next few years and translate into very strong overall EBITDA growth levels, while we sustain a high top line growth.
While these expectations factor in the benefits of the digital agent to our current go to market strategy cross selling and other referral business. They do not factor in any material benefit we could achieve from partnership arrangements overtime. We're currently engaged in piloting in beta testing and embedded.
Insurance strategy with a number of smaller partners to build our knowledge and operational capabilities in this area.
We believe partnerships represents a significant long term potential new growth vector for the company.
I couldnt be more excited for the trajectory of our business as we progress towards our goal of becoming the largest distributor of personal lines in the United States. There is no company in the marketplace that brings our accumulated experience and full set of capabilities to bear.
A choice product offering with over 140 carrier partners the benefit of knowledgeable sales and service agents and industry, leading technology that benefits our clients agents and carrier partners.
Our success is only made possible by the incredible dedication and drive to succeed from our employees and franchise partners and I would like to thank them for their hard work and commitment to winning with that I'll turn the call over to Mark Miller.
Yes.
Alright, Thanks, Mark Good afternoon, everyone I'm excited to join you today as the newest member of the <unk> leadership team.
While new to most of you I've actually been associated with the company for many years as Mark mentioned I've known him and his family for close to 25 years.
Also been abuse, a client for over 15 years and I've been on the board of directors since the IPO.
All those years ago, I would've never imagine just how successful the company would become.
But early on I could see that goes head with something unique and special.
It became a client because I was frustrated with my existing captive insurance company.
However, I state of client because goose that offered the best coverages.
Prices in the client service was amazing.
Now that I've been on the inside for close to 60 days I've seen firsthand what makes <unk> So special.
Culture people and technology.
As I made my way around the organization are consistently found team members at all levels, who are highly committed to delivering on the company's short term operational and financial objectives and aligned on achieving the company's long term mission and industry transmission of industry leadership for.
For the remainder of the year I'll be focused on hardening our core business.
Renewal revenues account for about 60% of the company's total revenue in the majority of the company's earnings my foremost focus will be to optimize the service functionality to drive continued high levels of retention and to drive them, even higher as we scale the business.
In addition, we will be optimizing the balance between growth and profitability. This includes the mix of franchise growth and corporate agency growth. We will continue working to deliver strong growth while improving margin. This includes thoughtfully managing our corporate agent growth with consideration for production.
Ridgemont bandwidth and overall absorbed that capacity we have.
<unk> seen encouraging results during the quarter and our ability to increase the velocity of franchise launches.
My focus will be on continuing this trend, while identifying viable new franchise candidates and identifying ways to increase productivity from the existing base.
Finally technology is and will remain a key capability to drive growth and profitability specifically as it relates to our quote to issue capabilities. My focus will be on working together with our carriers and development team to deliver this exciting new product to our clients and partners.
Be more pleased to be joining <unk> at this time the company that Marc Jones and the rest of the team have built over the past two decades is simply amazing.
What really excites me looking forward is our ability to get even better through continued technology and operating enhancements.
Our strong positioning and runway for growth in both revenue and earnings is unlike any U S personal lines company in the market.
I'm excited to bring my operational experience to help further scale, our already strong organization, along the path towards industry leadership and I'm looking forward to meeting our analyst and Investor community in person over time.
With that I'll turn the call over to our CFO Mark Colby for a deeper review of our quarter and financial outlook.
Thank you Mark and Hello to everyone on the call.
For the second quarter of 2022 total written premiums the leading indicator of our future core and ancillary revenue growth increased 42% to $566 million.
This included franchise premium growth of 46% to $419 million and corporate premium growth of 31% to $147 million.
This growth is being driven by improving retention and strong growth in franchise, new business generation and agency count.
Total revenues and core revenues were both up 39% for the quarter at $53 million from $48 1 million respectively.
Ancillary revenue, which includes contingent commissions was $2 million in the quarter compared to $1 7 million in the prior year.
Given ongoing profitability challenges for underwriters in the personal lines marketplace and some mix shift in contingent arrangements, we expect contingent commissions for the full year in the range of $8 million to $10 million.
However, we are seeing long past due rate increases from our carriers across the country, which will help the profitability over the long term.
Our continued strong premium growth bodes well for future year's contentions.
As the plans typically restart at the beginning of each calendar year.
Our franchise has generated core revenue of $23 $7 million during the quarter, an increase of 54% from the prior period.
Franchise core revenue growth is driven by new business production from our growing franchise count and increasing our retention levels at the end of the second quarter operating franchise count was 1344 up 25% from a year ago our.
<unk> signed but not launched franchise count at quarter end was 997 down from 1030 in the first quarter as we continue to actively engage our signed pipeline to drive faster overall launch activity and identify signed franchises that no longer intend to launch an offset by new franchise signings during the quarter.
In the second quarter, we saw a 31% launch growth year over year compared to roughly flat launch growth over the preceding three quarters.
Our early through Q2 thousand 22 franchised Casey I data continues to trend well with July launches up 70% and strong indications of scheduled trainees through remainder of the quarter.
We remain encouraged by the increased contributions in revenue from our tenured franchises as they continue to ramp up their production and higher new sales agents within their respective franchises to help drive positive same store sales.
It is critical that we focus our investments towards our most successful franchises.
Part of ensuring that focus requires evaluation of our lowest performing franchisees.
As a result, the pace of our terminated and transferred operating agencies increased to about 21% from the historical average of 15% and about 10% that we experienced in 2021.
We view this near term increase in churn is healthy and necessary to properly run a high performing sales organization.
And consistent with previous term it accounts for less than 1% of our new business generation, but consume substantial management resources.
Corporate sales head count at the end of the second quarter was 503, an increase of 11% from the year ago quarter corporate core revenues were $24 4 million in the second quarter, an increase of 26% compared to the year ago period.
Our corporate team remains an important resource supporting the franchises to improve overall productivity.
The significant investments we have made in people and geographic expansion over the last couple of years puts us in a strong position to continue supporting and expanding our franchise base.
Looking forward, we expect to manage corporate head count to optimize the balance between growth and profitability with focus on maintaining adequate resources for the franchise effort, while also improving overall corporate productivity and management efficiency.
Given these objectives, we would expect corporate agent count at year end to be flat to moderate to down moderately versus the June 30th level.
Total operating expenses for the second quarter of 2022, excluding equity based compensation were $42 2 million.
Up 30% from a year ago.
Compensation and benefits expense, excluding equity based compensation was $26 5 million for the quarter up 28% from the year ago period the.
The increase in compensation and benefits is being driven by increased head count across the organization, particularly in the hiring of service agents to manage our largest revenue stream renewables.
Corporate agents recruiting and onboarding functions to continue our growth trajectory and systems developers to ensure our technologies on the cutting edge for our clients and internal users.
General and.
And administrative expenses for the quarter were $12 4 million, an increase of 22% from a year ago.
Growth in G&A expenses was due to an expanding real estate footprint higher travel and entertainment expense marketing expenses and various other expenses, resulting from increased head count of 25%.
Total adjusted EBITDA in the quarter grew 85% to $12 5 million compared to $6 8 million in the year ago period.
EBITDA margin was 24% versus 18% a year ago.
Excluding contingent commissions EBITA margin expanded seven points in the quarter.
Adjusted EPS was <unk> 16 versus 13 in the year ago period.
While we expect overall margin improvement for the remainder of the year timing of revenue and expenses quarter to quarter can fluctuate and.
And we don't necessarily expect as much margin expansion in the back half of the year as we saw during the quarter.
Looking beyond 2022, we expect to drive annual margin expansion, excluding contingents for the next several years as we manage core revenue growth moderately higher than expense growth on an annual basis.
As of June 32022, the company had cash and cash equivalents of $31 1 million, we had an unused line of credit of $24 8 million at quarter end.
Total outstanding term note payable balance was $96 9 million at the end of the quarter.
For the full year 2022, our guidance is as follows.
Total written premiums placed for 2022 are expected to be between $2 152 billion and $2 215 billion.
Representing organic growth of 38% on the low end of the range to 42% on the high end of the range.
Total revenues for 2022 are expected to be between 194 and $205 million representing organic growth of 28% on the low end of the range to 35% on the high end of the range driven by continued high levels of core revenue growth offset by weaker than historically average contingent commissions as a result of the carrier's profitability.
<unk> they are just recently addressing.
As a reminder, the contingency plans, we start each calendar year and a below average contingency year does not equate to weaker bonuses in future years.
We continue to expect the growth in EBITDA and EBITDA margin for the full year, however, lower than expected contingent commissions could result in more moderate EBITDA and margin than planned.
We do expect more significant growth in EBITDA and EBIT margin when excluding the effects of contingent commissions.
Our business continues to deliver strong consistent revenue growth and we are pleased that profitability is beginning to scale.
We look forward to continuing to deliver on the business through the remainder of the year and many years beyond.
Want to thank everyone for their time and with that let's open up the lines for questions operator.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any keys.
To withdraw your question. Please press Star then two we will pause for a moment as callers join the queue.
The first question is from Ryan Tunis with Autonomous Research. Please go ahead.
Hey, Thanks, Good evening couple on margins the first one.
You guys still feel comfortable that you can do at 19% to 20% EBITDA margin. This year, even when we're looking at lower contingent commissions in the back half.
Hey, Ryan it's Mark Colby now I don't think that that's the case anymore. As we said I think we're going to lose about five points.
Contingent commissions alone on our margin. This year. So I think kind of mid teens is a more realistic expectation for this year, but again those plans we start every meeting.
So kind of looking forward to next year again and going forward past that we feel like we can continue to manage our core revenue little bit growth, a little bit higher than our expense growth and with the plan to kind of gradually step up margins over the next several years.
Got it and then I guess, a bigger picture margin question.
You know again, a quarter ago with normal conditions, we were thinking we could maybe do a 20% margin. This year, but then in the prepared remarks. You said you were hoping to do mid Twenty's over the next few years, which is.
Kind of what you guys were doing when you IPO Ed.
I know in the past you've talked about a longer term aspiration of 40% plus.
Yeah, I'm, just kind of trying to reconcile that.
Mid twenty's because a few years would seem to me to give you guys plenty of time to reach operating scale.
Yes, Ryan it's Mark Jones.
The sort of mid Twenty's as kind of an intermediate.
Guidepost, we we believe that.
The business at sort of maturity as a 40 plus percent EBITDA margin business.
That's ultimately what we're working toward we.
We may see stronger margins in the.
In the medium term as we shift the mix of business more heavily toward our franchise channel.
And sort of constrained the investment and corporate.
But.
We're trying to be conservative.
So I'll just tell you that upfront that sort of mid twenty's in the intermediate term ultimately where we.
We're very confident that we can turn at a 40% plus EBITDA business at maturity.
And then just to follow up on that Ryan I think at maturity.
Online can vary but it's.
Several years 10, plus years out for us and I think also.
Gross not going to be 30% to 35%, 40% margins in the long term there is always that trade off between growth and profitability. So.
We feel like we can grow 30% to 35% for several more years.
Even considering considering the macro factors that we're facing now and so.
It's definitely a tradeoff, we can make but we feel like with the ultimate goal of maximizing profit dollars that 30, 35% growth with margins in the mid Twenty's as the best play for now.
Got it and then just just lastly.
Just thinking I guess.
The actions, we're taking in the corporate channel when you guys used to disclose that.
Our income statements with beach.
If I look at 2021 over 2020.
Total operating expenses grew by about $45 million and about 17 million of that was from corporate channel.
Comp and Ben.
So I guess, what I'm, saying is I would think that.
Vesting lesson that channel would would offer.
Cut into a lot of your expense growth. So I'm, just trying to reconcile that with.
What exactly is the benefit there so I'm trying to understand thanks.
So as you know if you looked at that.
It's strategically essential because we use it for.
Product process and technology R&D, we use it for training resources.
We use it for kind of an instrument development. So strategically it's a crucial part of our competitive moat.
Question that you know.
We need to answer is okay, if it's not generating.
Attractive margins, how much do we need to invest in this and so we've taken a good hard look at it.
And we are at a scale now that.
We can very comfortably.
Support everything that we need to do in the franchise network and so if we're going to allocate an hour of our time.
In a dollar of our money.
I think our shareholders, particularly this shareholder would like to see it deployed where youre going to get the biggest bang for your Buck.
We're still going to.
Sort of invest in.
Our corporate channel, but we don't need to grow it at.
At the same rate that we have historically because we've.
At the scale, we need to be.
Thank you.
Thanks, Brian . The next question is comes from Matt <unk> with JMP. Please go ahead.
Hey, Thanks, good afternoon.
I wanted to ask a question on the.
The housing market.
It's been a topic of interest for some time I guess for a few months now given kind of the macro headwinds.
Bruce heads referral partnerships.
Can you just kind of Peel back the onion, a little bit Mark I know you.
Reference a few numbers I think I caught 23% more referral partner partner Activations, good number of reactivation and so forth I was just hoping you could maybe put us in a franchisee issues in terms of how theyre going through their day is this at the top of their list of concerns in terms of kind of the slowdown in housing activity or is this a.
Given some of the things you mentioned are pretty easy offset for them and they're there they've got other things higher on their list that they're worried about.
Okay.
I wouldn't describe it as easy because these guys are working really hard.
But in terms of how they allocate their time basically when you have fewer leads coming in you have more time to do business development outreach and develop more referral partner relationships.
It would be a very different story, if we were 70% market share, but we're 3% of the home closings in the country, so our ability to pivot.
Is quite remarkable and we can't pivot in 24 hours, but we can pivot.
And Ah.
Very short period excuse me, a very short period of time.
Dan.
Pick up referral partners and Thats what were seeing.
Captain.
<unk>.
Our people are.
Sort of extending their outreach efforts.
And they're having success so that.
The impact.
Of an undeniable slowdown in the housing market is much much more muted.
For us.
And for them.
Yes, I think Matt you'd be surprised that just the number of leads the franchise needs to support their business I think the average leads that they get per month for partners is about 10.
If those.
Worst case, they are cut in half right, they're not having to go get 50 leads all of a sudden that's replaced five a month right and so I think it's achievable. It does take some work and some time and some investments in developing those relationships, but we're very confident that we can we can offset some of the housing market pullback by just going out and grabbing more share as Mark said.
Okay, Great very helpful. And then maybe I don't know if it's related or.
Separate or maybe both.
In the digital age and I'd be curious you've had it out there for a little while now how.
How are agents using it have you seen them using it as a tool to help offset some of these headwinds are.
Curious any update as to.
How they are embracing that as it as it evolves.
Yeah. So.
We're still developing best practices. There I think we're seeing the most benefit is from our internal digital marketing exercises that we're doing and we started doing this at the beginning of the year, we've seen month over month step function increases in that they performed.
Way better than we expected. So I think we're helping them again offset some of the pullback in the housing market by driving traffic to them through through cross sells and client referrals and so I would say that's currently the most leveraged use of the tool.
Okay, Great and then one just numbers guidance question on the I guess the revenue guide.
Obviously caught.
The contingent the biggest piece that I'm doing the math right.
Drop the dollars of revenue guidance by $3 7 million versus last quarter.
The right way to think about it and it's just all contingent and kind of at the other components of revenue stayed the same or did those actually go off that at all and <unk> come down and I know, maybe I'm getting a little too refined but just curious how you think about it.
I'm glad that you asked that Matt It is straight up contingencies.
So it's one of those things that will affect us this year, but it will not.
No sort of structural decline.
Which is why if you look at our premium guidance, we actually firm that notched it upward a little bit because the sort of the core of the base of the business. We continue to be really optimistic about that we don't set insurance premiums the carriers do.
And.
As you know they got behind the curve with some.
Some heavy losses, thus far this year and they're trying to catch up on those and those affect us in the on the contingency line and whenever those loss ratios do turnaround and I'm confident that they will.
We will have 40% plus more premium kind of loaded in the gun ready to be paid contingencies on so.
That's kind of how we're thinking about it overall.
Great. Thanks for that color I appreciate it.
Okay.
The next question is from Paul Newsome with Piper Sandler. Please go ahead.
Thank you for the call.
Yes.
Bit of a dumb question, but how real time should we think of these contingent commissions.
It will essentially tying into what's happening.
Personal lines market.
Are we talking about contingent changes that are really effective what happened in this last quarter.
Last year with respect to the profitability.
Okay.
Sure.
Does that I guess.
The corollary is that I think we have a particular view about what's going to happen with those.
And most of this tariff review.
That would shift.
Contingency right.
Sure. So there's a couple of different things that affect commission is kind of just like <unk>.
Profitability, what drives profitability, it's how much rate they have and how much how many losses. They have right. So I think during COVID-19 when a lot of these insurance companies gave a lot of rate back to their clients that's easy to do.
It's a lot harder to get that rate back when they need it like they do now and so I think over the remainder of this year potentially in the next year. We will continue to see strong premium increases I think that'll help offset their profitability losses that <unk> seen recently, so it's to be determined in a Max Jerry I cant actuary I can't.
To say that but I know that they needed some premium premium increases for the last few years and I think they are taking the right steps to help their profitability, which in turn helps us not just our core revenue from the premium increase but also on the contingent front with profitability, but Paul in terms of thinking of it.
How does this.
Impact kind of the outlook for us so that is one and this is one of the reasons why we have stripped out core revenue cost recovery revenue ancillary revenue. So that there is kind of visibility.
We have control over.
Volume of business that we write we don't have control over the.
The underwriting profitability of that business the carriers control that.
To the extent that they control.
Losses that are outside their control that impacts it.
We think the way to look at our business is too.
If you are to forecast out your.
Assuming a normalized level of contingencies and what we've indicated historically was $80 to 85 basis points of premium.
We may get to the end of this year and say.
Maybe that that should be up or down just a hair, but it's not going to move it's not going to move a lot. The if youre trying to judge the underlying health of the business you want to look at premiums and the kind of the core revenues that come from that recognizing that all of the.
Kind of the new business that we are writing in the franchise channel. We're only seeing 20 cents on the dollar for that so there is there is a timing gap between.
When we generate when we generate the policy versus when we see revenue. That's why we tell people look at look at premiums over revenues to get a gauge for the health of the business.
No I get that I apologize I wasn't asking my question.
So most of US cover the insurance industry most of the silver view of the profitability of the major personal lines writers.
So all of us are more optimistic than others.
No.
I have a very optimistic view.
How progressive Allstate and all the other insurers are going to.
We will put profitability. My question is is how much of a lag time.
There is between what happens to their results in general in your contingent commissions.
Yes, the market view.
<unk> has their views on that.
That might drive kind of what are our views.
Profitability in the near term.
Yeah, so because we grow so fast that we get some new business bias in our loss ratios right, because we're selling a lot of insurance, but.
As far as the earned premium goes like where we're always behind because we're writing growing our new business. So fast so.
Probability of a claim happening on day 365 is the same as they wanted.
I think there's always going to be some a little bit of drag there. So.
All I can say is as as carriers continue to increase their premiums like we've seen really starting.
During this quarter I think.
I think that will continue to help the story of their profitability.
Okay.
And then maybe another big picture question.
And more color on the go to market strategies.
To the extent how much are you really dependent upon.
The housing market home insurance.
This point I would imagine that you have.
Diversified that overtime, but.
But it's tough to tell how much of that has changed.
Over the last gap. So we have such a large renewal book all of that only about in any given year roughly 20% of our total revenue is exposed to the housing market.
And even less of our earnings because all of our all of our.
Profitability is in the renewals.
So I think the seasoned agents are more diversified as they build their book of business and they are able to grow their business from client referrals. So I think that's the newer agents that are a little bit more exposed to the housing market and the ones that we're trying to get in front of and coach them on <unk>.
Leads are probably going to drop a little bit.
Haven't already here's what you do to combat that start now because it might take 90 days to replace that lead flow like those kinds of conversations are happening in the field every day.
Great. Thank you very much.
Yeah.
Thanks, Paul.
The next question is from Meyer Shields with <unk>. Please go ahead.
Thanks, I think maybe.
A question on contingent commissions.
Two parts I think one mark talked a little bit about obviously the diminished profitability built mentioned some changing arrangement.
We can get some more color on that and then more broadly.
Are you.
Given that so much the contingent.
Our out of your control how comfortable are you with.
The current mix of contingent and core Commission.
Okay.
Yes, so we.
We continue to focus on what we can on new business they're in.
It's really.
Can't get into details of specific contingency plans, but does change every year.
And given where the profitability was kind of during the negotiating season for this year is contingent commissions.
Quite frankly, we didn't have a lot of people are negotiating power their so ho.
That changes as the carriers become more profitable, we can negotiate more kind of guaranteed growth based contingencies, but.
Really where we're focused on what we can and that is growing our core revenue.
With the hopes that over time, we can start to negotiate some better plans as profitability changes as we grow bigger books of business with some of the smaller carriers too I think.
As we become more and more important to them as distributors and a larger percentage of their book of business. I think we will have some more negotiating power there, but again these are partnerships that present us going in there banging our fist on the table demanding more money, we have to kind of balance their initiatives with our initiatives and I'm confident that we can really start to more.
Our contingents within our carrier mix.
So that's kind of the way to think about five.
Five years to seven years kind of what we always talk about is how we think about it as a percentage of premium that's how we'll continue to think about it.
And again, we'll have some more thoughts going into kind of for Q3 Q4 earnings on what those could look like by Q4 earnings as we give our guidance for next year.
Okay.
That makes sense.
Second question and this is just like two small ball issues, but they do have an impact on net EPS can you walk us through what happened with the non controlling interests and the tax rate in the quarter.
Yeah. So that was I think our effective tax rate. This quarter was about 40%, which is usually we expect 10% to 12% effective tax rate.
So.
What happened was just some some forfeiture of some invested options that reverse tax asset triggered a larger tax expense than we would normally expect in any given quarter and onetime we don't expect that to continue the rest of the year.
Also a lot more earnings.
Increased tax expense Unfortunately.
No Unfortunately, rather.
Yeah.
And the Noncontrolling interest.
Is there any.
I struggled with us for a while doing good way of modeling it or guidance you can provide on that.
Okay.
I don't think so.
Yes.
Fair enough okay. Thanks, so much.
Yeah.
The next question is from Mark Hughes with Truest. Please go ahead.
Yes, Thank you and good afternoon.
The 31% launch growth in the quarter.
With the Onboarding.
Yes, that's new franchises that went live during the quarter.
Yeah.
And then the.
Underlying pricing I Wonder if you could talk about that it seems like it's helping on your.
Renewal royalty fees renewal commissions.
What do you think the average is now maybe versus what you would've seen a year ago.
Yes, I think if you really kind of focus on the difference between our client retention in our premium retention new client retention was 89% premium retention was 95% I think that delta is obviously going to be driven by.
By a lot of the rate.
Gotcha.
And about the growth profile of the business if the corporate agents.
We've flattened out from here.
Driving roughly half your revenue.
New business commissions the agency fees, the renewal commissions spring from that.
Half the business with the growth profile changes in his lab.
Extent that your retention is less than 100, then that will decline over time.
Okay.
It's not out of the business is yes. Please go ahead, it's about it's about a quarter of the business.
If you look at it based on premium Mark and.
That's the way you use.
Have to look at this so.
On the franchise side Theres a lag between when premium is earned and when revenue is earned.
But it's.
Our corporate agency.
Is becoming a smaller part of the kind of overall portfolio every year as our franchise business dramatically outgrows it yes.
And within the corporate channel over two thirds of our premium is coming from renewals right. Those don't just go away.
So as we continue to add new business in the corporate channel. We can continue to grow there with.
Flat or moderately down number of producers. We also expect increased productivity from those producers that.
That we have as they mature them down the learning curve.
We understood that the new business adds to the renewals.
Okay.
That's one of the reasons, that's one of the reasons why I kind of analysis now is the time to be doing this.
Haven't been to a point historically, where a corporate was at scale, where they can support the franchise, but also.
Their production was in their growth was way too important to our overall growth story to be able to slow it down with without slowing down the machine now overwhelming majority of our growth comes from our franchise channels. So we can slow corporate growth without materially slowing the overall growth of the business, but cigna.
Significantly helping with our margins.
Understood. Thank you.
Thank you.
The next question is from Pablo <unk> with JP Morgan. Please go ahead.
Hi, I just wanted to follow up on that last question about corporate versus franchise right. So if we assume that it flattened out this year, maybe you grow again next year, but much lower than we were growing before does that imply then that you know.
The growth in the franchise comp, which I think if I look historically called the past three years, it's been anywhere from 35% to 45% a year.
Should we expect that to.
Materially offset the slowdown in corporate is that right.
Right way to think about it so that you sort of land, where you were before which is 30% 35% growth.
Yes, I think it will be continuing to focus on our franchise growth.
Having some more margin to work with and making additional investments in the franchise level productivity onboarding recruiting of those franchisees.
I wouldn't say, we would accelerate materially I think.
<unk> high levels of.
Franchise Onboarding will be key.
But kind of more importantly, just improving their productivity, we where our investments are focused.
Okay.
And then second question is.
I think mark had mentioned that the 30% to 35%.
Expectations premium growth includes the impact of that.
Digital agent.
I was wondering if you could sort of frame that out more for us or maybe provide some numbers like that.
To what extent does the digital agent both of them.
Contribute to growth right I'd be curious to hear how.
We are seeing.
That technology, helping your agent.
Yes, it's surely helping.
Not materially enough to give numbers on a call right now, but again, we're seeing step function increases every month and its contributions and I think.
Towards the end of this year early into next year.
It might be some numbers that are moving the needle and we havent assumed in any of the.
Kind of forecasting.
A true sort of growth vector with that digital agent.
With an embedded insurance strategy.
Sort of a substantial number of carriers being able to provide.
All the way through to issue. So that's that's not factored into any of our.
Any of our outlook, but it's a very real.
We view it as a very real opportunity that we're putting in.
Significant effort behind them.
Some pretty attractive.
Sort of upward Optionality, if you ask me.
Thank you.
Thanks Pablo.
I'll now hand, the call back over to Marc Jones for closing remarks.
We appreciate everyone's time today. Thank you.
This is the end of the call.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating helpless day.
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