Q1 2024 Goosehead Insurance Inc Earnings Call

Participants

Dan Farrell; Vice President - Capital Markets; Goosehead Insurance Inc

Mark Jones; Chairman of the Board, Chief Executive Officer; Goosehead Insurance Inc

Mark Miller; President, Chief Operating Officer, Director; Goosehead Insurance Inc

Brian Pattillo; Vice President - Strategy; Goosehead Insurance Inc

Matt Carletti; Analyst; Citizens JMP Securities, LLC

Brian Meredith; Analyst; UBS Investment Bank

Michael Zaremski; Analyst; BMO Capital Markets Equity Research

Andrew Kligerman; Analyst; TD Cowen

Tommy McJoynt; Analyst; Keefe, Bruyette, & Woods, Inc.

Mark Hughes; Analyst; Truist Securities

Paul Newsome; Analyst; Piper Sandler

Scott Heleniak; Analyst; RBC Capital Markets

Pablo Singzon; Analyst; JPMorgan Chase & Co.

Presentation

Operator

Good day and thank you for standing by, and welcome to the Goosehead Insurance First Quarter 2024 earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded, and I'd now like to hand the conference over to Dan Farrell, Vice President Capital Markets. Please go ahead.

Dan Farrell

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 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.
And we refer you all to our recent SEC filings for a more detailed discussion of risks and uncertainties that could impact future operating results and financial condition of Goosehead. We disclaim any intention or obligation to update and revise any forward-looking statements except to the extent required by applicable law.
And I would also like to point out that during the 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 period to period by including potential differences caused by 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 recent 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 Goosehead.com. Now I'd like to turn the call over to our Chairman and CEO, Mark Jones.

Mark Jones

Thanks, Dan, and welcome, everyone, to our first quarter call. I'm very pleased with the progress we've made toward our goals, personal lines, insurance distribution is a quintessential long tail business. I tell people all the time that it is not a get rich quick business. It's get rich over time, but Staybridge business driving substantial change in our company generally takes many quarters to achieve, but those changes when made tend to be very sticky and sustained.
I am pleased to report that our hard work over the last year and a half or more fruit in the first quarter. Franchise producer headcount has begun growing again. We ended the quarter with 1,963 producers. Our recruitment efforts to support franchisees that want to add. Producers are going extremely well with a total of 168 producers being placed in existing agencies during Q1 as a reminder, when an agency adds a new producer on average, it improves the productivity of everyone in that agency.
So helping our franchise partners add producers remains an incredibly long lever for us and an important area of focus. Our focus on enhancing the quality of our producers is also driving very large productivity gains. 1st year franchise productivity is up 86% year over year, but the gains are not limited to that cohort.
Our existing franchises have delivered 19% same-store sales growth in the first quarter on the heels of 23% same-store sales growth in the fourth quarter. Our franchise network currently accounts for 78% of our premium volume.
So productivity gains here can really move the growth and earnings and yields over time. We're also proud to have continued to deliver strong margins through smart cost discipline and maniacal focus on productivity. We believe all of these enhancements to be structural and will benefit our business for years to come.
As I prepare to hand off the CEO. role to Mark Miller, I'm very happy with the capabilities of our senior team and the way they're working so effectively together well, we're excited for these wins in the short term we're facing some temporary headwinds. We are operating in the hardest insurance market and macro environment we've experienced in our 20 plus years in business.
That being said, we know that that insurance is a market that cycles between hard and soft and these cycles impact, product pricing and availability with derivative impacts on client retention. Historically hard market cycles. Last two to four years, our current cycle has been amplified by the COVID black swan event, but we have reason for optimism as carriers report gains and profitability resulting from rate increases to cover inflation, impact on claims costs as well as product rationalization.
When even California's insurance regulators allow carriers to price more rationally. You know that the first steps toward market normalcy are close at hand. An example of how this can affect our business in March we saw same-store sales increases about 107% in California.
There is a positive to the temporary market challenges we face in strengthening the long-term health of our business because we have been forced to level up our game enhancing and hardening our skills and adding to our competitive arsenal. We are seeing very temporary challenges in our retention rates, but are highly confident we will return to our historically high retention as we progress through the current market cycle.
While we navigate the current environment, we're committed to continuing to deliver on our earnings growth through aggressive cost management and careful scrutiny on where we invest a dollar of our capital and our time, our smartest shareholders. And these are the bulk of our largest investors understand the dynamics of our business, our structural improvements and our transitory challenges invest for the long term and know these temporary headwinds will have a trivial impact on our long-term results.
I'm pleased to announce that our Board of Directors has authorized a substantial stock buyback plan, which we will utilize as we see fit to take advantage of market dislocations you'll hear more about this later on the call.
I believe we are better positioned today to deliver on our long term goal, which is becoming the largest distributor of personal lines insurance in the United States during my lifetime than we have ever been in our company's history. We will continue to remain maniacally focused on what we do best deliver world-class service for our clients, deliver the best agent experience and bringing the most favorable and attractive client risks available to underwriters at our carrier partners.
Thank you to our team for delivering on another successful quarter. And with that, I will turn the call over to our President and Chief Operating Officer, Mark Miller.

Mark Miller

Thanks, Mark, and good afternoon, everyone. to summarize operations in Q1 I'll provide updates on three key areas, franchise productivity, commission retention and producer headcount. First, let's dive into franchise productivity. The franchise network now accounts for 87% of our total agent count and 80% of new business production. After a 30% increase in franchise productivity. In Q4 2023, we saw an even stronger 42% increase in Q1 of 2024. This improvement was led by an 86% increase in our less than one year franchises.
We know 1st year productivity strongly correlates to long-term franchise success. So we believe our newer vintage of franchises will perform very well for many years to come. We have had a relentless focus on quality over quantity for the past year targeting candidates with the desire and strong skill set to grow a scaling multi agent business. We're starting to see signs this strategy is bearing fruit as we continue to launch higher quality and faster ramping new franchises.
If you dive into what's driving the increased productivity, it's primarily an increase in the number of referral partner leads per agent with the challenging insurance environment, putting downward pressure on close rates. The only solution to drive productivity is to get more leads.
And the best way to do that is by marketing to referral partners going into Q4, we doubled down on our referral partner marketing strategy. These efforts take time and they had some impact on Q4, but they are the primary driver of Q1 productivity growth as a reminder, our agents have access to an exclusive tool that shows them the production data of every loan originator in America.
These mortgage professionals all have an insurance agent. They refer clients to, but many are frustrated with that experience. Some refer business to a captive agent who only has one offering and may not be competitive. Others referred to an independent agent, but they're frustrated by the turnaround time on proof of insurance, which in cost closing, delays to set agents offer more value to these referral partners than any other agent and history, our value centers on three components choice.
We have the most robust product offering in the industry to make sure we find clients the right coverage at the right price speed we have a service team dedicated to servicing these referral partners, which means we can get them proof of insurance in under an hour partnership. Our local agents will partner with loan officers to market to realtors and generate more business.
The challenging home insurance environment and higher interest rates have made our value proposition to these referral partners more pronounced than ever. We're also providing more support and training to our agents on executing this strategy than ever before. For example, over the past two quarters, we have been sending out sales leaders into the field to go execute on half day referral partner visits with our agents.
After one of these field visits, we generally see a greater than 75% lift in the number of referral partner leads. That agent gets over the following month. In Q1, we saw 27% year over year improvement in the number of referral partner activations. This was the best quarter on record. We believe these investments will allow us to sustain high levels of productivity for years to come.
What's more exciting is that as the housing market improves, these new referral partners will send a higher volume of leads to our agents. And as the insurance market improves, our agents will close. Those leads at higher rates, leading to increased productivity we are incredibly encouraged by the trends in the franchise productivity. As a reminder, these predictivity gains do not immediately materialize on our revenue line. They will, however, boost revenue as policies renew in the 2nd year as royalties contractually go from 20% to 50%.
Second, let's dive into commission retention because of a combination of inflation, higher reinsurance cost and unprecedented weather activity. Insurance underwriters experienced some of the worst results on record in 2020 and 2022 and 2023 to fix that carriers have taken aggressive price increases changed underwriting guidelines and decided to not renew many policies.
Nowhere is this more pronounced than Texas homeowners insurance, our largest concentration of clients, Texas homeowners insurance went up over 20% in 2023 over twice the national average rate. These rate increases have led to unprecedented shopping activity. In addition, in Texas, there are a few large captive carriers who haven't raised rates as aggressively and are losing billions of dollars.
These losses are not sustainable, but the increased shopping activity and mispriced captives have led to a decrease in client retention in addition to carriers who have been under extreme financial distress, significantly lower commission rates, which is having a near term negative impact on our commission retention. Importantly, the carriers who are truly partners such as progressive, Sage, sure.
Safeco and Mercury, among many others, have taken a long-term view and not impacted commissions at all these carriers know that agents have a long-term memory and they want to maintain a great reputation so that they can start growing again when the time is right.
The good news is we see no impediment to being able to get back to our historic retention levels as the market heals, Texas is generally a more flexible state that will allow insurance carriers to make the changes they need in order to open back up for business. Many carriers are moving to higher deductibles and depreciable route schedules to create a product where they can be profitable as our carrier partners open back up and the captive carriers raise rates, we believe our retention will go back to 89% plus.
Third, let's dive into producer headcount growth. We continue to believe that helping our existing franchisees. Add producers is one of the longest levers in our business. Helping source a new producer for an existing franchise provides incredible value to our franchises and is very low cost for us. Every new producer added to a high-performing franchise is the equivalent of launching almost two new franchises.
Additionally, when a new producer is added, we see productivity of everyone else in the franchise increase. Our scaling franchises added 168 producers in the quarter through a combination of our corporate recruiting program and their own sourcing efforts. Producers per franchise ended the quarter at 1.7 compared to 1.6 in Q4 and 1.51 a year ago.
Our team dedicated to recruiting franchise producers now totals 17. We expect this team to help us add several hundred more producers to the franchise network this year. As a result, we believe overall franchise producer count will grow from current levels, and we will see an increasing number of agents per franchise.
Franchise producers ended the quarter at 1,963, up from 1,957 in the fourth quarter. This represents the first sequential producer growth in the last six quarters. One great example of an agency adding agents quickly is the Gary Miller agency out of flowery branch, Georgia.
Gary has no relation to me launched back in March of 2020, and he has been a part of our agency staffing program since inception Gary has hired six producers in US agency. As a result, he's had great success utilizing this program, particularly with the producer Zach Miller Hong.
Over the quarter, Zach produced approximately $15,000 in new business revenue per month, which is around 2.6 times higher than the average producer in Georgia. And we will continue to assist Gary in recruiting top talent to his agency as his hiring needs continue on corporate, we've had tremendous success with college recruiting and have locked in the majority of signings for our summer class.
We expect to end the year with at least 375 corporate agents. Many of these agents do their time at corporate as a paid apprenticeship. They come in for a few years learned to be an expert at their craft, develop a large referral partner network, gain leadership experience and then go launch a franchise.
This opportunity is allowing us to attract higher caliber talent than ever before. One example of this is no attachment, no. I joined our Denver corporate office in August after graduating from the University of Denver.
He immediately found success activating new referral partner relationships and started generating over $20,000 per month in revenue within three months. Now I know is in its 7th month, is now generating over $30,000 per month in revenue and continuing to grow.
No likely learn over $175,000 in its 1st year out of college. And you will have many compelling Goosehead career options in the future. This opportunities unrivaled on-campus, and we continue to recruit top talent to join an industry that has historically struggled to do so recruiting this level of talent and then launching them into franchises remains one of our largest competitive advantages. We will continue to capitalize on this strategy and grow our corporate team up to our absorptive capacity.
To summarize, in Q1, we created structural changes that are here to stay. We're incredibly excited about the gains in franchise productivity and headcount growth. We know the market headwinds will eventually abate. And when they do, we believe we are perfectly positioned to rapidly and real accelerate revenue growth. We're extraordinarily confident we have the right strategy and the right team to execute our long-term vision of becoming the largest distributor of personal lines insurance in our founder's lifetime.
With that, I'll turn the call over to Mark Jones junior to give more color on our financial results.

Mark Jones

Thanks, Mark, and good afternoon to everyone on the call. In the first quarter of 2024, we began our growth reacceleration phase total revenue core revenue, new business, premium growth and franchise producer count all accelerated sequentially over the fourth quarter of 2023.
On top of that, we generated more cash than in the first quarter in any year in our company's history, we have placed a tremendous amount of scrutiny in every aspect of our business within our control and made strategic decisions to minimize the impact of forces outside of our control.
Quarter-end total franchise producers were 1,963, up from 1,957 as of year end as Mark Jones mentioned, our existing franchises added 168 producers into their agencies, growing our producers per franchise for the fifth consecutive quarter to 1.7 as a reminder, adding a producer to an existing agency typically drives the production equivalent of two new agencies.
Our agency staffing program has been delivering strong results, which should drive a virtuous cycle of continued momentum in the franchise business. Each center franchise onboards a successful producer. They become more confident in the program and generate cash flow to fund the next producer and overall growth of their agency.
As a reminder, each time a producer is added to a franchise. It improves the productivity of everyone in that agency. This remains an incredibly powerful tool for future new business growth. Corporate producers at quarter end were 292, up 6% from the prior year period.
We are excited about the health of our corporate team, and we're now in a position to onboard a new class of college recruits over the summer. We've already locked in a significant portion of our summer class with approximately 65% of planned hires having already signed their offer letters. We expect by the end of the year, our corporate agent headcount will be over 375 which sets us up to drive further acceleration in new business production in 2025.
Mark Miller discussed some of the challenges we have faced in the carrier environment and how those have impacted not only new business generation but also retention rates. What Avenue we've taken to combat those impacts is to increase our marketing efforts to drive additional lead flow because our close rates have seen a temporary decline. We need to generate more of the top of the funnel to fill the gap in the first quarter in the face of cyclical lows in housing activity.
We generated a 31% increase in lead flow per agent over the prior year period through a combination of increased share of wallet with our existing referral partners, new referral partner activations and lead flow diversification from strategic partnerships as a temporary headwind to product availability inevitably abates, we believe there is significant upside to productivity through converting a higher percentage of this increased lead flow.
Total written premiums, the leading indicator for future revenues grew 28% over the prior year period to $819 million this includes franchise premium growth of 32% to $650 million and corporate premium growth of 15% to $169 million.
First quarter was the second consecutive quarter, we observed an acceleration of new business premium in both distribution networks with franchise new business premium up 19% and corporate new business growth up 11%.
But building momentum in new business premium is being partially offset by the continued slowing of our renewal premiums due to declining retention rates related to the temporary market challenges as carrier profitability is restored through a combination of pricing increases and modifications to underwriting models.
We expect that our client retention will progress back towards our historical long-term average of 89% we've made significant investments and improvements in the quality of our service function that give us confidence in our ability to drive increasing client retention as the carrier market normalizes.
Total revenues for the quarter grew to $64.5 million, representing 11% growth over the prior year period, with core revenues of $58.8 million, representing 13% growth over the prior year period, both accelerating sequentially over the fourth quarter of 2023.
As we previously mentioned, a larger and accelerating portion of our core revenues is being driven by the franchise network with 60% of the first quarter's core revenue coming from royalty fees compared to 55% in the first quarter of 2023. We expect this trend to continue as franchises onboard producers and reduce the productivity gap between the average corporate producer and the average franchise producer.
This has a lag effect on revenue growth rates as we recognize only our 20% royalty fee in the first term of a policy, which steps up to 60% in each subsequent term. Policies in force grew 13% versus the year ago quarter as the temporary declines in retention rates are muting the impact of improved new business generation.
We expect to see a reacceleration in the policy in-force growth rate beginning in the third quarter of this year. Contingent commissions for the quarter were $2.7 million versus $1.9 million a year ago. For 2024, we are assuming contingent commissions to be roughly 35 basis points of total written premium. We are expecting approximately $1 million of contingent commissions in the second quarter compared to $4 million of contingents in the year ago period.
Longer-term, we expect to see contingent commissions returning to the historical average of 80 basis points of total written premium. However, we are remaining cautious and prudent in our near term forecasting as the timing and pace of the recovery of profitability for carriers, a major driver of contingent commissions has uncertainty and is not entirely within our control.
Cost recovery revenue for the quarter was $2.5 billion compared to $3.5 million in the year ago quarter. For 2024, we are expecting cost recovery revenue to decline moderately from the 2023 levels as we have dramatically improved the health of our franchise network, resulting in fewer franchise terminations and less accelerated recognition of initial franchise fees for GAAP purposes.
It is important to remember that this changes nothing from a cash basis as we collect franchise fees at the time of training and they're non-refundable at that point, but we are required to recognize the revenue over a 10-year period or the life of the franchise.
Adjusted EBITDA grew to $11.7 million in the quarter compared to $10.2 million in the year ago period. Adjusted EBITDA margin for the quarter held steady at 18% compared to the year-ago period. We continue to expect total margin expansion for the full year as we remain focused on cost management to mitigate the bottom line impact of moderately lower revenue growth expectations for the near term we expect the majority of the margin expansion.
For the year to occur during the fourth quarter as our class of new corporate agents ramp up production, the accelerating franchise new business from the fourth quarter of 2023 converts to more profitable renewal business and the timing of year over year contingent commissions as a result of increased business in various geographies.
We have now met certain state tax Nexus thresholds, which result in additional state tax filings. Because of these additional state tax filings. Our significant deferred tax assets produced large state deferred taxes, it resulted in a current period benefit for future state tax deductions.
As of March 31st, 2024, we had cash and cash equivalents of $51 million our unused line of credit was $49.8 million and total outstanding term notes payable balance was $75.6 million. Operating cash flow generated in the quarter was $11.9 million compared to a use of cash of operations of $639,000 a year ago.
Our free cash flow generated in the quarter was $9.1 million compared to a use of cash of $4.2 million in the year ago period. As a reminder, the first quarter generally represents our seasonally weakest quarter of the year from an earnings and cash generation perspective, given the uncertainty in the carrier product environment and its temporary impact on client retention, we are revising our guidance for the full year.
As a reminder, our philosophy on guidance is to be as transparent and accurate as possible. We guide to what we actually believe we will achieve for the year for the full year 2024 total written premiums placed are expected to be between $3.62 billion and $3.82 billion, representing 22% organic growth in the low end of the range and 29% growth on the high end of the range.
Total revenues are expected to be between $290 million, and $310 million representing 11% organic growth in the low end of the range and 19% organic growth from the high end of the range. Adjusted EBITDA margin is expected to expand for the full year. The reduction in the high end of our guidance largely incorporates the experience we've seen in Q1.
The low end of our guidance ranges incorporating the possibility of continued temporary decline in retention rates and performance of the renewal book. In the near term, we've made significant structural and foundational improvements to the core business that we believe will continue to drive performance for many years to come.
The insurance market has a long history of hard and soft cycles, and the current challenges we are facing are transitory. We remain incredibly excited about the future of our organization and have more confidence in the underlying operations than ever.
Our balance sheet flexibility and strong cash generation provide us with additional options to create shareholder value. Our current net debt to trailing adjusted EBITDA is just 0.3 times. And over the last 12 months, we've generated operating cash of $63 million.
Historically, we have favored returning significant excess cash to shareholders in the form of special dividends. However, we believe there is a significant dislocation in our current valuation versus our long-term earnings growth expectations.
As a result, our Board of Directors approved a $100 million share repurchase authorization in connection with an upsizing of our existing credit facility. The upsized facility will include an expansion of our revolving credit facility to $75 million and an increase of the total term loan of $25 million, while maintaining the existing pricing grid and tenor of the agreement.
Given our current valuation, we believe that shares, if you said stock represents an attractive buying opportunity, I want to thank our leadership team, our service team, our sales agents, our carrier partners and our shareholders for their support as we continue on our path to industry leadership.
With that, let's open the line up for questions. Operator?

Question and Answer Session

Operator

(Operator Instructions)
Matt Carletti, Citizens' JMP.

Matt Carletti

Hey Thanks. Good afternoon.

Mark Jones

Hey Matt.

Matt Carletti

My first question is a little bit asking you to look at your crystal ball, but you obviously talked a lot about that product environment. And I think that's that's no surprise like anybody paid attention to personal lines. I think is talking about it a lot. It just where do you think we are kind of in that that process and you guys see it on the ground day-to-day?
Does it feel later innings, are you starting to feel that the underwriters are thinking they're in a good spot in terms of pricing and getting changes in terms of conditions into the book and you expect an improvement in the not-too-distant future? Or do you think it's a little more middle innings and some time?

Mark Miller

Hey Matt, this is Mark Miller. How are you doing?

Matt Carletti

Good. How are you?

Mark Miller

I'll start and then I think Brian and I are probably closest to it because when the carrier executive teams come in, we usually talk to them, I would say break it down by home and then auto or auto than home, I would say auto is improving more quickly towards the end of that cycle.
And we're starting to see some of the major carriers come back in on the home side, our expectation was it would start to recover by kind of this time about and it's been slower than our expectations would be we still have carriers that are in the market and offering product at reasonably good prices. But the broader broader coverage of places like Texas are pretty tough right now.
Still. So we're waiting and seeing, but I don't know whether we're at the end of the cycle, but I would say we're towards that at least the middle of it and coming out of it. But Brian, what's your opinion?

Brian Pattillo

Yes, I think that's exactly right. And you look at Progressive's results on who you have been posting mid 80s combined ratio. They're looking to dial-up growth now and they're starting to dial back restrictions. Some of the bundled carriers are waiting to dial back auto restrictions. Until the home is in a better place and yet to Mark's point, I think home is a little bit still wait and see, especially in markets like Texas. So I think probably we're middle innings on home later innings, on auto.

Matt Carletti

That makes sense.

Mark Miller

We've seen a big correction in like California gateway, which gives me some optimism.

Matt Carletti

Yes, yes, that makes perfect sense.

Mark Jones

They are multi and we are seeing some early we are seeing this is Mark Mark Jones, Matt. We are seeing some early progress in that. The like, for example, Progressive Home, their combined ratio has come down substantially from its size, which doesn't necessarily mean that we're at the end of the game yet, but it is at least it's a light at the end of the tunnel and we don't think it's a train.

Mark Miller

And one of the ones that moved quickly on I think there get there. So it's different by carrier, some moved quickly and raise their price and they're becoming profitable now and other ones relate to the game. And like we've said in the calls, there are a handful of captives that are mispriced compared to everybody else that have not raised price yet. So it kind of depends what they do.

Matt Carletti

Got it. And then if I could ask you if that was the right way to ask this is that I guess, like you provide us with '24 guidance and you've got to get a little more conservative. And I thought you gave a lot of really good color on why that is.
I'd imagine you have some form of '25 guidance internally. And as we think as you think through this being temporary and understanding your model in terms of how health premiums convert and revenue and things like that. You've given kind of the change in the '24 guidance over the last quarter or so was there any change in that kind of internal view of what '25 might look like, same better or worse?

Mark Jones

No, Matt, this is Mark Jr. Looking at 2025, we're going to be putting a lot more players in the field here over the next few months as we onboard the new college class and our 1st year corporate agents are ramping up just as well, if not better, in many instances as they have in the previous year. So we feel very good about that. And our existing agencies are continuing to hire.
You saw that producer count number grow sequentially for the first time this quarter in a while. So we feel very good about the new business generation looking into 2025. And our expectation is as the product market normalizes, you actually start to get a tailwind from client retention as opposed to as big of a headwind as it has been right now.
So we're not really have any changes in expectations for what 2025 or longer than that looks like. And the other thing is as carriers restore profitability, the contingent commissions number start to look very attractive as you grow your premium base and start to get a higher percentage of that as contingencies, which are, again, 100% earnings.
The other point I would make is we've made comments in the prepared remarks that we've taken steps to kind of rationalize the cost base to make sure that we don't sacrifice bottom line earnings lower kind of dealing with a short term had another revenue growth number. Those all of those costs don't immediately get put back in the P&L in 2025. So you come out of this leaner and more effective as soon as you get to a more normal product environment.

Matt Carletti

Super helpful. Thank you for the color.

Mark Jones

Thanks, Matt.

Operator

Brian Meredith, UBS.

Brian Meredith

Thank you. A couple of them here for your first one. I'm just curious of looking at and maybe this has to do with the fact that you're getting some commission rate cuts. But if I look on corporate call it core revenues divided by, call it corporate written premium and the same thing for franchise called fee divided by the franchise kind of premiums. It's kind of been consistently declining over the last couple of years. I'm curious, is that because of what's going on with with commission rates? Or is there something else going on there?

Mark Miller

Yes. So the commission rate as part of it and we mentioned, it's just a couple of carriers that's not a broad scale issue. A lot of it is just as the mix shifts from the corporate side, driving the majority of not necessarily majority, but the majority of the growth in new business production to the franchise side driving the majority of the growth that naturally just causes the lag from premium to revenue growth considering it's 20% in the first term of a policy and 50% subsequent to that.
That's really the largest driver of that. And we talked a lot about over the last couple of years, the rationalization of the corporate team after we kind of peaked at that 506 headcount, that just causes a little bit of a short term drag your total aggregate new business production, although it made material improvements to the health of the corporate team, it was the right decision, but we expect that to continue to grow into the future, which will you'll see that flow into renewals in the following years.

Brian Meredith

Got it. With the mix of auto versus home effect, that 2% would assume auto commissions are lower than home?

Mark Jones

We don't see a big difference in commission rates between product lines where that would be impacted as just a carrier do not renewing a policy, whether it's a home or an auto. So if your auto is retaining better because carriers feel like they've got better pricing to the extent a disproportionate amount of your book as a whole that could impact you there, which ours is 55% home.

Brian Meredith

Got you. And then my second question, just curious, looking at your corporate sales agents with greater than one year tenure, you that continue to decline. Is that going to be bottoming out here soon? And I appreciate you're going to have a lot more corporate agents at the end of the year, but I assume that's going to also meaningfully impact productivity overall, if you've got a much lower percentage of when your tenured agents are greater?

Mark Jones

I mean, we talked about this a little bit in the last call. As you continue to launch out franchises and promote people into management out of that tenure bucket, it naturally kind of places a cap and what that productivity looks like because you're you're taking your best, most productive agents and putting them into a different distribution network, either on the franchise side or in management and so I don't necessarily expect to continue to see the slide that we have seen this year.
But you've got to remember looking at this year versus last year, we just had started the franchise launch program. And so you've got 35 people at this point who are included in that number at the beginning of last year, who are now not included in that number. So as your year over year trend normalizes looking into 2025, you shouldn't see that kind of impact. You may see a little bit more of that this year as we continue to pump out more franchises in the year-over-year numbers, look a little skewed.

Brian Meredith

Great. Thank you.

Operator

Michael Zaremski, BMO.

Michael Zaremski

Hey, good afternoon. Maybe going back to the comments about some carriers, putting your commissions, I guess just look in hindsight, it kind of makes sense being an analyst because the carriers are seeking to improve their profitability.
So I'm just kind of a this is a lever, but I'm just kind of curious then. So how much of this is just a new trend that just surprised you all and you're baking into your guidance in case other carriers do the same. And then on the contingents, I'm assuming that this would impact contingents. So unless the carriers eventually went back to the old better and our commission structure by why would contingents go back to their historical levels over time.

Mark Jones

Mike, just to add to your comment on the guidance, we are not expecting to see anymore of that. This was very isolated situation in the market, looking at some more color on that. It also shouldn't impact the contingent commissions because those are not carriers that we were receiving contingencies from that in 2020 through or we're expecting to in 2024.
So it doesn't impact what the medium or longer term outlook on contingencies look like. And also, I would argue that the vast majority of carriers understand the benefit of having an independent agent that knows how to distribute your product very successfully. And this is a very shortsighted move.
I'll just jump on on that comment. For a second. First of all, I think this is short term in nature. I've not seen or had any discussions with any other carriers. These are two carriers that we as we mentioned in this in the call that were financially distressed. They came to us and said we are in a financial position where we need to back away.
So this was Homeowners of America and Hippo, and they wanted to pull out of the market and they wanted to reduce commissions as a result of it. One of those carriers dramatically changed the contracts for our clients underneath it as well. So it's not even the same paper.
I haven't seen that out of any other major carriers other than those two and the market naturally adjusts to the carriers that have the right paper at the right price. In this case, they don't. So the market's correcting itself. So when I say it's temporary, it starts the business starts to move to other carriers.

Michael Zaremski

Okay. That's great. That's great color on that. Just switching gears a bit, and I I believe you teased us out in the prepared remarks. But as Tom said, and I ask because I feel like it's somewhat complicated. So when we look at the the revenue guide it versus the premium rate guide, you have a much bigger decline in the guide on the revenues.
And so is the are you expecting that more of your revenues are more of your premium going to come from the franchise segment from some new producers so that that's driving that delta or so, Mark, which I can offer has a slower commission?

Mark Jones

Yes, that's exactly right, Mike. So with the performance we've seen thus far this year, the franchise side of the business is doing a really, really great job of continuing to drive productivity. And our expectation is that will happen for the remainder of the year as well. And so you feel the impact of that immediately and premium. That's what you see the premium guide move is not as large as the revenue guide move, but that doesn't have the same impact on revenue, right? It's $0.2 on the dollar, so you're exactly right on that.

Michael Zaremski

Okay. Got it left. I guess lastly, I don't know how much you could say, but there's been rumblings in the trade rags insurance trade rags about a very large large auto insurance carrier. Maybe maybe the third largest in the U.S. potentially looking to enter the IIA. channel. I don't know if you could say anything or if that's something that you've heard two or maybe is it because maybe that could help in terms of the product you all have to offer here? your clients?

Brian Pattillo

It is Brian. Yes, our belief, I mean, we've seen this trend happen for years now where there's been movement both on the captive side and on the direct side towards the independent channel. If you look at some of the big captives have made big acquisitions and done moves to focus on a choice model.
And then similar and direct companies that really thought to go direct to consumer has pivoted going to a dual distribution model really falling progresses moves. We know that, yes, what progressive cause the Robinson client writes $200 billion of the market that preferred home auto customer that retains performs well.
I think every auto carrier wants more of that type of business. So I can't speak to any specific carrier, but we do believe that the trend will continue and that more of the direct carriers and captives, we'll embrace independent distribution to go after that segment of the market.

Michael Zaremski

Thank you.

Operator

Andrew Kligerman, TD Cowen.

Andrew Kligerman

Hey, everybody, and I apologize in advance for the background noise. Just some before I get into my questions. Can I just ask a couple of quick statistics? One being you're citing 89% retention. Where was it this quarter?
And then with regard to on Hippo and Homeowners of America, what percentage of your your book of business are those two carriers. I mean, it kind of sounds like a real nonevent when I hear the names of the two companies.

Mark Jones

Hey, Andrew. So client retention for the quarter 85% of it on your first one on touching on your second question there, we had been in business with Homeowners of America for a long time. So over a period of time, we've built up a really nice partnership at a relatively sizable book of business, and they've made decisions that they're going to make a lot of that book of business has rotated off to other carriers as naturally the value to the client and the agent has declined in that product. So just naturally that happens, it may not have seemed like that's a super big carrier, but they were a relatively important partner for us in the early days.

Mark Miller

And so that had policies like Texas, they were they were really big Hippo and he'll act for both large for us.

Andrew Kligerman

I see. And the commission reduction, how much was that?

Mark Jones

Yes, I think we're going to get into specifics on the rate, but it was enough for us to call it out because the quarter.

Andrew Kligerman

Okay, fair enough. Thank you. And then with regard to expenses, I saw that G&A only went up 8%, which was great. But the employee comp was up 14% US You listed out a lot of reasons in the press release, but I'm wondering if you could have tempered that a bit more and be on maybe clarify a little bit why it was up that much, just given the pressures on revenue?

Mark Jones

I mean how we secure our future revenue growth is by continuing to hire and onboard really, really talented people. And so we've said forever, our secret sauce is the human capital we're able to bring to the table that's so differentiated in the industry.
So we believe strongly and continuing to do that. So well, we can manage the cost bar very well with G&A on that side of the business. I don't want to limit who were hired and who we're bringing into the system because that's going to be a short-term decision that's going to have a long-term impact.

Andrew Kligerman

So that makes a lot of sense. And then just lastly, there was some new legislation on reducing commissions for real estate agents. Does that concern you at all? Should that have any pressure on you as you move forward. I mean, we've seen some recent interest on the franchise side of real estate brokers wanting to get into insurance as a side business.
But I haven't seen any other negative. So our business. So the fact that they're seeing lower commission isn't, but I mean, home sales will be what home sales will be and you'll still get your lead Is that how you're thinking about it from?

Mark Miller

Correct. It doesn't change our relationship with the with the real estate brokers and real estate volumes going to be a real estate volume is, but I think we're getting an upsized percentage of the leads that come out of the industry and growing well.

Mark Jones

And we're also up we're also targeting for referral partners. The highest volume of realtors, and they're not going to be the ones that are affected. It will be the lower productivity, realtors still get squeezed. And so that will have much less effect on us.

Michael Zaremski

Got it. Thanks so much.

Operator

Tommy McJoynt, KBW.

Tommy McJoynt

Hey, good afternoon. Thanks for taking my questions here. Hugh, you gave a good explanation on sort of the bridging the change in the guidance on the revenues. Just want to make sure I understand and kind of the lowering of the lower end of the range on the premium side. If you could just kind of I've kind of bridge that what changed there in terms of was it rate policy count, number of producers just explaining that premium change.

Mark Jones

And that's largely a function of retention. And so if we don't get the home market to stabilize as quickly as we would like there is the opportunity for client retention to continue to slide a little bit more throughout the year. And now we have seen the peak of what we believe that do not reduce from carriers is that we should be on the back half of that.
But really it's a function of client retention being slightly lower than what it has historically been. So certainly if that returns faster than what we are expecting, you could see that that premium number be closer to the high end of the range. But I would rather be conservative in the forecasting.

Tommy McJoynt

Okay, got it. And then just the other question on the expense side, and it sounds like you may have touched on this, but do you have visibility into what equity based comp should be for the rest of the year? And then as we think about kind of into 2025, is there any reason that it should either step up or step down year over year, just given what you know about vesting schedules related to that.

Mark Jones

Yes, looking at Q1 is your best estimate for what it should be that that full year. So typically, the first quarter is when you get new options awarded up to the managing directors here. And so then that's a similar number to that would be recorded in each quarter of the year.
Looking at 2025, there'll be additional options that are awarded to the senior team and at which point you would see a step up in equity based compensation. Just as a reminder, our philosophy on that has been kind of between 1% and 2% of the share count is an appropriate level for the dilution because of Black-Scholes valuation, given the volatility in our stock tends to overvalue the actual economic reality of those options awarded to the employees.

Tommy McJoynt

Got it. Thanks.

Operator

Mark Hughes, Truist Securities.

Mark Hughes

Thank you. Good afternoon. The new do not renewals go into that 100% premium retention measure?

Mark Jones

Yes, they do because that would be premium that was on the books last year that that will not be on the books this year. And so that premium retention is it is a trailing 12 number. And so it's kind of got a lag effect on what exactly is happening in the book. But yes, they are included in that.

Mark Hughes

Okay. And then you did talk about the dinar settlement. Do you have a rough breakout for how much of your business comes from brokers versus a mortgage lender?

Brian Pattillo

I would say definitely the majority mortgage lenders on we worked quite a bit with realtors on. Yes, but I would say the majority, I mean, I think probably that 75% plus come from lenders if you look at our referral partner business altogether, which is roughly two thirds of our new business, yes, probably 75% from lenders, maybe 25% from realtors.

Mark Hughes

Very good. Thank you.

Operator

Paul Newsome, Piper Sandler.

Paul Newsome

Good afternoon. Thanks for the call. I wanted to revisit the guidance change. I'm just sort of reading down sort of the pieces and I would have thought that it sounds like retentions of problem commissions went down and some but that should have been offset by the fairly large price increases we've seen for home and auto.
I guess the question is, is there another piece in there that we're missing? And I was thinking are we lost, for example, are we actually thinking more policies in force growth will slow as well, as part of that equation?

Mark Jones

Paul, I think we said in our prepared remarks, we would expect policy in force growth rate to reaccelerate in the third quarter of this year, which we do believe that will be the case, which means you do have one more quarter of deceleration in that number.
That is still, I think, relatively strong growth. It's not what we've historically done, but we fully believe we'll be able to drive back to kind of our historical numbers on policy in-force growth rate. The revenue guide is really a function of client retention as a temporary very temporary headwind.
We expect that that will improve ideally by the end of this year, but certainly in 2025, at which point it becomes a tailwind. But the new business productivity, especially on the franchise side of the business is doing very, very well. And that's why you see the premium number not move as much as the revenue number.

Paul Newsome

So just to be a little bit, the was there actual had a sort of a push out of the decelerated growth the quarter before that was unchanged from the prior guidances?

Mark Jones

Now that's on that number is unchanged. It's just a function of the amount of policies that are renewing. And so maybe it's moved by a couple of weeks, it's not necessarily moved massively up. But if you just think about how much of the book is home and how challenged the home environment is. Now it's challenging to keep those clients on if they're getting 100% price increase.

Paul Newsome

And my second question we're were talking about Protivity for the agents. Is that an average number? Or are we looking at sort of like cohorts? And I would imagine cohorts as they age become more productive regardless.
So I was wondering if there's any way to sort of tease out what is sort of actual productivity of zero. So if the average 3rd year is much better than the average of the maybe that's happening. But maybe you could talk to that if we because of getting rid of your four agents would automatically improve productivity just from an average perspective, but maybe is there an actual, but by cohort on Protivity improvements that you can talk about?

Mark Jones

Yes. Yes, definitely. And so if you look at the productivity disclosures, that we provide, you'll see it's broken down into less than one year and greater than one year agents on both the franchise and the corporate side.
On the corporate side, the tenure of that bucket is actually a couple of months lower this year than what it was last year, just from timing of onboarding. And so the ramp up of those agents is just as good as it was in the previous years. We feel very good about that 1st year corporate agent productivity on the greater than one year bucket, we talked about a little bit already that transition of corporate agents into franchises or into management.
And so if you adjusted for those items, you can do the math, it's around 19% productivity improvement if you kept those same agents that launched franchises in that greater than one year corporate bucket. So we are seeing very strong productivity improvements, I believe in the corporate side, on the franchise side of the business, it's even more profound.
And so if you look at just the same store sales numbers, which has nothing to do with the amount of agents that you're calling this franchise existed this year and this franchise existed last year, Q4, that number was 22%. It's up again, another 19% in Q1. And we feel like that's going to continue to grow. So we feel very good about the productivity of the agent force and we don't necessarily see a cap on that in the near term, especially if you get some product tailwinds.

Paul Newsome

Great. Appreciate the help as always.

Operator

Scott Heleniak, RBC Capital Markets.

Scott Heleniak

Yes, thanks. Just wanted to I just had a quick question on the franchises. You talked about adding hundreds more on the franchise producers. Is that mainly going to be to the existing franchises like like you have now? And can you talk about the franchise conversions or others?
So on track to I think you had said before 30 is that is that still you didn't mention in the prepared remarks. I was just wondering if that's still expected to be the case.

Mark Jones

Yes. So we I think we've talked about this year in 2024, it would be more like 20 to 30, not necessarily that full 30. Remember, we started the year with less corporate agents in 2024 than we did in 2023. So it was just a smaller pool to pick from as that team grows, which it will in 2024.
We indicated on the prepared remarks that we'll be over three, 75 by the end of the year. So we feel great about that. But producers into existing franchises, yes, that will be hundreds more this year. We're going to continue to launch more high-quality franchises. I think the vast majority of your producer growth is going to be coming out of producers into existing agencies, which obviously just as a reminder, creates much more productive capacity than adding a new franchise.

Mark Miller

About half of those half of those people being added to the franchises come through our recruiting program that we've established, which I said has 17 recruiters now doing nothing but full-time recruiting for franchises. The other half come from franchises recruiting on their own. And then we are less worried about the quantity of new franchises that we launch and more about the quality of the franchises. And so we're just being very selective about people. We're leading into the franchise network right now and being very selective about the states. So we're very state-specific right now and where we need to grow geographically.

Scott Heleniak

Got it. Understood. And then just a quick question, Mark, you referenced of the margin expansion comment, you said most of that will come from Q4. Do you still expect margins to be up in Q2 in Q3, year over year? I know the majority is Q4, but do you have any anything going out on Q2 and Q3?

Mark Jones

Yes. Just the timing of contingents in the second and third quarter compared to the previous year, you could see the total margin percentage down on a year-over-year basis. But if I look at the core margin, you should still get good scale out of it, although remember, we're about to onboard a significant number of corporate agents and that cost doesn't just hit as soon as they start, which is largely June, July, August, September.
A lot of those onboarding costs, licensing, things like that happened before they start. So you should see the compensation lines growing in the second and third quarter. And then you get nice scale as they ramp up their production throughout the summer and into Q4.

Scott Heleniak

Okay. And just last one, too, on retention. I know it's been talked about a lot and you're targeting 9%, you're 85 now. But is that is that being dragged down by what's happening in Texas? Is that it significantly different by state? And so have things left in one or two states and it kind of brings it up? Or is it just pretty pretty similar across the board?

Mark Miller

Yes. I mean, all states have a bit of a retention issue compared to our historic numbers. But Texas is by far our largest state home is our largest product in Texas, is really suffering right now just from availability of product and one indicator of what's going on is on Texas. Premiums are up.
I believe the number is 23% year over year. If you look on a national average, they're up about 10% or 11%. So it's up twice as much in our shopping activity mirrors that. So we look at how many people we have asking for re shops, they get upset when their price goes up by a certain amount, that's a trigger point.
So 20% I want to shop. And so shopping activity for the number of policies is up twice as much. And a lot of that is coming out of Texas. And so until the home carriers come back into the market, we're going to fight retention as hard as we can, but it's going to be a struggle.

Scott Heleniak

That's a good detail. Thanks a lot.

Operator

Pablo Singzon, JPMorgan.

Pablo Singzon

Hi, good evening. I just wanted to follow up on the commission disclosure.
When were they exactly is just so that we have a better sense of when the impact started and when that should be fully in the run. And then I guess related to that, what part of the book is Technisource non-Texas? I know corporate is mostly Texas franchising. As I think of for Texas, but if you could just give us an update on the next year. Thank you.

Mark Jones

Yes, I think though the whole book is about 54%, 55%, Texas. So it's still a big disproportionate amount of sorry -- 45% Texas. So it's a disproportionate amount of Texas, and we really started to feel the effects of those commission impacts here in the first quarter.

Pablo Singzon

Okay. And then my second question, I was a bit surprised by the positive comments in California. Just given all the announced exits are positive indicators in homeowners and I know some of those comments have been made by captive insurers, right? So maybe not directly relevant, but in your view is what's happened in California, the dislocation there are net positive or negative?

Mark Miller

It's definitely a net positive. So our business has gone up significantly in California and we have the product availability. So our agents and have told me that they haven't seen an environment like this before in a long time.

Pablo Singzon

And then last, sorry, if I missed the buyback program, will that be financed by operating cash flow or the increased debt capacity I just wanted to get a sense of how that will be funded? Thank you.

Mark Jones

Yes. It's a combination of the both. And so in our prepared remarks, we mentioned that the term loan has been increased by $25 million. So that transaction closed today. So a portion of the buyback plan will be funded by that. A portion of that will be funded by operating cash flow. And as needed, we will draw down on the revolver capacity to fund any additional share repurchases.

Pablo Singzon

Got it. Thank you.

Operator

Thank you. That concludes today's question and answer session. I'd like to turn the call back to Mark Jones for closing remarks.

Mark Jones

Thanks, everyone. We appreciate your participation on the call.

Operator

This concludes today's conference call. Thank you for participating, and you may now disconnect.