Q3 2022 Goosehead Insurance Inc Earnings Call
Thank you for standing by this is the conference operator.
Welcome to the Goose head insurance third quarter 2022 earnings call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
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I would now like to turn the conference over to 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 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'd 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 excluding potential differences caused by various variations in capital structure tax position.
<unk> 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 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 In addition, this call is being webcast an archived version will be available shortly after.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 Www Dot you said insurance dot com with that I'd like to turn the call over to our CEO Mark Jones.
Thanks, Dan and welcome everyone to our third quarter call I will provide a strategic overview, following which Mark Miller will cover our operating results and Mark Jones Junior will review our financials.
We just passed the 19th anniversary of the founding of our company and we continue to refine our business model every day.
When we started the company we set the goal of becoming the number one distributor of personal lines insurance in the United States. During my lifetime, and we remain committed to doing what it takes to get there.
I feel very fortunate to serve the team that is building one of the best businesses on the planet.
With a 390 billion dollar market.
Very weak competitors in the personal lines space.
Credibly resilient recession resistant underlying market demand for the product basic.
Basically if you live somewhere or drive something you have to buy a product.
And then lastly, extremely attractive margin and cash flow potential, particularly after 19 years and accumulating over 700000 clients.
We remain true to the principle, we were founded upon which is to place the client at the center of our universe and to build the business around bringing extraordinary human capital and technology to bear to create an unmatched insurance experience.
Our core business, which is our corporate agency and our franchise network remains strong and we continue to invest in strengthening them.
This business has a powerful and growing competitive moat protecting it and we have no meaningful competitors, who operate at scale with a choice model.
We're not arrogant to believe that we'll never face competitive threats in our core business, but we believe that creating viable competition will take a very long time cost a great deal of money and be exceptionally difficult.
Our digital agent represents a potentially extraordinary growth opportunity with different competitive dynamics than those in our core business. We have a substantial competitive lead with our technology, but we constantly operators, if new industry entrants or investing to duplicate what we have built <unk>.
Remember that our carrier partners entrust us to legally bind them to provide coverage and ultimately pay claims. This is a privilege we have earned over many years and millions of transactions.
Crucial element of our competitive moat, particularly as it relates to the digital age. It is our relationships with insurance carriers and the track record. We've built over the last two decades of writing high volumes of high quality profitable business.
It will be very challenging and it takes time for competitors to earn the trust of insurance carriers sufficient to convince them to hand over the responsibility to commit them to bank waves.
That being the case, we need to invest and work very hard to build our quote to issue capability as soon as possible to protect our competitive position.
Our recently announced addition of Justin Records as executive Vice President of Technology and partnerships.
Designed to help do just that.
<unk> has an internal team of more than 40 people, whose mission. It is to extend our technology lead and deepen and widen our competitive moat.
The U S housing market represents a headwind for you said, but not nearly to the extent that some assume and it is a headwind we are actively responding to based on our experience managing through the housing downturn during the great financial crisis of 2008 2009.
Only about 20% of our revenue is exposed to the housing market from transactions tied to home closings. The remaining 80% comes from referrals and renewal business.
Regarding the 20% of our revenue connected the housing we currently represent only about 3% of home closings per year. So we still have huge market share to gain and are not dependent on overall housing market transaction growth.
Our referral partner search tool technology allows us to pivot to add new referral partners when volumes soften with existing ones.
We're seeing this phenomenon play out every day with our agents.
We're ramping up activity to generate new business via client referrals in our digital marketing team consistently generates leads from current and former clients that are turning into a meaningful revenue.
Well higher than normal underwriting losses of plagued many of our carrier partners. This year most have been successful at increasing premiums whenever this happens we get a pay raise because we earn a commission as a percentage of those premiums. This is creating a tailwind for us in 2022 and beyond and we.
Hope that higher policy pricing drive better industry profitability and more normalized contingent commission levels looking further out.
The housing market headwinds impact about 20% of our revenue base, the premium pricing tailwind benefit 100% of our book of business.
2022 has been a transition year for us over the last two years many of our corporate agents were on boarded and received training in a virtual environment. Some of these agents did not ramp up as quickly as those who went through in person training, which negatively impacted the profitability of our corporate channel.
Now that we're in a post pandemic environment training is largely conducted in person and we are managing out are less productive agents more aggressively our.
Our business has strengthened by moving out weak performers, who consume valuable management resources, but contribute only negligible revenue.
Management investment can be best placed where it will drive attractive returns.
2022, we've made it a priority to watch more agencies at a faster pace.
Good progress to date with our backlog declining from 1030 agencies earlier this year to 884 at the end of Q3.
We've also sharpen our pencils on the optimal use of our resources to drive growth that is profitable and sustainable.
This includes the recalibration of the relative roles that corporate and franchise channels play in our strategy.
In simple terms the cost structure for corporate is extensive and new producers take time to become profitable well a healthy profitable corporate business is central to our strategy.
Franchise network is the primary driver of our growth now accounting for more than three quarters of premiums.
The cost to add new producers and franchise is nominal and every dollar of new revenue they generate comes with higher incremental margins.
We continue to leverage the full capabilities of what we've built over the years that in ways that optimize profitability without sacrificing growth.
Examples of this include utilizing the amazing recruiting machine, we've built to help franchisees add producers to their agencies and creating a much larger aperture for highly capable corporate agents to become franchisees and build their own business.
After launching the initiatives just a few months ago to help our franchisees recruit producers. We expect to have helped to place more than 30 producers with agency partners by year end.
So far this year nine corporate agents have become franchisees with six of them being among our top 10, new agencies for productivity that's out of almost 400 agencies launched so far.
Just one specific example is red Mcfadden, who after spending three years incorporate launch this franchise this summer in Denver.
Ren was the second most productive franchise agent in our entire mountain region. In just his first month lives. We're extremely encouraged by the opportunity we have to cede outstanding franchisees from corporate franchise opportunity also significantly strengthens our on campus recruiting value proposition.
Yes.
Our optimized plan is to thoughtfully and profitably grow corporate overtime, albeit not as rapidly as we grow our franchise business. We believe we can continue to attract very strong talent to our corporate business and provide great career opportunities whether that be to remain in corporate or become a franchisee.
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But we believe that earnings will be stronger in capital B capital will be most productively deployed by.
Investing differentially in the franchise business.
Finally, we continue to work hard to strengthen our management capabilities. So that we have the right people and skill sets to scaled you said from a middle market to a large company.
As <unk> largest shareholder and the person with the most to lose if we get things wrong.
And as someone with an intimate understanding of <unk> needs.
Highly confident in the moves we are making are the right ones to drive long term shareholder value.
So far our efforts are beginning to pay off as revenues in Q3 climbed 38% year over year.
We delivered $11 million of adjusted EBITDA at a 19% margin.
Representing 320 basis points of margin expansion from 2021.
Even in an environment of economic uncertainty our business remains very strong and we're more confident than ever that we're building one of the great American business success stories with that I'll turn it over to Mark Miller to discuss our business results.
Thanks, Mark and good afternoon, everyone when.
When I started four months ago, Mark Jones, and I agreed on our list of priorities and I'm excited to report that we're making excellent progress against each of them.
We're currently focused on enhancing service levels for our clients building, a healthy franchise business optimizing productivity of corporate agents opening new growth opportunities through technology innovation and partnerships and building the people processes and systems that are prepared to operate in a much larger scale.
Like most companies in the U S. The great resignation had some impact on our service organization earlier this year.
But we responded quickly by mobilizing our recruiting and training teams to staff open positions.
As of now we have reached the optimal service head count to meet demand and what you have seen significant improvements in key service metrics such as average wait times.
At the same time, we're also continuously implementing new processes and technology to provide a more seamless customer experience. Our scheduled call back program is a great example of this type of innovation. We believe that this laser focus on service will ultimately drive even higher NPS and retention rates. These changes are in.
Turn improving employee satisfaction, reducing employee attrition and driving cost efficiency.
The foundation to growing any recurring revenue business as customer attention. We currently achieve what we believe to be industry, leading customer retention through our world class service organization that delivers an unmatched customer experience as evidenced by our 90 NPS score the continued investments and improvements in this area will position us.
Sustained sizable future growth.
Turning to the efforts to build a healthy franchise business, we have been focused on improving franchise launches and compressing the time between signing and lunch.
I am extremely encouraged with the underlying trends were seeing during the quarter, we launched a 144 franchises up 57% year over year and a new company record. In addition, our signings remain strong and our pipeline are substantial.
<unk> of our signed pipeline continues to improve and we're seeing faster launch rates. This is a direct result of changes we implemented in our recruiting and onboarding processes and the adjustments to the compensation model of our recruiting team.
During COVID-19, we delayed culling of underperforming franchises. We have now returned to our historic process of eliminating low production franchises that put a drag on our overall system. This culling is offsetting some of the strong trends, we're seeing in that franchise sales and launches.
Just to be clear these terminated franchise account for less than 1% of our new business production, but they absorb a disproportion amount of valuable operating bandwidth.
Additionally, we are increasing our focus on converting strong corporate agents to franchise owners historically very few corporate agents have converted to franchise ownership. However, corporate agents that flip over to franchise ownership are overwhelmingly successful typically their first year production is in the top 5% of all franchises launch.
And the overwhelming majority of successful expanding this effort over time will create long term career paths for our best corporate agents and be highly accretive to go said.
Moving onto how we're optimizing productivity of corporate agents during the quarter, we deliberately reduced our corporate agent head count by 18% to focus on increasing productivity and eliminating the P&L drag caused by underperforming agents. This initiative has already started to deliver improvement in productivity per agent.
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With this near term slowdown in corporate head count, we see an opportunity to strengthen the team and become substantially more efficient with minimal impact to our overall company topline premium growth. This improvement will further establish our corporate agency is the gold standard of performance in the industry and the best.
Practice model for our rapidly growing franchise business.
Overtime, the corporate agency, new business production has become less and less of a driver of our overall revenue growth. We believe the best way to expand our footprint rapidly inefficiently across the U S is with a finely tuned corporate agency.
That feeds the franchise network with technology innovation and highly skilled talent.
As we optimize the corporate business, we will add head count only to the extent it supports the expansion of the franchise business.
Moderating head count growth in the corporate agency does not mean, we intend to slow overall corporate and franchise producer count combined earlier.
Earlier this year, we pilot program, where our recruiting team identified top producer talent for scaling franchises. This program was overwhelmingly received in the pilot and we're expanding the service to the roughly 200 franchises in our network that are in our high growth phase of their business development.
We believe this will result in significant total producer additions to our franchise business over the next year and the number of franchises that are scaling their operations will continue to grow as our franchise business matures. We currently have over 700 franchises that are less than two years old. So this is a service of our franchise organization will leverage for years to come.
Yeah.
We have approximately 1000 professionally trained in license sales and service agents and our corporate operations and over 2000 and franchise agents across our 1400 plus franchises.
This total number of agents will continue to grow meaningfully to serve our client needs and drive us toward our long term goal of industry leadership.
Our proprietary platform is unmatched in the industry and we are focused on leveraging this advantage through further technology innovation and development of partnerships. We recently launched our new agent facing rater, we call. It aviator. This allows agents to more seamlessly and efficiently quote across products and carriers to determine the best path.
<unk> coverage.
We also are continuing to make progress on our <unk> capabilities.
Currently have one carrier unquote to issue and are in various stages of development with several of our other national.
Regional and new digital carriers, we expect a meaningful portion of our premium base will be <unk> enabled overtime.
I couldnt be more excited with the Companys current position and the priorities we are focusing on to position. The company for its next phase of substantial growth our market opportunity is enormous we remain hyper focused on driving revenue growth, while continuously hardening, our operating processes to scale efficiently to meet these <unk>.
Warmus market opportunities.
We believe that executing against these strategic priorities will allow us to grow our core business premiums at 30% to 35% annually over the next several years with potential upside to this through partnerships and to drive EBITDA margin well into the mid to high <unk> over the same time period with that.
Let me turn it over to our CFO Mark Jones Junior.
Thank you Mark and Hello to everybody on the call are <unk>.
Results this quarter in a difficult personal lines marketplace and challenging macro environment demonstrate the inherent strength and consistency of our business and the uniqueness of our operating platform insurance as a necessary product for the vast majority of the population regardless of the challenges of P&C underwriters and overall economic uncertainty.
As a scale independent agency with industry, leading proprietary technology, we provide a seamless choice shopping experience and valued advice, which cannot be matched by single product platform.
Vantages of our model for clients become even more evident in times of industry and macroeconomic stress we.
We are best positioned to optimize our clients' outcomes as carriers raise pricing to address underwriting profitability, helping them maximize their buying power in an increasingly challenging home buying process and manage the experience through loss events as a trusted advocate.
We are in an incredibly favorable position in the personal lines insurance value chain, we benefit from our close proximity to the client relationship as in most businesses those with the closest relationship to the end client tend to control or significantly influenced the profit pools are ability to provide the client with the choice platform, they need and highest level of service creates the.
<unk> for excess economics as a broker we do not carry the balance sheet risk that carriers do and in fact in a rising premium environment, we get a raise in our entire book of business our emphasis on expanding the franchise distribution significantly reduces the potential downside risk of fast expansion as we bear significantly less cost to ramp that producer.
This allows us to optimize earnings while minimizing risk. These characteristics will allow us to drive consistent high levels of revenue and earnings growth with significant cash flow conversion and limited balance sheet risk for many years to come.
For the third quarter of 2022 total written premiums the key leading indicator of future core and ancillary revenue growth increased 42% to 616 million.
This included franchise premium growth of 46% to $464 million and corporate premium growth of 30% to $151 million. This growth is being driven by continued strong performance of our renewal book from high retention levels, and increasing P&C pricing needed to improve underwriting profitability.
Additionally, we continue to add and improve the quality of our franchise producer count.
These benefits were partially offset by our deliberate near term reduction in corporate agent head count to drive productivity improvements increased efficiency and maximize long term profit dollars, we're already seeing benefits from these efforts emerge.
Total revenues and core revenues were up 38% and 39% for the quarter at $57 7 million and $51 $9 million respectively.
Our cost recovery revenue of $3 4 million was up 73% as accounting rules require us to defer the recognition of initial franchise fees over the term of the franchise agreement.
Terminating an underperforming agency resulted in the acceleration of the remaining deferred franchise fee revenue.
Importantly, the cash flow of these initial franchise fees is unchanged as we collect these revenues at the launch of the franchise.
Ancillary revenue, which includes contingent commissions was $2 4 million in the quarter compared to $2 5 million a year ago.
We continue to expect contingent commissions for the full year to range between seven and $10 million given current underwriting profitability.
However, we are seeing long overdue rate actions in the industry that overtime should improve underwriting profitability and lead to a more normalized contingent level looking further out.
Our franchises generated core revenue of $26 $4 million during the quarter, an increase of 54% from the year ago period.
<unk> core revenue growth is driven by new business production from our growing franchise, count and increasing premium retention levels.
At the end of the third quarter operating franchise Count was 1403 up 23% from a year ago increased culling of underperforming franchises is masking the strength of the underlying kpis in the franchise distribution.
In the third quarter, we saw 57% launch growth year over year compared to 31% in the second quarter and roughly flat large growth over the preceding three quarters.
The 144 launches in the quarter was a record for us as we begin to see the existing backlog launch we terminate our early fourth quarter franchise Kpis data continues to trend well as we expect strong launch grow through the balance of the year.
We remain encouraged by the increased contribution in revenue from our tenured franchisees as they continue to ramp up their production and higher new sales agents within their respective franchises driving positive same store sales.
This is being offset in the near term by higher churn of franchises, which ran at 25% annualized in the quarter compared to 21% in the second quarter at a roughly 15% historical average.
We expect higher churn in the near term as we make it for high single digit churn that we allowed through most of the pandemic.
Our most successful franchises continue to drive higher percentages of premium growth at.
It remains critical that we focus our investments towards these most successful franchises.
Part of ensuring that focus requires evaluation of our lowest performing franchises, we view, the resulting near term increase in churn as healthy and necessary to properly run a high performing sales organization and consistent with previous churn it accounts for less than 1% of new business generation, but consume substantial management resources.
Our overall recruiting pool also remains strong and robust and the quality of our signed but not yet launched franchises continues to improve as we actively engage our signed pipeline to drive faster overall launch activity and identify signed franchises that no longer intent to launch.
Our signed but not launched franchise count at quarter end was 884 down from $9 97 in the second quarter and 1030 in Q1 with strong signing activity offset by our efforts to coal the pipeline of franchises that will not launch.
We expect higher launch rates to continue to emerge as the signed pool is increasingly comprised of more recent recruiting quarters, which took place in a more normal operating and labor environment compared to Covid years.
Corporate sales head count at the end of the third quarter was 411, a decrease of 18% from the year ago quarter.
Corporate core revenues were $25 4 million in the third quarter, an increase of 27% compared to the year ago period 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 efforts, we expect corporate head count to be slightly down from the third quarter by year end.
Longer term, we expect to grow the corporate distribution. However, it will not grow as fast as the franchise network. They will at the level needed to support franchise growth.
Given that revenues produced through the franchise network are accounted for on a net basis. These changes may moderately impact our revenue growth near term, but they will significantly improve our margin profile and earnings growth trajectory.
Total operating expenses for the third quarter of 2022, excluding equity based compensation were $46 7 million up 33% from a year ago compensation and benefits excluding equity based compensation was $30 9 million for the quarter up 28% from the year ago period, the increase in compensation and benefits is being driven.
By increased head count across the organization, particularly the hiring of service agents to manage our largest revenue stream renewals recruiting and onboarding functions to continue our growth trajectory and system developers to ensure our technology is on the cutting edge for our clients and internal users.
G&A expenses for the quarter were $13 5 million, an increase of 33% from a year ago.
Growth in G&A expense was due to an expanding real estate footprint higher travel and entertainment expense marketing expenses and other various expenses, resulting from increased head count of 19%.
Our bad debt expense was $2 3 million compared to <unk> 7 million a year ago with the increase largely driven by our increased culling of signed franchises that have yet to launch.
Total adjusted EBITDA for the quarter grew 67% to $11 million compared to $6 6 million in the year ago period, EBITDA margin was 19% versus 16% a year ago.
Excluding contingent commissions EBITA margin expanded six points in the quarter.
Adjusted EPS was <unk> 24 versus 26 in the year ago period.
We continue to expect our full year margins will be up compared to a year ago.
Looking beyond 2022, we expect to drive annual margin expansion, excluding contingent for the next several years as we manage for revenue growth moderately higher than expense growth on an annual basis.
As of September 32022, the company had cash and cash equivalents of $46 1 million, we had an unused line of credit of $24 8 million at quarter end.
Total outstanding term note payable balance was $95 6 million at the end of the quarter. During October we paid down the $25 million drawn on the revolving credit facility with existing cash on the balance sheet.
For the full year 2022, our guidance is as follows.
Total written premiums placed for 2022 are expected to be between $2 176 billion and two to $1 5 billion representing growth of 40% on the low end of the range and 42% on the high end of the range.
Total revenues for 2022 are expected to be between $194 million and $205 million, representing organic growth of 28% and 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 historical average contingent commissions as a result of carriers profitability challenge.
They are just recently addressing as a reminder, the contingency plans restart each calendar year and a below average contingency year does not equate to weaker bonuses in the future years.
We continue to expect growth in EBITDA and EBITDA margin for the full year, however, lower than expected contingent commissions could result in more moderate EBITDA and margins in plant. We do expect more significant growth in EBITDA and EBITDA margin when excluding the effects of contingent commissions.
Our business is demonstrating strong revenue and earnings growth in the challenging environment, we look forward to continuing to deliver on the business through the remainder of the year and many years beyond I want to thank everybody for their time and with that lets open the lineup 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 tone acknowledging your request if you.
You are 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.
Our first question comes from Matt <unk> of JMP. Please go ahead.
Hey, Thanks, good afternoon.
Mark I wanted to ask go back to some of your own.
I want to go back to some of your opening comments you talked a bit about the housing market impacts and how he had 20% of your revenues are exposed to that but also about the pricing environment and how obviously up.
Tire book is exposed to that and I was hoping you could maybe make it more direct comparison between the two now looking for numbers, but just kind of as you see it qual.
Qualitatively right now.
Is the pricing environment.
Strong enough that you can see it offsetting kind of the impact from the housing market.
Or is it too difficult to call.
At this point, it's I think it's too difficult to call if I'm going to be.
Sort of completely honest with you we don't really know.
How.
How much compression theres going to be in existing home sales.
Over the next sort.
Two or three months and so we're trying to be cautious I think the important thing.
That we remember and we keep our people focused on is this is a time, where there's market turbulence in the way you win when there's market turbulence as you have.
Our maniacal focus externally on your clients on your referral partners and you add referral partners and given that we're only about 3% of the.
Real estate closing the home closings in the country.
We've got lots and lots of.
Sort of white space in the market to pick up so.
We're working with our <unk>.
Our agents, both our corporate agents in our franchise agents to increase their referral partner marketing activities that doesn't happen overnight, but it does happened pretty damn fast.
And also yes.
Mark Miller can just talk he spent out on the road and talk to lots of franchisees, Yes, Hey, Matt how are you doing.
I was just going to add them.
I think you know we were out on the road doing four big regional conferences with our with our franchise owners and I sat down and talked to over 100 of them for sure.
Just ask them, what their questions and concerns where at this point.
Great. Thank you very much that's all I got you you did a great job of answering my other questions in the opening comments. So thank you for the color and best of luck.
Thanks, Matt It's Matt.
Our next question comes from Paul Newsome of Piper Sandler. Please go ahead.
Good afternoon, and thanks for the call.
Maybe just one more run off of this.
New business issue.
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With the corporate agencies shrinking a little bit.
And other effects.
It seems like folks are familiar with some of the stock are very focused on this idea.
Ultimately the new business P Snapple renewal piece.
And maybe even not the productivity piece will.
Markedly slow.
And if you could just kind of maybe focusing just on that piece of again I know you've talked about it already but.
It just seems to be where we.
Getting the most questions.
Yes, Paul This is mark junior what I would say to that is we're not singularly focused on driving corporate agent head count exact we've said specifically, we're going to focus on productivity with those agents, but what we do want to do is add to the total producer count between both corporate and franchise. So we talked about this program to add.
AG producers into the franchise network talked about 30. This year were going to continue to do that.
On a go forward basis, and what we've seen is those producers have been very successful.
We responded to Matt.
The housing market headwinds out there our agents are doing a really good job combating that with taking additional share from their referral partners.
As well as cross selling their existing book working their cancelled policy list. So our agents are doing a very good job of being agile in what is a challenging macro environment, but the fact is as everybody has to have insurance, regardless of whether you're in the middle of the housing transaction or not we've got the inflationary environment right now where it's generating some additional shopping.
Behavior, and Thats, an opportunity for us to take additional share in the marketplace.
So.
Paul you might be interested in this as we as we've talked about as we think about.
Growing total producer head count and the focus being in the franchise channel.
When we win an existing agency hires a producer they.
They produce on average.
One and two thirds the production of a new franchise. So you think about that if if if we add 200 franchise producers out in the field next year, that's the equivalent of adding about 320 new franchises.
So we've learned we've learned some.
There's real leverage and.
And we're applying that where we're going to get the biggest bang for our Buck.
Makes sense, that's maybe a little bit nitpicky, but I noticed that the lower the lower range.
Contingence and the guidance went down a little bit is there anything behind there.
John It's a small number but just curious if there's anything there.
Tony.
Yeah, I'm sure you've seen the macro P&C environment carriers are having some real profitability challenges I'm sure you saw some of the notes that have come out. This week. There is some uncertainty in that environment of whether.
It's going to be in the top end or the bottom end of that range. We would expect probably at this at this point, it's closer to the bottom end of that range, just given the profitability with the carriers.
Daily with the rate that they're taking right now and through next year, we'll start to see that normalize over the longer term, but that's where we're at right now.
And then last question and then I'll, let somebody else asked but I wanted to ask about the elevated bad debt.
I understand where it's coming from.
But you know should.
Should we anticipate that that remains at elevated level, given what you're doing with.
Both are approved you count franchise as well or.
Does that snap back to kind of a more normalized level.
Yeah, I think in the new term in the near term, you'll you'll continue to see that be elevated as we work through the rest of that backlog that the age of that backlog has come down. This year. So we're pleased with the progress that we're making there is still some work to be done so youll see that remain elevated in the near term and then over the intermediate.
To get to longer term that would normalize back to historical levels.
Thank you very much for you to help us really appreciate it.
Yes, Thanks, Paul Thanks, Paul.
Our next question comes from Ryan Tunis of Autonomous Research. Please go ahead.
Yeah. Good evening, just one for me.
We've been reducing incorporate.
To what extent is.
The expense base that we're seeing this quarter indicative of all the action.
And we've taken through Q I'm, just I'm trying to figure out what the right expense base line might be.
And then the fourth quarter.
That's how I would plan for that for the expense growth in the fourth quarter.
Yes.
Thank you.
Our next question comes from Thomas.
K B W. Please go ahead.
Hey, guys. Thanks for taking my questions.
So I guess continuing on the expense topic. So the employee compensation expense line increased about $5 million sequentially. I think you called out a few hirings and other initiatives.
Is there anything in there this quarter that was good.
Could be considered a one timer or has that number more run ratable.
Yes, I think.
Mark Miller I talked about our service levels in our in the prepared remarks, we added a bunch of service head count during the quarter to get us back up to the levels that we wanted them to be I think the level that you see it at here probably makes sense on a go forward basis, you won't see big increases from corporate agent head count and the associated management overhead.
From that but scaling the back office service. Our Onboarding teams is we're going to continue to add.
Many producers and a productive environment that we can as well as our agency management team to help those franchises ramp up as successfully as possible. So I wouldn't say that there's anything necessarily one time and the compensation from the quarter.
Yes. This is mark Miller I would just say on Mark Juniors comments about service.
Last quarter, we talked about we needed to ramp up the service levels, we achieved that during the quarter and so.
We ended with close to 600 service agents, so thats, what youre seeing come through.
We're at the level that we need to be at right now, but we will need to take it up slightly.
As volume grows but we can also start to dial things back with automation. So we're trying to find that perfect balance, but thats, probably what some of the step up in head count cost is.
Okay. Thanks, and then actually just going back to the to the housing question as well so I understand that only about 20% of revenue is exposed to the housing transaction volumes.
But is it fair to think that a sharper.
Slowdown in housing does weigh on growth since that new business compounds into renewal overtime.
Yes, I mean, that's just that's just the arithmetic what we are doing.
We saw a very rough housing market in 2008 2009.
And at that time, what we said because we haven't seen anything like that in the history of our business. So he said well what.
What are.
Sort of analogous.
Circumstances that we can learn from and we looked at what happened during the dot com bubble burst.
There were companies that were successful in companies that failed during that time the ones that were successful.
Ones that were very outwardly focused on their clients on their markets. The ones that failed tend to be inwardly focused circling the wagons and we pursued that strategy. In 2008 2009 were pursuing that exact same strategy now.
It works.
Right.
I'm very proud of and I'm very confident that we will.
We'll come out of this adjustment in the market.
With a very strong renewal book.
Even if it's.
Werent blowing away all our sales records.
Still going to be a very powerful renewal book going forward.
I would just add we are still such a small piece of the market share. So that would be a really really big concern if we had 40% market share.
Less than 3%, there's still plenty of white space, even with our significant housing downturn, we just need to execute on our strategies and we have confidence that we can do that.
And I would just add on top of that I think there are other ways to generate volume that we're that we haven't discussed yet, which we've been pretty aggressive on our digital marketing efforts, which are pay.
Paid off very nicely.
Cross selling to the existing base people that only have one policy line with us picking up additional policies.
Going to customers that have cancelled over time and going back to them or ways that we're generating incremental volume from the existing base.
Got it thank you.
Our next question comes from Mark Hughes of tourist. Please go ahead.
Yeah. Thank you. Good afternoon I was wondering if you could talk about the total franchise trend up 17% in the quarter.
You've mentioned that you are more actively culling some of those are the ones.
Ones that you don't anticipate will will eventually go to operating status, but then I wonder if you could talk about that those those terminations without calling versus new sales, how it's adding up to.
17% growth.
Maybe just some sense of where that goes in coming quarters.
Yes, so we think about trying to secure all of our launches from the most recent pool of signing so that backlog that's now at 884.
The <unk> of that is where you're seeing the drag on the total franchise count growth as opposed to the operating agency count growth. We're focused on driving total operating agencies that are going to go out there and sell insurance policies. So that at 23% in the quarter. That's net of some relatively aggressive calling to make sure. We've got the healthiest system that we can.
57% increase in total agencies launched during the quarter with some strong Q4 trends. So we're seeing really good things in the data there from an operating agency standpoint.
And I'm sorry, what was the 23% number you mentioned.
23% as the total operating agencies growth, 17% as the total franchisee algebra.
Backlog.
Yeah anything about new franchises sold them when we think about the last couple of quarters versus the prior trend.
They've been really encouraging trends so a record this quarter 144 franchises launch that's a 57% increase over the prior year Q3, we've got strong initial Q4 trends there, it's all going in the right direction there.
Understood and then the the attrition within the operating franchises.
When do you think that are you kind of get over the hump and that's.
That starts to slow down or more normalized.
Yeah, So we're running a little hotter than our historical average now.
Talking about during 2020 in 2021 that churn being below where we really needed it to be.
So I would expect that for the near term to be still running a little hotter than the historical average of 15% over the intermediate to longer term I would expect that to trend back down to the historical average.
And then a final question the corporate head count.
Mark Jones Junior did you could you make a comment about where you would did you say that might be down slightly by year end from here did I hear that properly.
Yes, that's what yeah, that's what we said in our prepared remarks, we were at 411 at the end of the quarter. The expectation is it will be slightly down from that at the end of the year.
Thank you very much.
Yes.
Our next question comes from Mark Dwelle of RBC capital markets. Please go ahead.
Yeah good evening.
Back on the.
To remain kind of on the expense topic, you've gone through a number of different things I just want to make sure I kind of reiterate what I've heard there.
It seems like a little over a year ago, a lot of money, we spent to build out the.
Corporate franchise, corporate channel and add infrastructure and people there so.
Is what we're hearing today.
Kind of just a refinement of that or are you planning.
Planning to exit some of these locations closed down branches.
Are there charges associated with all of that process or is this just kind of allowing attrition or how is it actually being executed.
Yeah, Mark it's Mark Jones senior.
Probably a year ago or so.
On one of the calls.
Had indicated that we were seeing our absorptive capacity expand.
It was kind of a different sort of operating environment with COVID-19 and whatnot and the truth is we overestimated and that's on me I overestimated, what our real absorptive capacity was once we got back to sort of a normal <unk>.
Operating environment, we found ourselves.
With.
Capacities that exceeded our sales managements ability to manage it so what we had to do.
As we've got to get that.
That corporate agency.
Sort of back to a level of attractive profitability.
And in order to do that we've got to take out the capacity, that's losing US money. We're in a situation, where we're kind of rebuilding our management bench a little bit.
But we don't anticipate.
We don't anticipate.
Sort of any other.
Like location consolidations or closings, we've we've done a little bit of office consolidation in Austin, We combined we had two offices there we put all the people together in one now.
And that actually proving very hopeful.
We had a small number of producers in Las Vegas.
That's not a particularly attractive market. So we took them out but all of our other locations. We continue to be committed to those locations.
<unk> committed to the business there, we just and so I don't anticipate that we're going to see.
Sort of any big charges or anything like that coming through it's just a matter of we got to sort of finish.
The kind of the cleansing of that corporate organization, because you know my eyes were bigger than my stomach.
Okay. That's helpful.
So two.
Maybe some of that bit then in conjunction with one of the prior questions as we look at the employee compensation expense.
I guess the traffic in the quarter was on the one hand you've added.
To flesh out the ranks of the service staff, but on the other hand, you've reduced some of the producer and presumably some support people staff.
Associated with them and that the net of that is the the overall growth in the.
The expense line or compensation expense, although the sequential and year over year basis is that not the right way of interpreting that.
Yes, that's fair.
Was there was there any expense you've had some changes in the senior management ranks recently.
Were there any expenses in the quarter are to be anticipated associated with any of that.
Well there is there is a little bit of severance, but that is not material in and of itself.
So a little bit, but not a lot.
Okay, and then lastly, maybe you've already answered this just already on the on the G&A side, there weren't any any unique G&A related expenses associated with either the staff up or the or the staff down as appropriate.
In the quarter.
No.
Will on a go forward basis continue to add service head count in the areas, where we think it makes the most sense right now our San Antonio Service Center is a fantastic location for us. So we're taking additional space there to grow there. It's a fantastic demographic for our service agents they do a fantastic job.
So we will continue to see real estate footprint expansion there from a service perspective.
Nothing else from a corporate sales real estate expansion expected in the near term.
Okay.
And then lastly, with respect to contingent commissions.
We're there.
Where the rather large ian losses.
In the quarter.
That you anticipate having a greater negative effect on.
The cumulative total for the year for this year's contingents I know they don't necessarily carry into next year, but if you.
Any refinement to the calculation there relative to how we were thinking about it.
Say previously.
Probably not specifically related to in most of those contingency plans include caps for the catastrophic.
Losses, but the losses have also been so tough for these personal lines carriers throughout the year that if you're already over the loss ratio percentage Hurricane doesn't help you get there, but also it doesn't really hurt you if you're already not earning it.
Like you mentioned, it's not it doesn't have any carryover impact into 2023, and we should hopefully see the pricing take hold over the next year or so and we can get back to kind of historical average level of contingencies.
Okay.
I think those are all my questions. Thank you.
Thanks Mark.
Our next question comes from Pablo <unk> of J P. Morgan. Please go ahead.
Hi, Thank you.
So first question I had was the gap between year on year growth in policies enforced in written premiums has been increasing over the past several quarters.
Is that gap, a fair representation of the benefit of pricing and I guess, perhaps exposure and do you think that gap to widen further in 2020 three or are we sort of passed the peak there for most of our pricing and exposure perspective.
Yeah. Good question Pablo So you can see that total written premium holding steady at that 42% I think that gap between total written premium growth in policy in force enforced growth is all is a fair indication of the pricing inflation that we're seeing in the market I think it's important that we and we take credit for being in the right spot.
<unk> and the insurance distribution value chain, where you know when the carriers need to take rate to increase their profitability, we get that raise on our on our entire book and when it's a soft market for them.
And they don't need to take rate, we typically have good profitability and high contingencies. So you probably do see that gap between <unk> growth and <unk>.
Total written premium growth.
Into 2023, but we would expect that that too is pricing.
It starts to normalize again level back often and certain shrink.
Got it that makes sense.
And just a follow up on contingent so.
Given all of the pricing actions being taken by the underwriters seems like you know that'd be my assessment is that personal margins should improve in 'twenty three over 22, right, but probably not to where they wanted to be longer term.
If that scenario comes to pass, but it would be fair to assume that your contingents in 'twenty three might be lower than what otherwise be a normal year.
Yeah, I think that's a fair assessment I, probably would not expect.
Super Great contingency year as compared to historical averages in 2023, I think the carriers, probably still have some more work to do on pricing before they get their profitability in a spot where they're gonna be willing to pay big bonuses to brokers.
So I wouldn't expect a blowout year and contingencies in 'twenty three.
Okay, and then last one for me it's a broader question, it's about the sort of the pivot from corporate to franchising and I think Mark Jones Senior get mentioned, you know upfront expenses and the ramp up time as reasons for moving away from corporate right on a relative basis.
So the question is that several years ago, you used to disclose a.
Segment margins right and I think at that point corporate spending about a 20% EBITDA, which in the context, that's pretty good.
But just given you know what you've done to date and all the discussion about it but is it fair to assume that that 20%. This you know significantly worse today and maybe part of the reason why you're moving away from corporate on a relative basis.
Yes.
Okay.
And the reason being just you know.
Terrific.
Pasadena, Bob served an envelope.
We're in the business of allocating finite resources right. So if we're going to allocate an hour of our time and a dollar of our money we want to allocate it where we're going to get the best return.
And we are improving returns in our corporate business by taking the actions that we're doing now but.
Again, if you sort of stand back and think about it in the franchise channel. There is theres not a lot of cost infrastructure that we have to carry cheat generate revenue theres cost infrastructure.
The structure, we carry to maintain that revenue.
Service, but basically in the franchise business people pay us to come work for Us and then generate.
And generate revenue for us so it's a it's a hell of a deal.
And it's not it doesn't consume the same kind of capital.
And you can move faster than you can.
Then we can in our corporate agency now.
That wasn't always the case when that franchise business was subscale the economics were very different but we know now.
We know now for example, if we're going to take someone out of the corporate channel.
Like.
I said in my remarks.
Out of the nine people that we took that we put into.
The franchise channel over the last couple of months six were in the top 10 agencies.
For production there are super productive agencies.
We know that when we move we help franchises add producers caused us a little bit but it doesn't cost us we're not carrying the payroll expenses and office expenses and all of that stuff.
For those producers and we know that there are roughly 1617 times as productive as an entire new franchise. So you know what we're doing is we're looking at what are the longest levers that we can pull to get the best return.
For an hour of our time.
A dollar of our money.
Got it that makes sense mark thank you.
Okay.
Our next question comes from Josh Shanker of Bank of America. Please go ahead.
Yeah. Thank you for taking my question.
I'm just curious of the corporate franchise corporate agents, who are no longer with the platform.
Many of them, who left going to become franchisees or are the I guess initial nine who set up those are the best and brightest and there'll be finding more.
Yeah, Josh This is mark so you don't get to sale out of our corporate job and buy a franchise.
You got to go through our approval process, if you've proven that you can't sell in the corporate.
Position, where you've got the most access to resources and youre not going to be a successful franchise.
But we have plenty of very successful corporate agents that would like to buy a franchise that we control the timing of that and give them specific targets on what they need to do to buy a franchise and we see a really good pipeline of that in the coming year.
And just in terms of our on campus recruiting value proposition, it's pretty dynamite. When you can go on campus and say we have.
Basically an entrepreneurial program with our company you come work for us like a three year paid partnership.
And you.
You can be your own business sooner and get on a path to a sort of a seven figure income or net worth over the next decade.
Spectacular value proposition.
And so the the.
The 100, or so corporate agents, who didn't open franchises, we should assume they are basically gone.
For all intents and purposes.
Yes that that group that decline from Q2 to Q3 number in corporate agent head count and those are people that are out of the system, except for those nine that we talked about the <unk> franchise.
And we have literally just started just started moving people into franchises. So.
This is new but the early results are super good.
Very good and then I guess it was asked but maybe.
You got a little more color is there anything you can tell us about the newly signed a fran.
Franchisees in the quarter, if we take the 144 launches.
Track that from us.
Outstanding signatures, I guess that gets us to about.
Even where the number is but I assume.
You've added a lot of new signatures and you've called a lot of thing assures is there any magnitude you can talk about in that term.
We're not going to talk about specifics there, but I can tell you that the pipeline for new agencies remains very strong. If you look at the personal lines market, if you're working for one of the big captives and they don't want to write insurance in the area that you live in you are effectively out of a job. So our value proposition plays really really well in this market for <unk>.
<unk> professionals. So we have a very strong pipeline of new franchises that are both signing now and that we think will continue to sign through 2023.
Well. Thank you for answering my questions I appreciate it.
Thanks, Josh.
This.
A question and answer session I would like to turn the conference back over to Mark Jones for any closing remarks.
We appreciate everybody's time, thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Okay.
Okay.
Yes.
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