Thank you for standing by. This is the conference operator. Welcome to the Goosehead Insurance Second Quarter 2022 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. 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 a more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of Goosehead 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 excluding 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 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An archived version will be available shortly after the call ends on the investor relations portion of the company's website at gooseheadinsurance.com. With that, I'd like to turn the call over to our CEO, Mark Jones.
Thanks, Dan, and welcome to our second quarter of 2022 results call. I'll provide a summary of our key results in the second quarter, and we'll 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 runway for growth. The 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 as a member of our management team.
I've known Mark for 25 years since I was a partner at Bain & 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 that 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 towards 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. Profitable growth that maximizes our competitive strength and long-term economics.
We are not a growth at all costs company, and we are at an enviable place in our company's life cycle where we can better leverage the strategic assets we've built 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%-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 and revenue growth, not withstanding a slowdown in the housing market and 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've recalibrated our hiring in the corporate channel for the back half of 2022 with the objective of maintaining our capabilities as opposed to adding bulk in that channel that causes margin compression. This transition process will be evolutionary as opposed to revolutionary to ensure we protect the strategic asset we've built in our corporate agency, but it will be deliberate and should enhance our efforts to expand margins. We also continue to develop our Digital Agent capabilities. We are leveraging our Digital Agent to drive client referrals and cross-sales and have seen 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. While the current macro environment remains a net headwind for our business, we remain confident in our ability to deliver for agents, clients, partners, and shareholders. We continue to focus on improving performance on our three key drivers of growth, client retention, new business productivity, and producer, and particularly franchisee growth. I remain encouraged by the current underlying trends we're observing. Client retention 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.
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 roll out 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. 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 700,000 households. These efforts are in the early stages, but are already providing tangible benefit to growth as we have seen sequential monthly improvement in this 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 home builders. During the quarter, we activated 23% more new referral partner relationships than the 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 lead in over 90 days was over 2.5 x the prior year. Encouragingly, our more tenured franchises are seeing year-over-year same-store sales growth as they improve their productivity and hire producers. At corporate, we continue to provide valuable resources on management, recruiting, and training as these tenured franchise owners scale their already highly successful operations. Moving to producer count, total franchises increased 30% and operating franchises grew 25% in the quarter. 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 begun 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 non-performing franchises account for less than 1% of new business, but consume 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 for 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 in 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 in 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 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 agents. 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 of 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-30s% 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 earn 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-20s% over the next few years and translate into very strong overall EBITDA growth levels while we sustain high top-line growth. While these expectations factor in the benefits of the digital agent to our current go-to-market strategy, cross-selling another referral business, they do not factor in any material benefit we could achieve from partnership arrangements over time. We're currently engaged in piloting and beta testing an embedded insurance strategy with a number of smaller partners to build our knowledge and operational capabilities in this area. We believe partnerships represent a significant long-term potential new growth vector for the company. I couldn't 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.
All right. Thanks, Mark. Good afternoon, everyone. I'm excited to join you today as the newest member of the Goosehead leadership team. While I'm 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. I've also been a Goosehead client for over 15 years, and I've been on the board of directors since the IPO. All those years ago, I would have never imagined just how successful the company would become. Early on, I could see that Goosehead was something unique and special. I became a client because I was frustrated with my existing captive insurance company. However, I stayed a client because Goosehead offered the best coverages at great prices, and the client service was amazing.
Now that I've been on the inside for close to 60 days, I've seen firsthand what makes Goosehead so special. Its culture, people, and technology. As I've made my way around the organization, I 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 of industry leadership. 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 and 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, management bandwidth, and overall absorptive capacity. We've seen encouraging results during the quarter in 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. I couldn't be more pleased to be joining Goosehead at this time.
The company that Mark 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 and $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-$10 million. However, we are seeing long past due rate increases from our carriers across the country, which will help their profitability over the long term. Our continued strong premium growth bodes well for future years' contingents as the plans typically restart at the beginning of each calendar year. Our franchises 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 a growing franchise count and increasing retention levels. At the end of the second quarter, operating franchise count was 1,344, up 25% from a year ago.
Our signed but not launched franchise count at quarter end was 997, down from 1,030 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 and 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 Q3 2022 franchise KPI data continues to trend well with July launches up 70% and strong indications of scheduled trainings the 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 hire 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 as healthy and necessary to properly run a high-performing sales organization. Consistent with previous churn, it accounts for less than 1% of our new business generation, but consumes substantial management resources. Corporate sales headcount 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 in 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 an expanding franchise base. Looking forward, we expect to manage corporate headcount 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 moderately down versus the June 30 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 increase in compensation and benefits is being driven by increased headcount across the organization, particularly in the hiring of service agents to manage our largest revenue stream renewals, corporate agents, recruiting and onboarding functions to continue our growth trajectory, and systems developers to ensure our technology is on the cutting edge for our clients and internal users. General 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 headcount 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, EBITDA margin expanded seven points in the quarter. Adjusted EPS was $0.16 versus $0.13 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 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 30, 2022, 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%-42%.
Total revenues for 2022 are expected to be between $194 million 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 challenges they are just recently addressing. As a reminder, the contingent commissions restart each calendar year, and a below average contingent commission year does not equate to weaker bonuses in 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 margin than planned. We do expect more significant growth in EBITDA and EBITDA 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. I 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 will hear a tone acknowledging your request. If 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. 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 a 19%-20% EBITDA margin this year, even when we're looking at lower contingent commissions in the back half?
Hey, Ryan, it's Mark Colby. No, I don't think that's the case anymore. As we said, you know, I think we're going to lose about five points from contingent commissions alone on our margin this year. I think kind of mid-teens is a more realistic expectation for this year. Again, those plans restart every year. Kind of looking forward to next year again and, you know, going forward past that, we feel like we can continue to manage our core revenue a 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. I guess a bigger picture margin question. You know, again, a quarter ago with normal commissions, we were thinking we could maybe do a 20% margin this year, but then in the prepared remarks, you said you're hoping to do mid-20s% over the next few years, which is kind of what you guys were doing when you IPO'd. I know in the past you've talked about a longer-term aspiration of 40%+. Yeah, I'm just kind of trying to reconcile that with the mid-20s%, 'cause a few years would seem to me to give you guys plenty of time to reach operating scale. Thanks.
Yeah. Ryan, it's Mark Jones. The sort of mid-20s% is kind of an intermediate guidepost. We believe that the business at sort of maturity is a 40%+ EBITDA margin business, and that's ultimately what we're working toward. We may see stronger margins in the medium term as we shift the mix of business more heavily toward our franchise channel and sort of constrain the investment in corporate. We're trying to be conservative. I'll just tell you that up front. You know, sort of mid-20s% in the intermediate term, ultimately, we're very confident that we can churn out a 40%+ EBITDA business at maturity.
Yeah. Just to follow up on that, Ryan, I think at maturity the timeline can vary, but it's you know, several years, 10+ years out for us. I think also, you know, growth's not gonna be 30%-35% with 40% margins in the long term. There's always that trade-off between growth and profitability. We feel like we can grow 30%-35% for several more years, even considering the macro factors that we're facing now. You know, it's definitely a trade-off we can make, but we feel like with the ultimate goal of maximizing profit dollars that, you know, 30%-35% growth with margins in the mid-20s% is the best play for now.
Got it. Then just lastly, thinking, I guess, about the actions you're taking in the corporate channel. You guys used to disclose the separate income statements of each. If I look at 2021 over 2020, your total operating expenses grew by about $45 million, and about $17 million of that was from corporate channel comp and G&A. I guess what I'm saying is I would think that investing less in that channel would offer, you know, really cut into a lot of your expense growth. I'm just trying to reconcile that with, you know, what exactly is the benefit there. That's what I'm trying to understand. Thanks.
As you know, if you looked at that essentially product line profitability, you will see that the corporate channel is sort of breakeven. It's a breakeven enterprise. 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 management development. Strategically, it's a crucial part of our competitive moat. The question that you know sort of we need to answer is, okay, if it's not generating attractive margins, how much do we need to invest in this? 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.
If we're gonna allocate an hour of our time and a dollar of our money, you know, I think our shareholders, particularly this shareholder, would like to see it deployed where you're gonna get the biggest bang for your buck. Now, we're still gonna, you know, sort of invest in our corporate channel, but we don't need to grow it at the same rate that we have historically because we've, you know, we are at the scale we need to be.
Thank you.
Thanks, Ryan.
The next question comes from Matt Carletti with JMP. Please go ahead.
Hey, thanks. Good afternoon. I wanted to ask a question on the housing market. You know, it's been a topic of interest for some time, or I guess for a few months now, given kind of the macro headwinds and, you know, Goosehead's referral partnerships. Can you just kind of peel back the onion a little bit? Mark, I know you referenced a few numbers. I think I caught 23% more referral partner activations, a good number of reactivations, so forth. I was just hoping you could maybe put us in a franchisee shoes in terms of how they're going through their day.
Is this at the top of their list of concerns in terms of, you know, kind of the slowdown in housing activity, or is this, given some of the things you mentioned, a pretty easy offset for them and they got other things higher on their list that they're worried about?
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. Our ability to pivot is quite remarkable. You know, we can't pivot in 24 hours, but we can pivot in a very short period of time and pick up referral partners, and that's what we're seeing happen.
We, you know, our people are, you know, sort of extending their outreach efforts, and they're having success so that, you know, that the impact of an undeniable slowdown in the housing market is much, much more muted for us and for them.
Yeah, I think, Matt, you'd be surprised at just the number of leads a franchise needs to support their business. I think the average leads that they get per month for partners is about 10. If those or even, you know, worst case, they're cut in half, right? They're not having to go get 50 leads all of a sudden. They have to replace five a month, right? I think it's achievable. It does take some work and some time and some investments in developing those relationships. You know, we're very confident that, you know, we can offset some of the housing market pullback by just going out and grabbing more shares, Mark said.
Yeah. Great. Very helpful. Maybe, I don't know if this is related or separate or maybe both. Just on the Digital Agent, I'd be curious, you know, you've had it out there for a little while now, how are agents using it? Have you seen them using it as a tool to help offset some of these headwinds? I'm just curious, any update as to, you know, how they're embracing that as it evolves?
Yeah. You know, we're still developing best practices there. I think where we're seeing the most benefit is from our internal digital marketing exercises that we're doing, and we started doing those at the beginning of the year. We've seen month-over-month step function increases in that. They've performed way better than we expected. I think we're helping them, again, offset some of the pullback in the housing market by driving traffic to them through cross-sells and client referrals. I would say that's currently the most leveraged use of the tool.
Okay, great. Then one just numbers guidance question on the, I guess, the revenue guide. Obviously caught the, you know, the contingents is the biggest piece of that. If I'm doing the math right, the drop, the dollars of revenue guidance by $3 million-$7 million versus last quarter, is the right way to think about it that it's just all contingents and kind of the other components of revenue stayed the same or did those actually go up a little?
Yeah.
Contingents come down? 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. It's one of those things that'll affect us this year, but it will not, there's no sort of structural decline, which is why, you know, if you look at our premium guidance, we actually firmed that, notched it upward a little bit 'cause the sort of the core, the base of the business we continue to be really optimistic about. We don't set insurance premiums, the carriers do. You know, as you know, they got behind the curve with some, you know, some heavy losses thus far this year, and they're trying to catch up on those, and those affect us on the contingency line.
Whenever those loss ratios do turn around, and I'm confident that they will, we'll have 40% + more premium kind of loaded in the gun ready to be paid contingencies on. That's kinda how we're thinking about it overall.
Great. Thanks for the color. Appreciate it.
Thanks, Matt.
The next question is from Paul Newsome with Piper Sandler. Please go ahead.
Thank you for the call. This may be a bit of a dumb question, but how real-time should we think of these contingent commission effects, if we're essentially tying them to what's happening in the personal lines market? Are we talking about contingent changes that are really reflective of what happened in this last quarter or last year with respect to the profitability of the companies that you're writing for? Because I guess the corollary to that is if we have a particular view about what's gonna happen with those companies, and most of us have a view, that would shape our view.
A couple different-
of contingents, right?
Sure. So there's a couple different things that affect commission. A is kind of just like profitability. What drives profitability? It's how many losses they have, right? I think during COVID, 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. I think over, you know, the remainder of this year, potentially in the next year, you know, we'll continue to see strong premium increases. I think that'll help offset their profitability losses that they've seen recently. It's to be determined.
You know, I'm not an actuary. I can't, you know, say that, but I know that they've needed some premium increases for the last few years, and I think they're 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.
Paul, in terms of thinking about how does this impact kind of the outlook for us, so that is one. This is one of the reasons why we have stripped out core revenue, cost recovery revenue, ancillary revenue so that there's kind of visibility. We have control over the volume of business that we write. We don't have control over the, like, the underwriting profitability of that business. The carriers control that, to the extent that they control it. I mean, there's losses that are outside their control that impacts it. You know, we think the way to look at our business is to, you know, if you're to forecast out, you're assuming a normalized level of contingencies. What we've indicated historically was 80-85 basis points of premium.
Now, we may get to the end of this year and say, you know, that maybe that should be up or down just a hair, but it's not gonna move. It's not gonna move a lot. You know, if you're trying to judge the underlying health of the business, you wanna 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 $0.20 on the dollar for that. So there's a timing gap between when we generate the policy versus when we see revenue. That's why we sort of tell people, look at premiums over revenues to get a gauge for the health of the business.
No, I get that. I apologize. I guess I wasn't asking my question well. Most of us cover the insurance industry, and most of us have a view of the profitability of the major personal lines writers. Some of us are more optimistic than others. If, you know, I have a very optimistic view of, say, how Progressive and Allstate and all the other insurers are gonna report profitability, my question is how much of a lag time is there between what happens to their results in general and your contingent commissions.
Yeah.
Because the market has a view. Market has their views on that, and that might drive kind of what our view is on.
Yeah.
You know, profitability in the near term.
Yeah. Because we grow so fast, we get some new business bias in our loss ratios, right? Because we're selling a lot of insurance. You know, as far as the earned premium goes, like, we're always behind because we're writing, you know, growing our new business so fast. Probability of a claim happening on day 365 is the same as day 1. I think there's always gonna be some a little bit of drag there. All I can say is as these carriers continue to increase their premiums, like we've seen really starting this quarter, I think that will continue to help the story of their profitability.
Maybe another big picture question. In more color on the go-to-market strategies. To the extent, how much are you really dependent upon the housing market home insurance at this point? I would imagine that you have diversified that over time, but it's tough to tell as an outsider how much of that has changed over the last couple of years.
Yeah. We have such a large renewal book, Paul, 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, you know, all of our profitability is in the renewals. I think seasoned agents are more diversified as they build their book of business, and they're able to grow their business from client referrals. I think it'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, "Hey, you know, your leads are probably gonna drop a little bit if they 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.
Thanks, Paul.
The next question is from Meyer Shields with KBW. 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, but also mentioned some changing arrangements. If we can get some more color on that. More broadly, are you, given that so much of the contingents are out of your control, how comfortable are you with the current mix of contingents and core commissions?
Yeah. We continue to focus on what we can on new business there and it's really I can't get into the details of specific contingent plans, but those change every year. Given where the profitability was kind of during the negotiating season for this year's contingent commissions, quite frankly, we didn't have a lot of pull or negotiating power there. Hopefully that changes as the carriers become more profitable. We can negotiate more kind of guaranteed growth-based contingencies. Really we're focused on what we can, and that's 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 these smaller carriers too, I think, as we become more and more important to them as distributors in a larger percentage of their book of business, I think we'll have some more negotiating power there. But again, these are partnerships. This isn't 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 diversify our contingents within our carrier mix.
Okay.
I think kind of the way to think about five to seven years, kind of what we always talk about is how we think about it of percentage of premium. That's how we'll continue to think about it. Again, we'll have some more thoughts going into kind of for Q3, Q4 earnings on what those could look like, probably Q4 earnings as we give our guidance for next year.
Okay. No. That's perfect. That makes sense. Second question, 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 interest and the tax rate in the quarter?
Yeah. That was I think our effective tax rate this quarter was about 40%, which is usually we expect 10%-12% effective tax rate. You know, what happened was just some forfeiture of some vested options that reversed tax asset and triggered a larger tax expense than we would normally expect in a given quarter. Again, one time, we don't expect that to continue the rest of the year. Also, you know, a lot more earnings help increase the tax expense, unfortunately. Or fortunately, rather.
Yeah. Completely. Okay. The non-controlling interest, I know I struggled with this for a while. Is there any good way of modeling it or guidance that you would provide on that?
I don't think so.
Fair enough. Okay. Thanks so much.
The next question is from Mark Hughes with Truist. Please go ahead.
Yeah. Thank you. Good afternoon. The 31% launch growth in the quarter, is that synonymous with onboarding?
Yes, that is new franchises that went live during the quarter.
Yeah. 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 have seen a year ago?
Yeah. I think if you really kind of focus on the difference between our client retention and our premium retention, the client retention was 89%, premium retention was 95%. I think, you know, that delta is obviously going to be driven by a lot of the rate.
Got you. Then thinking about the growth profile of the business, if the corporate agents, they flatten out from here, that's driving roughly half your revenue, the new business commissions, the agency fees, the renewal commissions spring from that. If half the business, if the growth profile changes and is flat, and to the extent that your retention is less than 100, then that'll decline over time. Is it still?
It's not half the business.
Yeah, please go ahead.
It's about a quarter of the business. If you look at it based on premium, Mark, and that's the way you have to look at this. On the franchise side, there's a lag between when premium is earned and when revenue is earned. It's, you know, our corporate agency is becoming a smaller part of the kind of overall portfolio every year as our franchise business dramatically outgrows it.
Yeah. That, you know, and within the corporate channel, over 2/3 of our premium is coming from renewals, right? Those don't just go away. As we continue to add new business in the corporate channel, we can continue to grow there with, you know, flat or moderately down number of producers. We also expect increased productivity from those producers that we have as they mature down the kind of learning curve.
Yeah, understood. The new business adds to the renewals. Okay.
No, that's one of the reasons why kind of now is the time to be doing this. You know, we haven't been to a point historically where, A, corporate was at scale where they could support the franchise, but also their production was, and their growth was way too important to our overall growth story to be able to slow it down without, you know, slowing down the machine. Now, the overwhelming majority of our growth comes from our franchise channel. So we can slow corporate growth without materially slowing the overall growth of the business, but significantly helping with our margins.
Understood. Thank you.
Thank you.
The next question is from Pablo Singzon with J.P. Morgan. Please go ahead.
Hi. I just wanted to follow up on that last question about corporate versus franchise, right? If we assume that you flatten out this year, maybe you grow it in next year, but much lower than we were growing before, does that imply then that, you know, your the growth in the franchise count, which I think if I look historically, you know, over the past three years, it's been anywhere from 35-45, right? It's about 40% a year. Should we expect that to accelerate materially to offset the slowdown in corporate? Is that the right way to think about it so that you sort of land where you were before, which is 30%-35% growth?
Yeah, I think we'll be continuing to focus on our franchise growth and having some more margin to work with to make additional investments in the franchise level productivity, onboarding, recruiting of those franchisees. I wouldn't say we'd accelerate materially. I think, you know, continuing high levels of franchise onboarding will be key. Kind of more importantly, just improving their productivity will be where our investments are focused.
Okay. Second question is, I think Mark had mentioned that the 30%-35% expectation of premium growth includes the impact of the digital agent. I was wondering if you could sort of, you know, frame that out more for us or maybe provide some numbers. Like, so to what extent does the digital agent ultimately contribute to growth, right? I'd be curious to hear how you're seeing, you know, that technology helping your agent. Thanks.
Yeah, it's surely helping, not materially enough to give numbers on a call right now. Again, we're seeing step function increases every month and its contributions. I think, towards the end of this year, early into next year, it might be some numbers that are moving the needle.
We haven't assumed in any of the kind of forecasting a true sort of growth vector with that Digital Agent with an embedded insurance strategy and you know sort of a substantial number of carriers being able to provide quote all the way through to issue. That's not factored into any of our outlook, but we view it as a very real opportunity that we're putting significant effort behind and you know some pretty attractive you know sort of upward optionality, if you ask me.
Thank you.
Thanks, Pablo.
I'll now hand the call back over to Mark 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 and have a pleasant day.