GSHD - NASDAQ

Good day, everyone, and welcome to Goosehead Insurance Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. Now it's my pleasure to turn the call over to Dan Farrell. Please go ahead.

Thank you, and good afternoon. Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements, which are based on expectations, estimates and projections of management as of today. Forward-looking statements in our discussions 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 the 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, 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 reconciliation 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 In addition, this call is being webcast and an archived version will be available shortly after the call ends on the Investor Relations portion of the company's website at goosehead.com.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, everyone, and thank you for joining our Q3 2025 earnings call. We are pleased with the results this quarter as they reflect continued momentum and strong execution. Our sites remain squarely focused on our goal to become the largest distributor of personal lines insurance in the U.S. in our founder's lifetime. It has now been slightly over 3 years since I joined Goosehead, and I've never been more excited about the direction we're headed. What originally drew me to this business were the strong fundamentals and market dynamics that create the opportunity for durable and sustainable growth. To hit a few of the most critical points, we distribute a product with almost completely inelastic demand. If you live somewhere or drive something, you must have insurance. We operate in an industry with over $530 billion of total written premium annually. We have made great progress towards industry leadership over the past several years, growing from just over $2 billion in premiums in 2022 to over $4 billion this year. Interestingly, we still represent less than 1% of the total market share. So our runway for future growth is enormous. Our industry remains fragmented. No individual distributor has more than 20% market share, which provides us freedom of movement across every market in the country and allows us to accelerate share capture. Our choice model and national scale are highly differentiated. We've worked incredibly hard to build out a product portfolio of national brands and niche regional products that allow our agents to be successful in just about every market in the country. Clients demand choice, and we have built a platform that provides a superior shopping experience. The competitive set, specifically in the personal lines space, has major gaps in meeting client needs. Single product platforms like direct online distribution and captive agencies can't meet the clients' needs for choice. Subscale independent agencies generally lack the necessary service capabilities, product depth and technology to deliver an exceptional client experience. This very favorable backdrop attracted me here, and each one of these points remains true today. There are no structural limitations to our growth, and we believe we are positioned better than anyone else for long-term industry leadership. During our second quarter earnings call, I laid out 5 key strategic initiatives: supporting accelerated expansion of our existing agencies, 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 partnership teams and developing new and maturing technologies. The first 3 key strategic initiatives relate directly to maximizing growth of the franchise channel, and we have made great progress here. For example, in Q3, our agency staffing program, which we call ASP, helped our franchise owners place 90 new producers into their agencies, a record for 1 quarter. We have identified the top markets to launch new franchises in, and we are aggressively pursuing that strategy, launching 34 new agencies across 13 different states during the quarter. We launched 10 corporate agents into franchises during the quarter, resulting in new business production equal to 77 average franchise producers. To further support corporate agents launching into the right geographies, we opened our newest corporate office in Nashville, Tennessee on October 1 and have identified the next several locations for 2026. Expanding the corporate office footprint creates amazing career opportunities for our corporate teammates, and it seeds new geographies with top decile future franchise talent. Our newest go-to-market team, the enterprise sales team, which takes inbound leads from a diversified set of partners, continues to scale, growing over 100% versus Q3 last year. We've also made meaningful progress on our AI initiatives, implementing new tools into our service delivery function to improve the client experience, reduce complexity and drive unit cost down. On our previous earnings call, we talked about several new partnerships that took the form of a Goosehead franchise. I'm excited to share another win this quarter. Goosehead has partnered with a top 20 mortgage originator and servicer, who upon launch immediately will be poised to become one of the largest agencies in the Goosehead system. We believe our industry knowledge, seamless user experience and white glove service will deliver an unparalleled client experience. Just to frame the size of the partnership business, we have already signed or taken live on our platform partners that represent in total, more than 1 million home loans serviced and 75,000 home closings annually. Our partners who have a captive audience, a great reputation with their clients and a specific need to solve client pain points are the perfect place to insert the Goosehead shopping experience. Over the years, Goosehead has become known for its innovative business model and technology. We have spent hundreds of thousands of hours and millions of dollars on building a technology stack that widens and deepens our competitive moat. Going back to 2018, we were unsatisfied with the comparative rating tools available in the market. So we built our own. We call that technology Aviator and it allows our agents to quote more efficiently. We built a client-facing quoting tool, our digital agent, that today provides lead flow to agents across the country and gives clients a real look at potential insurance options. We then deepened our integrations with a number of our carriers, developing quote-to-issue technology within Aviator that allows our agents to buy policies without ever leaving the Goosehead ecosystem, speeding up time to close and reducing friction. Building this foundation has been critical for the next step in our evolution, direct-to-consumer technology, which will integrate our quote-to-issue technology into our existing client-facing digital agent. We believe the digital agent will revolutionize how personal lines insurance is distributed, and it will break through the human capital bottleneck. Over the next year, we plan to deploy this tool to our existing and new partnerships, leveraging their client relationships to provide a tailored insurance shopping experience that ultimately maximizes value creation across the entire distribution chain. For our carrier partners, delivering the highest quality clients by utilizing precise client segmentation analysis and target marketing. For our distribution partners, increasing the lifetime value of their clients and solving pain points in their existing business. For our agents, increased productivity, allowing them to focus on marketing and cross-selling into our existing client base. For Goosehead, by driving high-growth and high-margin business at scale and most importantly, for our clients, providing a world-class insurance shopping experience that doesn't exist in the U.S. today. This incredible opportunity is about investing for the long term and remaining laser-focused on delivering shareholder value. Mark Jones, Jr. will give you more specifics on the timing and level of investment. We have an exciting road ahead of us at Goosehead as we enter into what appears to be a stable pricing cycle that we believe will allow our business to operate much more efficiently, resulting in higher client retention, higher buying rates, higher package rates, higher contingent commissions and most importantly, higher client satisfaction. As I turn this call over, I am pleased with our performance. This quarter demonstrates that we continue to gain momentum, remain focused on our clients, empower our teammates and execute with excellence. We have a massive head start on our competition, and I'm confident in our team. I would like to sincerely thank the Goosehead team for their hard work. With that, I will hand the call over to Mark Jones, Jr., our CFO and COO.

Thanks, Mark, and good afternoon to everyone joining us today. My 9-year anniversary with Goosehead is on Monday. But in reality, I've been around the business since its inception. I have seen or been directly involved in every iteration, every major decision, every success and every mistake from the front row. I can say with complete conviction, this is the most exciting time in our company's 22-year history. We are literally building the future of personal lines distribution in real time. As Mark Miller mentioned, our evolution of the digital agent to allow a frictionless experience for clients, which paired with our strategic partnerships is a massive opportunity for Goosehead to rapidly take share in a sustainable and profitable fashion. For many years, the investor community has asked us why we can't simply invest more money to drive faster growth. Our limitation has always been our ability to absorb new agents into existing teams, not a capital constraint. With the next iteration of our digital agent, we now have the opportunity to utilize our strong cash flow to invest aggressively in areas that break the human capital bottleneck and allow for much more rapid growth in the future. While we believe the independent agent will remain a critical piece for personal lines distribution, we also recognize there's a growing portion of the population that wants to interact and transact digitally. With that segment of the population, the bottleneck to growth isn't how many producers we add or how productive each producer is, but how seamless and educational we can make the process for clients and about capturing the maximum amount of lead flow. Today, we're going to talk about the investments we're making in both of those areas, the technology build and the business enablement through partnerships. While both are well underway, now is the time to double down and aggressively drive towards a full-scale platform. Let's review several numbers. In 2025, so far, we have invested $10.9 million into the digital agent platform, of which $8 million has been capitalized and $2.9 million recognized into operating expenses. During 2026 and 2027, in each year, we expect to invest between $25 million and $35 million and anticipate approximately 70% or $17 million to $24 million to be capitalized with the remaining $8 million to $11 million flowing through operating expenses. Operating expenses will include approximately $7 million to $10 million in headcount costs between both technology and partnership enablement and an additional $1 million in G&A. We expect revenue contributions to begin in the second half of 2026 with meaningful acceleration as additional carriers, states and partners come online throughout 2027 and beyond. The digital agent provides us the ability to efficiently penetrate significant portions of our total addressable market in a much more scalable fashion than our traditional referral partner relationships. Because of this, we believe the digital agent can add substantial incremental growth on top of our existing business with the potential to drive to 40% plus total written premium growth within the next 5 years. As Mark Miller mentioned, during the quarter, we signed a new partnership with a top 20 mortgage originator and servicer. This new partnership and others already on our platform are the ideal place to implement the next iteration of our digital agent. By integrating with our partners, we will be able to utilize the full depth of our data to provide actionable insights into what coverages make the most sense for a particular client and pairing that with newly developed AI tools, be able to risk match with carrier demand in their geography. This is critically important because it allows us to deliver exceptional value to clients, partners and carriers. While these new go-to-market motions are exciting and will be important for the medium and long term, our core business continues to perform and gain momentum. Franchise producers at quarter end were 2,124, up 1% from a year ago and producers per franchise was 2, growing 6% over the previous year. As we have previously discussed, consolidation in our franchise network is continuing to take place. Our best agencies are reinvesting their cash flow into 2 main areas for growth: first, onboarding new producers; and second, acquiring other franchise owners in their regions to further grow their total cash generation. Our most productive agencies are the ones most active in franchise consolidation, which helps further drive value creation as they onboard the newly acquired book and reach out to the existing client base. Acquiring agencies during the quarter had 3x higher average productivity per producer than agencies that were acquired. Operating franchise count for the quarter was 1,068, a decrease of 4% over the previous year. This is intentional and drives higher performance from the existing franchise base and further protects our brand. We expect operating franchises to continue to decline for the next 12 to 18 months. However, we anticipate continued growth in producer count during that time. Our corporate team delivered its highest growth quarter in nearly 4 years, generating new business commissions growth of 20% year-over-year, accelerating off the 13% in the second quarter of this year. Our strategy with our corporate sales team can be boiled down into one simple goal, to become a talent incubator for the rest of the organization. This team is the best place in our business to learn the Goosehead operating model. Our agents learn the value proposition to our clients and referral partners, the nuance of individual carriers, our systems and management practices, how to take care of clients on a daily basis and are grounded in the Goosehead winning culture. Success for our corporate sales team should be measured in terms of franchise launches, tenure-adjusted productivity and turnover. When we are consistently populating the country with high-quality franchises out of corporate, demonstrating best practices while setting the bar for productivity and minimizing turnover, our corporate sales team is executing exactly as designed. During 2025, we will launch a total of 10 franchises from our corporate sales team. And looking into 2026, we expect that to be at least 20 with a medium-term goal of 50 or more a year. Turnover is trending in the right direction but remains higher than our targeted level. We expect to reduce turnover with 3 key actions: first, reducing the sales manager's span of control; second, by investing in additional training and development programs that help our agents come down the learning curve faster and create a greater sense of connection to the organization. And third, as we look into 2026, smoothing out hiring of new corporate agents through the first 3 quarters of 2026 with limited onboarding in the fourth quarter. Our corporate sales team ended the quarter with 523 total agents, up 14% over the previous year, inclusive of 423 traditional corporate sales agents and 100 enterprise sales agents. The product market has improved dramatically over the last several months with national brands becoming more available, new entrants into important markets and more stable year-over-year pricing throughout the book of business. As we progress through the rest of 2025 and into 2026, we expect the product market to become a tailwind rather than the headwind it has been for the last 3.5 years. Remember, our business functions much more efficiently in a stable pricing environment. More product is available, close rates and cross-sell rates for our agents improve, the burden on our service team comes down, client retention improves and contingent commissions become more meaningful. Simply put, lower year-over-year premium increases are a great thing for our business. During the third quarter, we generated strong profitable growth. Total revenue grew 16% over the previous year to $90.4 million, core revenue growing 14% to $83.9 million and adjusted EBITDA growing 14% to $29.7 million. Adjusting for our renewal commission recovery in the second quarter of $4 million, core revenue year-over-year accelerated 131 basis points during the third quarter. We expect continued acceleration in the fourth quarter and improvement for the full year 2026. As of quarter end, client retention improved to 85% after 4 consecutive quarters at 84%. We expect to see continued improvement in client retention over time as we enter into a softer pricing cycle. We see no structural reason our client retention cannot ultimately return to or exceed our previous high of 89%, given the level of investment we've made into our service delivery function and client-facing tools like our mobile app. Policies in force at quarter end were $1.9 million, a 13% increase over the previous year period. The policy in force growth rate, while still 13%, has accelerated 37 basis points during the quarter, and we anticipate further acceleration in the fourth quarter. Total written premiums was $1.2 billion for the quarter, up 15% from a year ago. This includes franchise premiums of $976 million, up 18% and corporate premiums of $206 million, an increase of 1% from a year ago. We anticipate similar year-over-year growth in total written premiums in the fourth quarter as improvements in client retention are offset by pricing declines, followed by acceleration through 2026. Contingent commissions for the quarter were $4.5 million compared to $2.5 million in the previous year, an increase of 82%. Based on current carrier loss performance and the frequency of catastrophic events in 2025, we now expect contingent commissions of 55 to 80 basis points as a percentage of total written premium. While our outlook has improved, there remains a wide range of potential outcomes for the fourth quarter. Cost recovery revenue was $1.5 million compared to $1.6 million a year ago. Adjusted EBITDA for the quarter grew 14% to $29.7 million from $26.1 million in the prior year period. Adjusted EBITDA margin for the quarter was 33% compared to 34% a year ago. Adjusted EBITDA margin, excluding the effect of contingent commissions, was 29% compared to 31% a year ago. As of quarter end, we had $51.6 million of cash and cash equivalents and total debt outstanding of $299 million. Because of our strong cash generation and conservative balance sheet management, we are afforded optionality in how we drive shareholder value. During the quarter, we repurchased and retired 685,000 of our outstanding Class A shares, utilizing $58.7 million of our share repurchase authorization. We are incredibly confident in our trajectory and view the current market dynamics as a great buying opportunity for our organization and a lever to further compound earnings per share growth. We are reiterating our guidance for the full year 2025. Total revenues 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 placed for 2025 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. Before we open it up for questions, I would like to recognize and thank the Goosehead team for another quarter of disciplined execution, hard work and commitment. Also thank you to our valued partners who continue to make our journey to industry leadership a reality and importantly, our clients who we strive to serve with excellence. With that, let's open up the line for questions. Operator?

[Operator Instructions] Comes from the line of Brian Meredith with UBS.

A couple of them here for you. First one, I'm just curious, now that you have the enterprises becoming bigger and bigger, maybe you could kind of break out kind of the margin profile of franchise versus corporate versus enterprise as we kind of think about it and kind of the growth rates you think longer term in those different channels?

Yes, Brian, thanks for the question. So the enterprise sales business, we've structured it so that the margin profile of that over the longer term is actually more impactful than the regular corporate or franchise business. So ultimately, in the short term, investing it and starting it from 0 doesn't have the same margin, but over the longer term, it will generate higher levels of profitability than the franchise or corporate business. The franchise business is still, however, the driving force of the entire organization. It's something like 80% of the total written premium and the vast majority of the agency force. It's growing at a nice rate right now. You saw 17% new business royalty fee growth in the third quarter that accelerated off the 9% in the second quarter. So we're really pleased with that, but we would like it to be growing even faster than it is. And so what we're doing about that is just continuing to add new producers into the best possible agencies, help them find the right people and then arm them with the right tools to be as successful as possible. And then on the corporate side, you probably noticed that the growth rate is continuing to accelerate. The first quarter, 1%; the second quarter, 13%; third quarter, 22%. That team is going to continue to grow, but strategically into the right geographies with really the big purpose of launching franchises out of that. In the future, it's possible that you see disclosures broken out again, but the margin profile of that core business looks relatively consistent to how it has looked historically with the natural operating leverage year-over-year.

Got you. So just what you're kind of saying is that when you think about it, margin profile is going to be -- enterprise ultimately be the biggest then comes franchise SM corporate. So as the franchise is growing faster and enterprise is growing faster than corporate, that should have a really favorable impact on margins.

Yes, that's right. Over time at scale, right?

Yes. Okay. And then a question on the digital agent. It sounds really interesting what you're doing there. I guess the question I have is, one, how many carriers do you have on that digital agent right now? And what is the kind of pushback and resistance from a carrier perspective to be involved in that?

Brian, this is Mark Miller. I'll take that. So I would think about it in multiple ways. The digital agent that we've had for several years out there that hangs off the goosehead.com site, more of a shopping engine there than an actual booking engine. And then we've been talking about QTI integrations for some time now. There's about 12 carriers, I think, a mixture of home and auto that we built QTI connections for. What we're talking about with DTC, which we've kind of called -- continue the name of digital agent. You'll see us start using digital agent because I just want to come up with another new name. With digital agent, we're connecting that front end with the back-end capability. And we've talked to the major carriers that we need to integrate. Right now, our strategy is to go out with a handful of home and a handful of auto carriers at the same time, and we've talked to those carriers. And I would say their position is very strong and supportive of what we're doing there.

Is from Andrew Kligerman with TD Cowen.

I guess the first question is around home sales, home prices. What are you seeing there? And how is that affecting your written premium right now?

Yes. I mean we're not seeing any progress in housing activity. It's still at really depressed levels. The good news is, for us, we are such a small percentage of the market share that there's still just opportunity for us to go make more loan officer and realtor lead sources. So we've been continuing to do that, which is helping our teams continue to generate incremental lead flow. But the flip side of that is when you see an uptick in housing total volume, we've now got more total endpoints sending us leads than we've ever had before. So it will be a much bigger tailwind when housing starts to increase than it is a headwind right now. I mean it would certainly be favorable for us if housing starts to pick up. But right now, I think we've done a fantastic job of building out the entire referral partner network to capture as much lead flow as we possibly can and continue to take share in our existing markets.

And I would just add on top of it, I would say the biggest positive right now is just the reentry of insurance back into the market. So it's opening back up pretty quickly right now. And I talked about auto last time. Opening up the housing market is opening up pretty quickly, which kind of accelerates what Mark he just talked about with the housing market. It's an accelerator on it.

I see. And then the second question would be around franchise producer counts, which I think you've been emphasizing is more important than the actual franchise numbers. So we're looking at a quarter where the producer count is up about 1% year-over-year, 2% sequentially. And then I think, Mark Jones, you said you're going to add 10 franchises for the balance of the year, a minimum of 20 next year. So how could we think about producer count growing maybe for the balance of the year or next year? Or just what's kind of -- when do you think you'll get to like a run rate? And what would that be in terms of year-over-year?

So Andrew, a couple of things to unpack there. One, you mentioned 10 franchise launches this year. That's specifically corporate agents who are launching franchises, and we expect that number to in 2026 and a medium-term goal of 50. We're continuing to put new agencies into the system. I think we launched 34 in the third quarter. But this franchise consolidation effort is continuing to take place. I said in my prepared remarks, these agencies that are actually acquiring in the market are 3x as productive as the ones that are exiting the market. So it's not purely about the number of producers. It's about where they're located and which franchises that they're in. So we're going to continue to help our agencies source as much as we can to drive that producer count growth. I expect to see consistent producer count growth. Now it may not be perfect every single quarter that you get consistent sequential growth. But over time, we expect to continue to drive expansion in the producer number. And we did talk about in the prepared remarks, you should expect to see operating franchise count come down for the next year, 1.5 years. That is a really good thing for the business. It protects the brand and make sure we have the right agencies working in the right geographies. But you'll continue to see producers per franchise expand.

Got it. So grow to producer count, no particular numbers right now, but it's just more the quality of the situation.

Our next question is from Ryan Tunis with Cantor.

I guess I'm just curious why we're not a little bit more upbeat about the revenue trajectory here just given, again, like you guys said that things kind of reopening, Texas, et cetera, we haven't had any real catastrophes this year. It seems like all the homeowners' companies are wanting to get back in there. We're kind of reiterating revenue guidance. So I'm just kind of wondering like why are we not -- and yes, you guys bought back $60 million of stock. I'm just wondering why that's not kind of the main focal point here.

Ryan, I think we're really optimistic about the direction of the business, right? We've been fighting an incredibly challenging product market for the last 3.5 years, and we're just now starting to enter a soft cycle that we don't know how long it's going to last for. But if you look at history, the soft cycles typically end up being longer than the hard cycles. I think we've got producers generally in the right geographies. We're continuing to expand the geographies that we have the corporate agent footprint in so we can capture as much market share across the country as possible. Your point on carrier loss ratios having a really good year. I mean, there's certainly potential upside to the contingent commission numbers, right? You saw that last year where we had a really strong fourth quarter that was not necessarily exactly what we forecasted. Is that within the realm of possibility for this year? Yes, certainly. But I think we feel very optimistic about the direction of the business. The quality of the agent force is getting better. Client retention is improving, which is really the longest lever for future growth and growing premium. So we're very satisfied with the direction of the organization. I think you can see that with the $60 million buyback.

And I would just add, I would say the product market is about 80% healed, rough estimation, right? So it's not 100% healed. And some of it doesn't come back until January, like we've been notified that the product will be back in January, but it's not there yet in some of our key markets. So we feel a lot better about where we are today versus where we were a year ago, but still not completely back to a normal market yet.

Ryan, this is Dan. Just to clarify, and Mark in his comments did indicate that we expect to have fourth quarter core revenue growth better than what we put up in the third quarter on a year-over-year basis and then acceleration in 2026 as well. And then on premium growth, similar in the fourth quarter that it was in the third quarter and then acceleration next year as well. So I think we are positive that we're in an accelerating phase.

We had a very large contingency last year in the fourth quarter, contingency quarter.

Got it. Okay. So like if we get Jurassic Park back online here, proverbially, I guess, in January, how do we think about the margin trajectory? Like if you have the view that carriers are all of a sudden, the product is really going to be there next year, which is our view. Should we still just be thinking about like 1 point of margin expansion? Or are you guys going to let that fall to the bottom line?

Yes. So Ryan, I would say if you look at the core business, the franchise and corporate business, you should expect to see normal operating margin -- operating leverage happen on a year-over-year basis just as more of the book comes to renewal and you get better productivity out of agents from a healthier product environment. Remember in our prepared remarks, we talked about this investment that we're making in the digital agent, which will yield approximately $8 million to $11 million into operating expenses. So you shouldn't necessarily be thinking about margin expansion in that context. And it's kind of similar to the carriers, right, they have a new business bias in their loss ratios. We compensate much more heavily on new business and there's more back-office expense associated with that. So in periods where we can really lay into growth because the product is out there, we're going to do that. That helps maximize long-term profit dollars.

It comes from Tommy McJoynt with KBW.

So it looks like there is still a wide range embedded in the full-year outlook despite just a couple of months to go. So what needs to happen, either Goosehead specific or just in terms of the market backdrop to get to the high end of these ranges? And along the same lines, it looks like the contingent guide was raised 15 basis points at the midpoint, which by my math is about a 2% tailwind to revenue. So was that offset by a reduction in core revenues or other types of revenues? I just want to clarify that.

Yes, Tommy, I would say, yes, I certainly recognize there's a wide range for the fourth quarter. As we saw last year, contingent commissions are pretty variable near the end of the year. It's been a really good loss ratio year for our underwriters. It's been a pretty light catastrophic year. It was a light hail season in DFW, which is tremendously helpful. It would be placing some pretty false precision on it to say we can call that number super precisely. I think there is upside to the forecast that we put out there. I'm not ready to commit to that yet, but that's kind of why the revenue range is so wide because there is still, as I mentioned, a wide range of potential outcomes with contingent commissions. We've seen it go one way and another way in the fourth quarter really in the last 2 consecutive years. So it's hard to be super precise on that specific line. On the core revenue, we did tell you, you should expect acceleration in the fourth quarter over the third quarter numbers.

Great. And then going over to the digital agent side. Thanks for giving us some of those numbers around the investment spend and some of the expectations around what that can drive the growth. I want to clarify the 40% total written premium growth opportunity over the next 5 years that you referenced, what is that in dollar terms? Or just what is the baseline for that 40%? And then does that factor in any cannibalization risk of the core business?

So Tommy, I would say if you're looking at the third quarter, we grew total written premiums 15%. We think the ability to penetrate additional markets that we're not necessarily penetrating today through this digital platform could allow the business to, within the next 5 years, be growing total written premium at a 40% plus rate. Because if you think about how our traditional corporate and franchise agents go to market today, they're basically attacking 4 million-ish home closing transactions a year. And the starting point for this digital agent is integrating into our partners who are largely mortgage servicers and to a lesser extent, originators. We said in our prepared remarks, our current partners represent around 1 million mortgages serviced. Those are clients that we're not even really trying to go after today with our current go-to-market strategy. Now likely the conversion ratio on those may not be potentially exactly as high. But just from a sizing perspective, we have 1.2 million clients on our existing book today. The partners that we currently have are 1 million clients. So you could see how that's a really compelling opportunity to add a significant amount of market share in a relatively short period of time if you can optimize the tech integrations and get the funnel converting at a really high rate.

Great. And I'll just sneak one more in. The stock now is at a price about $17 lower than the average price that you bought back stock during the quarter. Can you talk about your appetite and capacity to do more buybacks here and how that balances with the investment spend that you need on the digital agent side?

Yes. I mean the great news is this business generates a ton of cash, and we've been really conservative with our balance sheet for our entire history. So we have a lot of optionality. You're right, we did buy back stock at a level that is over where the share price is today. We still have $36 million on our existing authorization as of the end of the third quarter. So there's still an opportunity to continue to act strategically in the market.

One moment for our next question that comes from the line of Michael

Regarding the auto and home pricing kind of year-over-year decel that's taking place impacting some of your KPIs. I know you've talked in the past, and I think we've had a tough time quantifying it kind of how much of that is coming from kind of a mix shift to lower cost states or geographies. Is there a way to help frame that or to figure out that's still a drag that's playing through the KPIs?

Yes. Good question, Michael. I think there's 2 ways to look at it that kind of can help explain the story. So we've got premium retention for the quarter of 93% against client retention of 85%. So that would indicate 8% year-over-year price increase on the existing book of business. So that doesn't really factor into geographic dispersion. That's policies that are on the books last year compared to the same policies this year. The geographic dispersion, I would point you to policy in force growth rate of 13% versus premium growth rate of 15%. That's going to take into account the impact of going from markets like Houston that have really high average premium per policy to markets like Columbus, which are a different level of premium per policy. It's easier bind rate, easier package rate, but each individual policy isn't worth exactly the same amount of dollars. So that's how I would look at it that way. Premium versus client retention tells you the change in price of the existing policies and then PIF growth versus premium growth tells you the change in the average premium per policy.

Okay. That's super helpful. Regarding franchise growth, I guess, keeping in line with kind of the shift to different markets a bit. Are there any major geographies or metros that you're near capacity?

No, I don't think so. I mean we've got 1.2 million clients, right? There's 8 million households in the city of Houston. So there's a long way to go in every specific geography. What we don't want to be is super dependent on one specific product market. So if you get a bad storm season in like Louisiana, I don't want to be relying on just New Orleans for my future growth. So we've been very intentional about trying to diversify the total risk pool, so we're not overly reliant on one individual market. But there's nowhere that we feel like we are saturated that we can't grow anymore because we have either too many producers or too much of the book. That's just not a reality. We're a long way away from that.

I would say there are certain markets that we know that we're not saturated nearly at all, right? Like there's a lot of markets that we need more penetration in. And that's what we're really focused on is how do we get franchises in every geo, especially the ones with the best insurance markets.

Got it. And lastly, kind of sticking to as follow-ups to both of my questions. So when you kind of talk about feeling good about an upwards trajectory in next year in some of the KPIs and growth, is there a way on a macro level for you to frame whether you're baking in an expectation for, say, home and auto pricing to decel further from kind of current run rates or for this kind of geographic mix to lower cost states to kind of not be a drag anymore? Is there any kind of macro overlay you'd be willing to touch on at this point?

Yes. I mean I would probably expect you're going to see continued progress in price stabilization. So we have markets that are basically flat year-over-year now. We have markets that are still kind of high teens. I expect those markets that are high teens to continue to trend down into the single-digit type growth numbers. And I think if you look at the revenue retention numbers in the second half of next year, they'll start to perform improving at the same rate that client retention is improving because what you're seeing right now is the price deceleration is happening faster than the client retention improvement, which just means you don't get that full benefit into revenue retention. But on a year-over-year basis, next year, you won't have that same dynamic, which means you get better renewal revenue retention growing with your client retention, which we expect to continue to improve.

Got it. And lastly, on the some of these kind of joint ventures, in my words, with the mortgage participants, servicers, for example, that are now kind of actually in place. Is there any quantification you want to offer on kind of how that should play out in the income statement in the quarters to come?

Yes. I mean what you'll see is that will largely materialize at least the ones on the platform today through new business royalties initially, because most of the mortgage servicer and origination partnerships that we've done to date have been in the form of a franchise agreement. So they don't have to be. That's just how they've materialized so far because these guys want to actually own the business, they want to manage the employees and capture the economic value associated with that. So you'll see that in, a, improving franchise productivity. You'll see it in continued growth in producers per franchise because they've got captive audiences that can sustain a significantly higher number of producers per franchise than what probably the average franchise would be able to do right off of the bat. And then over time, you see that continue to materialize through renewal royalty fees.

Our next question is from Katie Sakys with Autonomous Research.

I guess circling back to client retention. I mean it's great to see that, that number is finally coming up on a sequential basis. If I kind of think about the net of headwinds and tailwinds facing the broader personal lines market next year, how much improvement off that 85% client retention number is realistic next year? And how much of that might be coming from your service delivery tools coming online fully?

Yes. I mean I can't promise any specific number, but we're really encouraged by the current trajectory of it. The rate of improvement right now is faster than the rate of decline that it was leading into the trough. So the mirror image is actually an improving environment. If that holds true, then you can just kind of look backwards at the previous quarters and see what that trajectory looks like. We have spent a lot of resource into client-facing tools into automation that improves our service delivery into our mobile app that should help create stickier clients. And with a stable pricing environment, we expect that, that will create stickier clients. So ultimately, continue to expect it to improve. I can't give you a perfect answer on exactly the pace of improvement.

Okay. And then kind of shifting to the written premium retention figure. I mean, down again sequentially this quarter. I think I have the direction of the impact of pricing all sorted out. And if I kind of think about potential magnitude for next year in the relationship with improvement to client retention. Is it fair to say that we might be around a trough for written premium retention here, especially in the context of a 94% baseline that you guys have previously referred to?

Yes. I mean premium retention will ultimately be guided by what underwriters want to do with their pricing. So it's hard for me to make a perfect call on it because it's not necessarily with inside my control. But if you've got average year-over-year premium increase of 5%, and we've got 85%, 86% client retention, then you should expect 90%, 91% type premium retention. So it's ultimately just going to be client retention plus pricing will get you to your premium retention number.

Our next question is from the line of Mark Hughes with Truist Securities.

Were there any onetime revenue adjustments this quarter? I think you had $4 million last quarter, suggested there might be some in the second half, if I remember properly.

No, nothing onetime in the quarter. What we said in the second quarter was there was going to be improvement in the commission rate from that carrier that we recovered the $4 million from, which that did happen, but that's an ongoing permanent thing. So nothing onetime in nature in the third quarter at all.

Very good. And then the cost that you laid out for 2026 and '27, the $8 million to $11 million in OpEx, how should we think about that? Would you suggest that, that's incremental to what we might have thought about going in, in projecting the business last quarter. And now you've given the more specific detail on costs. Are you telling us that, that's largely incremental to the prior model?

Yes. I mean that's what we're trying to get across is that is an incremental investment on top of the normal business. So if you didn't have that, you would expect the normal operating leverage that we get on an annual basis from growing the renewal book. This is on top of that, which is why we said previously, I wouldn't necessarily think about margin expansion, considering we've got $8 million to $11 million that's going to be flowing through the P&L relative to this investment that wouldn't have otherwise been there. And we do think it's absolutely the right thing to do for the business for the long term and has the potential to unlock potentially very significant growth opportunity for us.

And then on the productivity within the franchise, the new business royalty fees, really nice surge from the first half, up substantially in the third quarter. Anything specific you could call out? I think you've touched on it. You've obviously been pursuing a lot of initiatives. But anything else you noticed in the quarter that had the fish jumping in the boat, so to speak?

Yes. I don't think there was anything super special. It was just kind of continued execution on the plans that we've been rolling out for the last while. The franchise community doesn't turn remarkably quickly. So you got to have faith and confidence in the decisions that you're making that you believe are going to drive aggregate productivity improvements. Great to see continued hiring from the top half of agencies. Those are the ones that really drive the incremental growth. We're getting a lot of very positive feedback from the franchise community. The consolidation efforts has actually aided in productivity because you're getting people out of the system who are largely taking up space and not necessarily contributing massively to growth. So while you may have variability on a quarter-to-quarter basis and what the aggregate growth rate looks like, it's absolutely going in the right direction. I mean franchise productivity per agency is up 19% in the quarter. I'd love to see that on 1% producer growth.

And it's really encouraging to see what we're seeing from our corporate agents that have gone into franchise ownership. We're getting some incremental lift out of those guys. So yes, it pulls down corporate, but these franchise owners that came out of corporate stay with us a long time, and they produce massive amounts of productivity.

Our next question is from Paul Newsome with Piper Sandler.

Just a couple of maybe quick follow-ups on the digital investments. What's the amortization schedule for the stuff that's capitalized? Does that get amortized over a certain period years?

Yes, it's typically 10 years for software similar to this. So that's what I would expect.

So we expect kind of 1/10 of that to be amortized each year for next year.

Correct.

And then when we think about the hope for acceleration growth next year, how much does the digital piece matter? You mentioned you thought that would be -- you see some productivity in the second half of the year. But is it -- when you think about your optimism for next year, is that primarily because of the other pieces that are moving in the right direction? Or -- and I'm thinking so almost more seasonality of the improvement if a lot of it has to do with the technology you're putting in, then I guess we expect more improvement in the back half of the year than maybe early on.

Yes. I mean the way we've been talking about core revenue and premium growth rates going into next year does not really contemplate much attribution from the digital agent. We expect that, that's going to start to contribute in the second half of next year. But remember, the baseline for that distribution channel is basically 0. So it's starting from nothing. It's going to -- we expect to be able to provide significant growth over the longer term. But I wouldn't expect to see material uplift in growth numbers in the second half of 2026, specifically related to that. I would expect continued consistent improvement through both the corporate and franchise business as well as the enterprise sales business continuing to pick up steam. I mean that team just continues to grow at 100% year-over-year, which is awesome to see.

And we have a follow-up from the line of Mark Hughes with Truist Securities.

Just one quick follow-up on the renewal commissions, a little bit of a dip in the third quarter after double-digit growth in 2Q '25. What was the -- what was behind that? Well, I guess some of that was the -- I think the one-timers in 2Q. So I get that. How about just when we think about renewal commissions having turned negative in the third quarter?

Yes. I mean if you go back to the second quarter and you take $3 million out of the renewal commissions number, that was the recovery. We actually improved the revenue retention rate in Q3 over Q2. So the decline in that is really just a function of the math, right? Remember, we produced basically a consistent amount in the corporate team for the last 4 years. Now we've got growth going again on the corporate side of the business, 22% commissions -- new business commissions growth. That's going to aid the renewal book in the future. But if you produce consistently for 4 straight years, that's the math. That's naturally what shakes out with the renewal book. But ultimately, the revenue retention number did improve in Q3.

And this concludes our Q&A session for today. Thank you, and I will pass it back to Mr. Mark Miller for concluding comments.

Yes. I just want to thank everybody for taking the time to join the call today. We appreciate your continued support and interest. Look forward to talking to you again in the new year with our Q4 results.