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Thank you for standing by, and welcome to the Goosehead Insurance Second Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Dan Farrell, Vice President, Capital Markets.

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 expectations, estimates and projections of management as of today. Forward- looking statements in our discussion are subject to various assumptions, risks, uncertainties 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 on them. We refer all of you 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 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 period-to-period by including potential differences caused by variations in capital structure, tax position, depreciation and 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 In addition, this call is being webcast and an archived version will be available shortly after the call ends on the Investor Relations portion of the company's website at goosehead.com.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 President and CEO, Mark Miller.

Thanks, Dan. Good afternoon, and thank you for joining our Q2 earnings call. Before we begin, I want to take a moment to acknowledge the devastating floods that struck Texas earlier this month. As a company rooted in Texas, this is not only where we do business, but these are the communities where we serve. We are working hard to support our employees, clients and agency owners during this devastating time where tragically lives were lost. Catastrophic events such as these are unfortunately a constant reminder of why we exist. Our hearts go out to the families affected by this devastation, and our Goosehead team is here to support you. Here at Goosehead, we continue to pursue our goal to become the largest distributor of personal lines insurance in the U.S. in our founder's lifetime. We've steadily ramped our vast distribution network, which has grown to over 2,500 licensed agents and 200-plus carriers. Our growth plan centers around a few key strategic initiatives, supporting the accelerated expansion of our existing agencies, a strategy we've continued to optimize over the last several years, placing the right new franchise owners in the right geographies, expanding our corporate team to further support top decile agency growth, ramping new go-to-market motions through our enterprise sales and partnerships teams, developing new and maturing technologies to help us win the AI arms race and accelerate our path to industry leadership. I'm going to expand on each of these topics, and Mark Jones, Jr., our CFO, will provide more information about the quarter's results. First, our agency staffing program, which we call ASP, has been a highly strategic asset for Goosehead. Simply put, this program helps existing agency owners find talented agents to grow their franchises. 20 years of industry experience has allowed our recruiting function to gain unique insight into identifying the highest potential sales agent recruits. We have leveraged our knowledge to create an internal recruiting firm that is dedicated to sourcing top talent to put in front of our most successful agency owners. Since the inception of this program in Q4 of 2022, our agencies have hired over 500 producers sourced through this internal recruiting firm with 132 starting in 2025 and roughly 150 more slated to start before the end of the year. When an agency owner adds an incremental producer, the productivity of all agents in that franchise improves. They add accountability, share best practices and lead flow. The feedback we've received from our franchise community has been incredibly positive on this program. It allows our agency owners to focus on what they do best, capture lead flow and drive sales teams, allowing them to outsource a very time-consuming recruitment process to our trusted ASP team who presents them with highly qualified talent. One example of this in practice is Troy Cropp, an agency owner in Tucson, Arizona, who served as an Army Ranger and as a previous State Farm agent. In July of 2021, Troy opened his Goosehead franchise and has since grown his agency to 9 producers, 7 of which were recruited through the agency staffing program. Today, Troy Cropp is not just an agency owner. He's a sophisticated business owner with a $10 million-plus premium book and over 6,500 policies in force. He has been part of our most advanced agency training programs, most of which focus on business growth and has put those trainings in practice by acquiring 2 other agency books as well as opening a second office location with 2 more office locations in the pipeline. We're incredibly proud of the business Troy has grown thus far and look forward to seeing them continue to grow in our ecosystem. To find the next group of agencies that look like Troy Cropp, our franchise development team has built pipelines into new talent sources that we believe have the grit, intelligence and leadership capability to be successful in our ecosystem. First, we've developed a program to attract franchises from the veteran community. We believe former service members possess many of the intangibles that we know separate our top agencies from those in the middle of the pack. They're smart, determined and execution-oriented. And most importantly, they know how to follow a proven business model. As a son of a veteran, veterans are near and dear to my heart for the tremendous personal sacrifices they made to our nation, and many have proven to be excellent franchise owners like Troy. We have also recently rolled out a new MBA franchise development program. As we've discussed in the past, we want our franchise community to evolve from largely consisting of solo agent operations to a tight knit community consisting of more growth-oriented owners that have multiple agents with multiple locations. By leveraging our existing campus relationships, we can provide an incredibly compelling offer of business ownership for current or recent MBA graduates. This initiative includes an accelerated training program that allows for rapid ramp and sets them up to scale by leveraging their entrepreneurial business education. While we're very excited about our veteran and MBA initiatives, it is abundantly clear to us that the single best source of new franchise owners is our own corporate sales department. Our corporate sales agents are steeped in the Goosehead corporate culture and highly educated and experienced in the Goosehead business model. As a reminder, when a corporate agent launches a franchise, they are up to 10x more productive than the average new franchise launch and have a very clear path to a 7-figure income. To further support the growth of both the corporate footprint and franchise community in the right geographies, we recently expanded into Arizona with the launch of our Tempe office. This has been the most successful new office launch in many years. This location should help us seed new high-powered franchises in the western half of the U.S. that we might otherwise not have been able to reach with our corporate footprint. We're also now announcing plans to launch a Nashville, Tennessee office in the fourth quarter of this year. We've developed a repeatable blueprint for successful office expansion and plan to continue to leverage that in the most strategic geographies over the next several years. Over the past decade, we have refined a highly sophisticated go-to-market strategy that focused on corporate and franchise agents and building strong relationships with individual loan officers and realtors. This strategy has proven to be extremely scalable and highly profitable. However, for the past 2 years, we have been quickly developing a new sales motion that we believe will be a solid third leg of the stool. We call it our enterprise sales and partnerships team. This new group has grown exponentially over the last year and continues to accelerate. I'm excited to announce 2 additional strategic partnerships that we'll be launching from this team. First, Baird & Warner is one of the most prestigious real estate firms in Illinois, founded 170 years ago. They currently have more than 2,000 realtors, over 40 loan officers and a title operation. They're launching a Goosehead franchise inside their existing business that allows them to further reduce friction in the home buying process, provide better outcomes for clients and capture insurance economics. They generate over 10,000 transactions annually, which should allow them to scale rapidly. In the last month, we have also entered into a partnership with Fay Servicing, a large prominent mortgage servicer founded in 2007. Their partnership with Goosehead allows them to solve industry pain points and address the rising cost of home affordability by providing a robust portfolio of home insurance offerings to their existing clients. Fay's franchise has the embedded lead flow that could rapidly take them from a new franchise launch to one of the largest agencies in our system. While both of these partnerships are Goosehead franchises, we also have a robust pipeline of traditional partners who would like to offer insurance products to their client base, but do not necessarily want the complexity of owning and operating the business. Because we can provide multiple ways to engage with our tech-first platform, supported by agents nationwide, we believe we're the partner of choice for organizations looking to add value to their clients while capturing very compelling economics. I believe our industry will be profoundly impacted by the rapid development of new technologies, particularly in the AI space. The list of potential use cases for AI in our business is incredibly long. However, we're thinking strategically and focused on what we believe will generate the maximum return. First, we're already leveraging AI to optimize the client experience for our existing book of business while reducing the cost to service. Second, we will utilize our data and our carrier relationships to create the U.S. first direct-to-consumer marketplace that maximizes outcomes across the value chain. We want to create a frictionless process that stands true to our founding principles, placing the client at the center of our universe. Our data should allow us to be intelligent about matching carrier risk appetite with client demand to optimize outcomes across the value chain. And third, we expect to capture additional market share through pinpoint marketing campaigns to drive client referrals and cross-sells. We know that we provide a differentiated client experience, and we should be leveraging that to continue to drive new business and fuel future growth. We built a tech team with the human capital and the appropriate infrastructure that we believe is highly capable of delivering on each of the critical initiatives. Even with all the progress we've made in AI and tech, the foundation of our business hasn't changed. Great companies are built on great people. To date, we've been able to build a great business by attracting talent that doesn't exist elsewhere in the industry by having high standards for the quality of our work and by operating with the utmost levels of integrity. While our day-to-day operations may shift in the coming years, our commitment to our people will not change. We will continue to invest in training, coaching and leadership development that will take our already phenomenal talent to the next level. It has been a challenging fight for the last several years, battling a historically hard product and housing market, but we're coming out the other side, poised for rapid and profitable growth with full commitment to our goals. I would like to sincerely thank our employees, franchisees, carrier partners and shareholders. We're just getting started. I'll now turn the call over to Mark Jones, Jr.

Thanks, Mark, and good afternoon to everyone on the call. I'm extremely pleased with the work our management team has been doing and the substantial investments we have made in people, technology, AI and partnerships that is setting the foundation for our next phase of rapid growth at Goosehead. For the last several years, we have been delivering strong results through the most constricted product market of the last 50 years. As we look to the back half of 2025 and importantly, into 2026 and beyond, the landscape for underwriting demand and capacity is becoming increasingly clearer every day. The challenging product market has made us a much stronger company across all facets of our operations. We built a scalable infrastructure, invested in our management and human capital and developed the technology skill sets to be a company many multiples the size we are today. Mark Miller touched on the longest levers to continue to drive growth for our business. I'm going to touch on the economics of a couple of those items and provide an update for the quarter's results and outlook for the future. We've made strong progress on our efforts to expand our go-to-market strategy through our enterprise sales and partnerships team, the most rapidly growing division in the company. This team is highly nimble and strategic as it allows us to further insulate ourselves from cyclicality in the housing market and gain access to pools of clients that our traditional go-to-market strategy doesn't naturally reach, such as homebuilders and those not currently involved in a home closing transaction. This team is rapidly gaining momentum, producing 88% more new business in the second quarter than in the previous year period and growing 41% sequentially over the first quarter of 2025. We believe the growth curve of this unit has the potential to be both exponential on earnings and revenue. As Mark mentioned, we recently entered into a couple of new strategic partnerships that take the form of a franchise agreement. The benefits of these new partners will materialize in our P&L initially through new business royalties through our 20% share and then into renewal royalties, where our economics become really interesting at 50% of the commission value. We plan to continue to expand our partnership aperture through new avenues in the coming quarters and ultimately use these relationships as the most logical jumping off point of the direct-to-consumer marketplace for hard at work developing. In corporate, we have taken steps to align our physical footprint with the most attractive markets, quickly expanding into Arizona with the launch of our Tempe office, doubling down across the country in Denver, Columbus, Charlotte and Chicago offices and beginning the expansion efforts of our 13th sales office in the Nashville market. Our former corporate agents continue to be the highest quality possible franchise launches, hiring rapidly and setting new records for new business productivity. This strategy is one that our competitors cannot easily replicate because they lack access to the pools of talent that we have spent decades cultivating, the technology infrastructure that we have spent millions of dollars building and the deep referral partner relationships our agents develop while part of the corporate team. Our corporate sales team ended the quarter with 479 total agents, up 53% over the previous year, comprised of 379 traditional corporate sales agents and 100 enterprise sales agents. After multiple years of consistent total output, our corporate new business commissions is now growing at 13% compared to the prior year, the fastest corporate growth in the last 3 years, and we expect that to accelerate through the rest of the year. Franchise producers at quarter end were 2,085, up 5% from a year ago, and producers per franchise was 1.9, growing 14% over the previous year. As we review our franchise community, it's easy to identify which agencies are fully committed to growth, following the business model and hiring aggressively. Our top 200 franchises have nearly 4x as many producers per franchise as their peers. And as a result, they grow significantly faster. This elite group of agencies, just like Troy Cropp, as Mark Miller discussed, look a lot like our corporate offices, they build cultures of excellence, have high standards for production and quality, and they have big goals that they pursue aggressively. Agencies in our top 200 grew their new business by over 30% in the second quarter, and their gross earnings was also up 30%, allowing them to continually reinvest into growth. During the quarter, we launched 16 new franchises across 12 states. 8 existing agencies were terminated and 30 operating franchises consolidated into another existing agency. The data validates that the continued consolidation in our franchise network is a net positive. Over the last 12 months, the productivity of the purchasing agency increased to 21% as they can more effectively capture value from the existing books of business. As Mark Miller stated, the first place that AI is taking hold in our organization is the area that bears the most cost, our service team. We have built large language models that reduce complexity for our service agents, speed up the time to resolution for our clients and allow us to forecast service demand with great precision. For the first time in company history, we expect the cost of service delivery to be less in the second half of the year than it was in the first half of the year, all while continuing to improve the client experience. This allows us to further invest in growth opportunities and technology, which increases our ability to scale at a rapid pace. The next place we are aggressively pursuing new technologies is creating a true online choice shopping platform, what we are calling the direct-to-consumer marketplace. We believe the independent agent will always have a place in personal lines distribution, and we are committed to being a market leader in that space. We also recognize the tremendous opportunity in front of us to radically change how personal lines insurance is distributed in the United States. Through precise client segmentation and detailed risk matching models, we believe we can create a marketplace and that not only rapidly fuels our growth, but provides the best possible outcomes for our clients and our carrier partners. Deploying this tool first through our partnership channel allows us to ensure our carrier partners get access to the highest quality client base. This will require significant investment, but the opportunity presents an incredibly asymmetric upside case. Disruption is in our DNA, and we do not plan on stopping now. Finally, maximizing the economic value of our existing client base to generate referrals, cross-sales and identify gaps in protection in our clients' portfolio represents another significant growth opportunity that can be greatly impacted by AI. We now have over 1 million clients and over 1.8 million policies in force, meaning we have a significant and diverse captive audience who have placed their trust in us to present the most logical and valuable options for their personal lines insurance. Deploying technology strategically here can help us better capture full share of wallet with our clients, improve client retention and generate client referrals. Turning to our second quarter results. We delivered another quarter of growth and profitability with total revenue growing 20% over the previous year to $94 million, core revenue growing 18% to $86.8 million and adjusted EBITDA growing 18% to $29.2 million, producing an adjusted EBITDA margin of 31% for the quarter. We remain committed to a balanced approach of organic top line revenue growth with strong profitability. Our deliberate focus on organic growth provides high-quality and consistent earnings, builds real competitive advantage and has no dependency on cooperation from the capital markets to fuel our business. Client retention for the quarter saw continued forward progress. And while still at 84%, we're now seeing consistent basis point rises in retention over time. We are confident that the strategic actions we have taken, combined with greater product availability will result in an increase in client retention in the second half of the year, providing a tailwind to what has been roughly a 2-year headwind in growth and profitability. We also expect that our average commission rate will begin to increase throughout the remainder of this year and into 2026 as our mix of new business and renewals naturally shifts back to the admitted product and away from state-run insurers of last resort and more complex non-admitted product. During the quarter, we recovered $4 million of past due renewal commissions and royalty fees from an existing large carrier partner and increased our commission for all existing business. This increased commission rate should result in a benefit in our existing renewal book with this carrier of approximately $1.5 million for the second half of the year. Total written premiums were $1.2 billion for the quarter, up 18% from a year ago. This included franchise premiums of $959 million, up 21% and corporate premiums of $217 million, an increase of 6% from a year ago. As a result of continued consolidation in our franchise community, which we believe is very positive for the health of the entire network, franchise new business premiums grew 13%. Contingent commissions for the quarter were $4.5 million compared to $2.2 million in the previous year, an increase of 103%. We continue to maintain our forecast of 40 to 65 basis points of contingent commissions as a percentage of total written premium. However, there is a wide range of potential outcomes depending on carrier underwriting performance and catastrophic loss activity. Cost recovery revenue, which is largely initial franchise fees, was $1.4 million compared to $1.9 million in the year ago period. Policies in force at quarter end were $1.8 million, a 13% increase over the previous year. Adjusted EBITDA for the quarter grew 18% to $29.2 million, up from $24.7 million in the prior year period. Adjusted EBITDA margin for the quarter was 31% and adjusted EBITDA margin, excluding the effect of contingent commissions, was 28%. Included in G&A for the quarter is a onetime noncash impairment charge of $4.7 million related to changes in our real estate footprint in Chicago, Columbus and Las Vegas. As of quarter end, we had $92.4 million of cash and cash equivalents and total debt outstanding of $299.3 million. On July 9, we successfully repriced our existing term loan from accruing interest at SOFR plus 350 basis points to SOFR plus 300 basis points, reducing our interest burden by approximately $1.5 million annually. During the quarter, we generated $28.9 million of cash flow from operations, representing a 53% increase over the prior year period. During the quarter, we repurchased and retired 5,600 of our Class A shares and have $99.5 million available on our outstanding repurchase authorization. We are reiterating our 2025 revenue guidance and revising our premium guidance for the year. Total revenues for the full year are expected to be between $350 million and $385 million, representing organic growth of 11% on the low end of the range and 22% on the high end of the range. Total written premiums for the full year are expected to be between $4.38 billion and $4.65 billion, representing organic growth of 15% on the low end of the range and 22% on the high end of the range. Our adjustment to premium guidance reflects a near-term gap where premium increase moderation is outpacing the recovery in client retention. We believe this is a short-term phenomenon and the benefits from a more normalized product environment will ultimately more than offset the rate decline. Importantly, our revenue guidance is unchanged to reflect the improving average commission rate in our book of business, allowing us to capture more dollars of revenue from the same dollars of premium. I am incredibly excited to watch the next evolution of Goosehead as we transition from an insurance distribution organization aided by technology to a technology organization aided by the best insurance professionals in the country. Thank you to the Goosehead team and to all those who place their confidence in us. With that, let's open up the line for questions. Operator?

And our first question for today comes from the line of Tommy McJoynt from KBW.

The first one here is you mentioned the upside to commissions as a percentage of written premiums as volumes move away from state- backed carriers and the surplus lines. Is there any way you could quantify that? Are you currently running something in the order of 25 basis points below average? Or is it a whole percentage point? Any way to roughly quantify that?

Yes. Tommy, this is Mark Jones. Over the last couple of years, as more business has shifted towards the excess and surplus lines market and the state-run plans market, there's just been a gradual and consistent decline in the average commission rate. We think we're at the point now where that is inverting back in the other direction as you're getting more of the national product available in specific regions that were pretty heavily impacted by that. So without putting a specific number on it, if you go back and look at the last couple of years, the ratio between premium to the gross numbers on the P&L to take your new business royalties divide by 0.2, your new business -- your renewal royalties divide by 0.5 and take the gross numbers from commissions and renewals, you can get to where generally the commission rate was 2 years ago and to where it is now, expect the trend to be kind of similar in terms of the recovery. So we think it's a very positive thing for the business, not just for our own economics, but also for the insurance industry in general.

Yes. And the majority of that rate shift was just mix, right?

Yes.

And so no reason they can't get back to where it was 2 years ago, just to clarify [indiscernible]. And then just a follow-up question on another area. I want to make sure I heard you correctly. You mentioned the cost of servicing being down in the second half of the year relative to the first. Is that cost of service referring to kind of the total expense base? Or what are you explicitly referring to the cost of service?

Yes, really the total cost of our service department. So not the whole back office expense base, but the service department is the biggest portion of our P&L. And this is the first time in company history, we've been able to deliver what we expect to be really strong scale out of that department in the second half of the year through leveraging AI to better route cases and meet client needs. So it's exciting for us to see those things start to materialize. But what's even more exciting is the impact that has to the client experience. It's going to continue to get better over time. And we should be able to drive incremental margin improvement in the future. Now just looking at the rest of this year, right, you got to remember, we hired a bunch of new producers in June. So their cost is not fully baked into the run rate. We have a big class coming in July and coming in August. So you should expect margin pressure in Q3 relative to Q2 and then improvement in Q4. But that comment specifically on service is to document some of the improvements we've made leveraging technology.

And you're referring to margin, excluding the contingents, right, when you talk about margin?

Correct.

Yes. And our next question comes from the line of Michael

I guess, a follow-up on some of the comments on kind of the mix shift timing drag in terms of the revenues versus the premium dynamics right now. Is that coming from -- if we look at like premiums per policy in force, I think it's up 4% year-over-year, so it's been decelerating. Is that what you're referring to? And is that coming from the kind of dynamic you've talked about in the past of moving -- accelerating sales in lower cost states, like, for example, Arizona, more sales there versus like historical levels in Texas? Or what other dynamics should be -- I know there's other dynamics you talked about, if you could help out, that would be helpful.

Yes. So it's 2 things. One, it's putting more business into lower premium states, which we've done that very intentionally, things like the Columbus, Ohio market for our corporate sales team generates a ton of policy productivity, but obviously, the policies there are less from a premium perspective than they are in Houston. And we've been doing that very intentionally across the country to kind of reduce Texas exposure. And now at the same time, you're getting to the point where premiums are leveling off on a growth rate on a year-over-year basis for the same policy. So everywhere outside of Texas, on average, the book is increasing at a much lower rate. Texas is still increasing pretty aggressively. But then if you talk about the actual dollars of revenue per that premium, that's come down over the last couple of years of commission rate pressure just from business mix shift, and we expect that to -- the trend to reverse in basically the same fashion in the future. And then as you think about just converting that into revenue dollars, that's where we see the revenue guidance, we still feel really confident on.

And you guys discussed some -- a lot of the new initiatives. So some of them are existing, some of them new, like the Baird & Warner, I guess, joint venture, you could call it, the servicing agreements. How many of these items, if any of them are baked into your guidance? And if they are in the guide, how material are they?

Yes. None of that is baked into the guide at this point, given those are relatively new. Baird & Warner launched their franchise in July of this year, and the Fay agreement just got done. We're really excited about those. We've made really good progress in the partnership space, and we expect that to be a really meaningful portion of the business over time. And importantly, really the best place to interject the direct-to-consumer marketplace that we're building. But none of that is baked into this year's assumptions. Those things take a little bit of time to materialize. But once they get moving, it turns into a really big snowball pretty fast.

And lastly, you talked about it, I think, a couple of times in the remarks about kind of expecting your commission rate or take rate, there might be another term for it to kind of -- I think we saw a bit of an inflection this quarter, and you expect it to continue to improve as the -- is kind of the, I guess, probably the profitability of the carriers improves and they open up their kind of their appetites a bit more. Is that -- is the line of sight fairly clear right now? Or is there still a bit of uncertainty in certain locations depending on kind of how the wind blows during hurricane season? Maybe that's always the case. But just kind of curious how -- if things sound like there -- your outlook might sound like a little bit better on that commission rate than it was a quarter ago, if I'm understanding correctly.

Yes. I would definitely say we feel like the product environment is in a better position today than it was on our first quarter call. We are seeing progress from the big admitted carriers coming back into markets in specific locations, more businesses flowing away from the state-run plans, which is a super positive thing, not just for us but also for clients. So generally feeling much more optimistic about the product environment now as opposed to the first quarter and certainly relative to last year.

And I think what we said on the last call, I'll just reiterate that the auto market is pretty wide open right now. So we've got plenty of product in every geo, admitted carriers there. And when you look at the home market, it's very geo dependent. Some look a lot better than others. But overall, I would say, improving dramatically over the last 6 months or so, and carriers are starting to run incentives for growth, things we haven't seen in a long time, which then naturally the commission rates kind of follow those national carriers in the admitted market instead of doing state-run plans, which for the last 3 years, we've had to do a lot of state-run plans because that was the only carrier that was available in certain states.

And our next question comes from the line of Andrew Kligerman from TD Cowen.

So I'd like to unpack some of the figures toward the end of your press release. Maybe starting with the total franchise producers. And you mentioned it's up 5% year-over-year. But since year-end, it's down slightly to 2,085 producers. Is there something seasonal there? Or is there -- I would have thought more -- we'd be seeing more producers on a sequential basis.

Yes. Great question, Andrew. What I would say there is it's a bit seasonal. But more than anything, what we've seen is some mergers and consolidations of the smaller franchises into the larger ones, which is very common in a franchisor sort of environment when they get to a certain age, the smaller ones start to consolidate with the bigger ones. And we look at that as very favorable to our overall ecosystem. The bigger ones will take that cash and reinvest it in producers where some of the smaller ones would not. And that's exactly what we're seeing. So we've seen a lot of orders, if you will, for our ASP program to help staff up these larger agencies. And we've got a lot of agents that started in July, and we'll have a lot more starting in August. So I think it's just a timing thing.

Yes, you should see it up sequentially in the third quarter relative to the second quarter. And like we talked about our kind of top bucket of agencies, they've got 4x as many producers per franchise as the rest of the group. And you're getting more agencies now kind of getting into that big scaling mode makes us feel really confident about the direction of the franchise community.

And then maybe moving down a bit, it looked like corporate agent productivity, both under a year and over a year, was down year- over-year. Then I looked at the franchise productivity, those under a year productivity was down. And then, of course, I guess, based on what you've been saying, those franchises with more than a year of experience, that was up a lot, like 20%. And I assume maybe that's part of the merging activity. But maybe a little color on why those other 3 components were down and why franchises with more than a year were up 20-ish percent.

Yes, sure. Happy to talk about it. So less than 1-year corporate agents, the tenure of that group is down 24% year-over-year. So productivity being down 13% compared to tenure down 24 actually means they're on a tenure adjusted basis, significantly more productive. I think that's a good thing. Now the tenure of that team will come up next year. But this year, we do have another big class in July, another big class in August. So you're going to see more tenure dilution in the third quarter. We're going to keep building that corporate team because it's the best place to launch franchises out of. That's less than 1 year -- greater than 1 year. Previous year's numbers include not as many franchise launches. So we launched a lot of agencies out of last year's greater than 1-year bucket. And if you didn't launch those franchises, you can back them out of the math, that productivity is actually up 2%. So we feel really good about that. Similar story on the less than 1-year franchises. Last year's less than 1-year franchise included 24 corporate launches. This year has only included 6 in that bucket. And we talked about how those can be up to 10x as productive as the average franchise. It makes a meaningful difference, especially in the less than 1-year group because there's just less franchises in that bucket. And then in the greater than 1 year, they just keep scaling. There's more agencies that are hiring. We feel really, really great about the direction of that team.

And then just the last one, premium retention. 99% in the year ago quarter, 95% this quarter, still good. I mean, does that -- I'm just not quite sure what that implies. Is rate coming down in some instances? Or just help me think through that.

Yes. Rate is leveling off. So the rate of increase in premiums year-over-year is leveling off. That rate is declining. Client retention is improving. Now it's still showing at 84%, but we see it basically going up basis points every single day. So we feel confident about that continuing to accelerate in the second half of the year. But we should be getting to a point relatively soon where premium retention and client retention go in the same direction, and there's just a small gap between the 2 of them for normal year-over-year pricing. I mean I've said it publicly many, many times, I'd much rather have a kind of 5% to 7% year-over-year pricing impact as opposed to a 20%. It's just a much healthier market for everybody in that situation.

And our next question comes from the line of Paul Newsome from Piper Sandler.

I was hoping you could give us a few more thoughts on that direct channel comments that you were making. Is this tied to what you had previously been working on? And I guess maybe any thoughts about what a significant investment could mean prospectively? Because I think in the past, there was some fairly heavy tech expenses that came through the system and it was something that you talked about a little bit in the past.

Yes, Paul. So to go back to the previous investments, I think you're talking about QTI investments there. And all of that stuff that we've done over the last few years on QTI help enable what we're talking about. So it opens up the connections between us and the carriers. So that code is all very valuable and still really relevant. When you think about our new enterprise opportunities that we have, there's a good opportunity to cross-sell into our existing book and sell into these enterprise clients using a direct-to-consumer sort of interface, which brings a very targeted client to the carrier, which is what they would want in a more automated fashion than what we do today. Now on the size of the tech investment, I think we're still scaling out all that, and we'll provide more color down the road, but we're working on the sizing of that project right now and staffing it.

Completely different question. Did the increased proportion of your business that was from [ state-runs ] or residual businesses policies impact the contingent commissions? Is that part of the story that you get less contingent on those kind of policies? I simply don't know the answer.

Are you asking if we get less contingent commissions associated with the renewal book?

Associated with the [Technical Difficulty] state-run plans.

Yes, yes. No, there's no contingencies associated with the state-run plans. The state-run plans are not trying to incentivize agents to put business there. It's simply there as a backstop for when there's not other product available for a client. Specifically related to kind of our forecast and guide for contingent commissions this year. Like I said in my prepared remarks, there really is a wide range of outcomes that could happen here. I mean we had a really light hail season in DFW, which is super positive for underwriter profitability. We don't know what's going to happen with hurricane season. So we'll see how that plays out. It could certainly be better than what we're expecting, although I'm not ready to promise that at this point. We'll have a lot more clarity. And certainly by the fourth quarter, likely by the third quarter, we'll have a lot more clarity on what contingencies look like for the year.

But if you just -- just so I make sure I'm not confused. If you write a higher proportion of nonresidual fund or you call them policies, that gives you more opportunities for contingent commissions. Is that fair?

Yes. Less policies on state-run plans should equal a higher percentage of policies earning contingent commissions, yes.

Our next question comes from the line of Katie Sakys from Autonomous Research.

I wanted to circle back to the 28% adjusted EBITDA margin, excluding the impact of the impairment expense this quarter. If I probably take a look at your adjusted EBITDA margins ex-contingents thus far this year, to put up expansion for the full year 2025, I think it implies fairly significant improvement over the back half of the year. Would you mind kind of walking us through where you think some of the drivers of that expansion might come from? And if possible, quantify how much margin expansion you guys are kind of getting a sight line on for the full year at this point?

Yes, Katie. So I think in a previous question, I talked about the third quarter, you should expect to see weaker margin relative to the second quarter and on a year-over-year basis because we have a significant amount of new hires coming in and also now expanding into the Nashville market in the fourth quarter and doing some of these very interesting tech investments. Margin ex-contingents, it wouldn't surprise me if it is down slightly for the full year, although we firmly believe we're making the right decisions to maximize long-term profit dollars. But as the client retention continues to improve, that could certainly aid that as our corporate agents come down the ramp-up curve and generate more productivity per agent, that generates incremental margin opportunity. But you shouldn't be surprised to see it tick down slightly in the third quarter, tick up slightly in the fourth quarter and potentially on the year, some slight compression because we're very intentionally making investments that are going to drive long-term value.

And I would say we're going to continue to be super cautious on our spending, but this is what we've been waiting for, for several years is to accelerate into the growth opportunity. And based on what we're seeing from the carriers, it's the time to press on it with more agents.

Yes, it feels like we've got a really interesting window of opportunity here where the product market is turning around. The technology is at a point now where we can really lean into it. And the partnerships that we're bringing on, which do take incremental investment to operationalize kind of each one of them. All of those things drive really nice long-term growth opportunities. And I want to make sure we're being disciplined enough to invest in those things as opposed to just arbitrarily dragging down cost.

Yes, certainly. I can appreciate a more long-term view here. I guess perhaps following up on the adjustment to the full year 2025 guidance. I think I've reconciled all the different moving pieces there and how they impact premium growth and revenue growth this year. But I assume that you guys also have more or less some sort of mental model built for 2026 at this point. Any changes to how you guys are thinking internally about the growth opportunity in 2026 and any quantification that you can provide us?

Yes. So we're not ready to give 2026 guidance at this point, but I can certainly speak in generalities about where the business is going. So going to continue to expand the corporate team, going to be placing agents in the appropriate geographies where they have the highest likelihood of success and holding people accountable to really high standards. I mean we've got multiples of industry best practice on the corporate team in terms of productivity. And same thing on the franchise side of the business. We're going to keep investing in our biggest and best agencies while pumping in new blood into the system from our MBA program, which we're feeling really good about from the veteran program and continuing to launch corporate agents into franchises. So if you break down some of the individual pieces, second half of the year, you should see really -- second half of 2025, I should say, you should see really strong acceleration in new business commissions generated from the corporate and enterprise teams. You should see new business royalty fees, relatively consistent levels of production because we've got a really good group of agencies today, and we're being really intentional about the ones that we consolidate into existing franchises. And then the pace of recovery of client retention will drive that renewal book. And obviously, that's the biggest lever to growth because it's the majority of our revenue.

And then if I could just sneak one more in. On your discussion of the recovery of past-due commissions this quarter, how much more of that do you guys see potentially still sitting ahead of you for the rest of the year? Are there other carrier partners where you still need to recover past-due commissions? And the example of the $1.5 million commission rate increase that you mentioned with a specific carrier partner, is that a one-off example? Or is that pretty representative of the degree to which commission rates are changing across your average book?

Yes. I mean that specifically is a one-off example, but we are seeing continuous improvement and specifically like engagement from our carrier partners on trying to incentivize growth in the best way as possible. I mean more and more of the conversations with carriers now are how do we get in front of your agents more frequently? What do we need to do to continue to drive growth? And obviously, one of the levers is it's compensation. We have other things in the mix with other carriers regarding commission rates, but we were satisfied to get that $4 million recovery, and that's showing up in renewal commissions and royalty fees, and that should generate another incremental $1.5 million throughout the second half of this year with improvement in the average commission rate.

And our next question comes from the line of Mark Hughes from Truist Securities.

The $4 million gain, are you able to share how much was in each category?

Yes. Renewal commissions was $3 million, renewal royalty fees was $1 million of that net. That's where they showed up. And so you can see what the revenue retention would have been absent that, which is a better guidepost for the third quarter than what you're seeing on the face right now.

Yes. And I assume were there any expenses related to that? Was there a commission payout? Or what was the flow-through from that $4 million?

Yes. Agents were -- shared some compensation associated with the recovery.

Yes. Any change in your experience, just your ability to convert leads? It seems like there's been a drop-off in kind of applications or more contracts are falling through. So are you seeing anything in terms of your ability to convert leads either because of the nature of the housing market or because of availability of product, which seems like it ought to be getting better and the housing market presumably will improve, but I'm just sort of curious what you're seeing in the short term here.

Yes. I mean product availability is beginning to improve. And so that's right now, not necessarily a significant headwind relative to the first quarter, certainly compared to the historical numbers that we're used to. The housing market and specifically kind of cancellations of mortgage applications does result in an increase in what we call false starts, basically policies that we write that don't end up actually becoming effective. That's certainly a short-term thing, which means that there's potential upside in the future to mortgage cancellations coming down.

Yes. And then one final question. The -- you had a very big increase in the corporate agent count last year. How should we think about the magnitude of what you're looking at this year again?

Yes. Last year, a bigger portion of the class started in July and August. This year, we front-loaded a little bit more of that in June, and we still do have a good-sized class that comes in, in July and August, but not quite as much relative to last year. You'll still see the numbers grow sequentially in the third quarter. And then typically in the fourth quarter, you just get kind of normal attrition and not much onboarding. So without giving you specific guidance on where the headcount is going to go, it should be up from here by the end of the year.

And our next question comes from the line of Pablo Singzon from JPMorgan.

It sounds like homeowners and personal auto have become more competitive versus several years ago, perhaps personal auto more than homeowners. As the impact of tariffs begins to roll through, do you see the environment changing and how that might affect your business?

Yes. I would say one place you'll see it is what we just talked about a minute ago, you'll see a shift to the admitted markets from kind of the state-run carriers because in a lot of places, we just didn't have the product availability. You'll also see our conversion rates are something that we look at, like how many times do you quote versus how many times do you actually close on the policy. With more product availability, you close at a much more frequent way. So each lead is worth a lot more if you can close it at a faster rate. So I believe that's what we'll see -- you'll see carriers -- we're already seeing it incentivize some growth and a commission mix upward to more profitable carriers.

Pablo, sorry, were you asking about tariffs specifically? I want to make sure we cover your question.

Yes. About tariffs, yes.

I'm sorry, I missed it. I didn't quite understand. I didn't see -- heard tariff's part.

I'm not sure that tariffs is really going to make an impact on our business. I mean there's certainly the possibility that it increases the repair cost for autos and kind of roofs and lumber, things like that. But we're obviously downstream of that. We're not the ones underwriting the product. We'll distribute it. I don't think it's going to change necessarily like severity or frequency. So maybe there's an increase in premiums associated with that, but I don't think it causes any restriction on the product market.

We certainly haven't heard anything about it from our carriers at this point.

And then second question, can you talk about demand on the new business side? So it's clearly capacity is opening up, which is good, retention is picking up too as well. But are you seeing more applications coming in and maybe because it's more shopping or perhaps underlying markets getting better like housing?

Yes. I mean we're still such a low percentage of market share in terms of home closing transactions across the country that we're still able to just go get more referral partners to maintain our lead flow. I would say definitely lead flow per referral partner is down, but our team knows exactly what to do to go develop more lead sources and continue to execute on their new business quotas. So expect that to be a tailwind in the future when housing recovers, but housing is certainly down year-over-year.

But we've been able to keep lead flow pretty consistent.

Okay. And then just last one for me. Where do you expect client retention and premium retention settling longer term, right? Because I think now we're in a period of normalization, but where do you see those 2 numbers longer term?

I mean client retention, I think our historical high was 89%. I think it's pretty reasonable to say that we get back to that over time. We will -- I would imagine we'll end up being better than that at some point, although I can't give you a specific time line on that. I mean we learn more every day about how to better serve clients' needs. And as we continue to roll out technology that makes it easier to be a client and easier to handle your own insurance portfolio and interact with us however you want to, I would expect that increases client retention over time. And then premium retention should just be a function of client retention plus pricing. So if you're in a normalized kind of 5% to 7% pricing year and you've got 89% premium retention, you should expect kind of 94-ish -- if you have 89% client retention, 94-ish premium retention.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mark Miller for any further remarks.

All right. I just want to thank everybody for taking the time to join the call today. I appreciate your continued support and interest. And once again, we look forward to speaking to you on the third quarter earnings call.