Goosehead Insurance, Inc. (GSHD) Earnings Call Transcript & Summary

So let's move on. Next session is with Goosehead. Goosehead is a second-time presenter at our conference having just gone public in 2018. From the company is Mark Jones, CEO; Michael Colby, COO; and Mark Colby, Goosehead's CFO. For those of you who are not familiar with the company, Goosehead is really unlike any publicly traded insurance organization, has been reporting organic revenue growth that is also unlike any other company, independent agency distribution of personal lines. It really hasn't changed much over the years. And Goosehead is leveraging a centralized service capability to free up agents to produce new business. Sounds pretty easy. It's really not. What we're going to do is start with a video that the company has produced. So we'll show that now, and then we'll get into some Q&A. Roll the video. [Presentation]

That's the new video from last year. Fantastic. That's great. By the way, as I look at that, remember, they are competing against other independent agents, and some of you may use an independent agent. Some of us, they wouldn't even know what you're talking about. It means it's just so far beyond what most of their local competitors can even envision doing. So it's a very different kind of company. It's hard to really capture all this in the 30 minutes we have, but I need to take a step back to make sure people do understand the model.

So maybe if we can just start with talking about your corporate agents and also the franchise model as well, just so -- for those of you that haven't -- for those folks that haven't seen you before, give some sense of the different avenue.

Sure. Let me give kind of the 30,000-foot overview of where we started because that is highly relevant as to what our human capital looks like now. My background was not in the insurance business. I was a long-time partner, Bain & Company. And in addition to having heavy client responsibilities, I was also a Global Head of Recruiting. My wife, Robyn, started Goosehead because we had a real estate investment portfolio that she was managing and she couldn't find a decent insurance agent. So she just said, "Well, I'm going to start my own agency." And I didn't think much of it because I was really, really busy at Bain. And we have 6 kids. They were starting to grow up and go off to college, and I thought, "Well, this will just be a nice business -- hobby business for Robyn." And I was interviewing a young kid for an associate consultant job at Bain. And I looked at this guy's resume before he came in the room, and extremely impressive, Rhodes Scholar nominee, #2 in his class, lots of leadership experience. And he walked in the room, and I -- first of all, before he got there, I thought, "Okay. I got 45 minutes with this kid. I'm going to spend 5 minutes evaluating, 40 minutes selling. He's obviously a lock." He came in the room and my mind changed. Firstly, his physical appearance was quite striking. His hair stood straight up like Kramer on Seinfeld. And he came in the room, I said, "Lee, how are you doing?" And I'm not exaggerating when I say this. He's waving his arms. "I'm great. Everything is awesome." And I thought, "I don't care if you're a Rhodes Scholar nominee." My key client at that time was Jack Nasser when he was CEO of Ford. And there's none of this in Jack's office. So I said, "Well, we can't give you an offer at Bain, but I'm involved in this other thing, this insurance thing. Would you be interested?" And he said, "Well, I don't know anything about insurance, but yes, I'll take a flyer on you." And that gave me the idea that we can hire people like that. People that under any other circumstances wouldn't be selling personal lines insurance. And that -- the challenge -- there was this sort of huge avoidance that the industry has for young talented people. And when you think about it, if your son or daughter goes off to college and they call you in the spring of their senior year and say, "Mom, I've got a job." And you're thinking, "Yes, this is wonderful." And your daughter says, "I'm going to go sell insurance." Your hair starts on fire and you're thinking, "Why did I waste all this money on a college education?" It's a different story when your son or daughter calls and said, "I'm going to go work for this Bain guy. They're doing something completely different. It's growing at 35% a year. There's incredible career opportunities, incredible financial opportunities, incredible learning opportunities." And you say, "Okay. That makes sense." And so what that did is it opened up a talent pool that heretofore had been closed for -- to the rest of the industry, and that's how we built our corporate agency. In 2012, we were looking at opportunities to accelerate growth and better leverage our back office, and I came up with the idea of let's try franchising. So we did. Our corporate agents and our franchise agents function very similarly. We separate sales and service. So the agent spends all their time generating new business. We do that. The same for our franchise agents. And there's some magic there in that we take all that service burden off their plates. So they're able to continue to grow even as their book of business gets larger and under any other circumstances they get bogged down with service. But those 2 agent groups function very similarly. We use our corporate agency as a key strategic tool to do research and development, training and mentorship with our franchisees. And as a result, our franchisees are almost double as productive as industry best practice.

Just maybe quickly talk about the economics of the franchise channel because that is also fairly unique.

Yes, sure. So each franchisee pays us an initial franchise fee. It averages about $30,000, but this covers all of our costs to recruit, train, onboard and support the agent for their first year. It's really a cost-recovery tool. After that, our compensation is variable depending on how much they sell. So the first term of any policy that they sell, we keep 20% of the commission, and they keep 80%. And every single year that policy renews, it's a 50-50 split, and we retain our business at 88% historically. So what that does is creates a 120% mechanical revenue increase just by retaining at 88%.

Highly visible.

Extremely visible, predictable. And the beauty of it is, I think, it's -- 60% of our franchisees are less than 1 year of tenure with us. And we know there's also a 2- to 3-year ramp-up. So we're continuing to kind of fill the top of the funnel with what we need to be selling it with and knowing that it's going to be very predictable. And the other thing on that is the margin on the renewal business is much higher than on new business. The cost of service is less. The amount of commission we pay is less, so it creates some very nice economics down the road.

When I first met you guys and heard the story, I said, "Well, you have to go find these people that are willing to come work for you." And I knew in the corporate side you've been able to do that and you're recruiting out of school and you have a differentiated story. But the franchise side, you got to take a guy who's already working at a State Farm or an Allstate and convince him to come over in a very different model. So the question is, how have your recruiting efforts evolved relative to what you might have expected if we go back 3 years?

Right. But -- well, first, I mean, it's a huge, huge pool to recruit out of. At State Farm, Farmers and Allstate, the big 3 captive, there's over 100,000 agents across those 3 insurance companies, and they're all -- they're feeling very acute pain points. Single-product platforms, so they have 1 set of underwriters, 1 product to offer their clients, so their addressable market is much smaller. Their ability to win, their close rates are a lot lower, but they're also operating in a traditional model. So the faster and the better they are at sales, the sooner they work themselves out of a sales job and into, basically, an administrative role, doing all of the ongoing customer service work. And I also think it's probably lost on a lot of folks from outside the space on how far behind their frontline folks are from a technology perspective. I mean they are literally working on green screens. So the tools they have are very limited. So for us, that has been a very attractive recruiting ground. 65% of our new agents in the franchise channel are coming from that specific recruiting pool. I'd say, over the last 3 years, what have we learned? One is we've been better at evaluating the talent. Both our ability to evaluate the talent has improved, but also our presence and the brand recognition has improved. So we're capturing the attention of a different caliber of agent. We've also learned along the way what do we need to be doing to set these agents up for the fastest ramp for the highest likelihood of success, and we've made a lot of changes in our on-boarding efforts and our initial training and the support that takes place after that initial training to ensure the success. And we're seeing the results of that in higher productivity, we're seeing the results of that on kind of a trending down of our agent attrition, all very positive things.

So relative to your expectations, again, I thought that 3 years ago it's been at least in line with what you expected? And if not, somewhat better?

For sure. Yes, for sure. I mean, these are all things -- the results that we're seeing today, Jay, are -- they're taking place today because of investments we've made 3 years ago. So a lot of it was -- these are the returns that we expected to get, but I would say certainly -- probably exceeding our expectations.

Got it. In the video, there's a -- there's a quick reference to referral partners. And maybe -- so folks understand that, just explain kind of what you're doing. Because other agencies, local agencies, would love to have these referral partners and they try all the time.

For sure.

But you're able to make a much more robust relationship with these folks.

So if you -- I mean, if you look at the big 3 captives that I mentioned, each of them has a $1 billion ad budget, direct-to-consumer. If you watch an hour of network television, you're going to see 5 State Farm commercials, 3 Allstate commercials, several Farmers commercials. It's not an area that we want to go spend money. So we had to figure out what's some more -- what's a playing field that we can compete on and win against these juggernauts. And what we learned was that by integrating into the home-buying process, we solve pain points for the customer, but we also solve pain points for the professionals in that space, the realtors, the loan originators. The insurance -- believe it or not, the insurance kind of piece of the puzzle and buying a new piece of real estate is oftentimes the most difficult part of the process. And it's the kind of primary reason why a deal may fall apart at the closing table. So if you're a commissioned real estate agent, if you're a commissioned loan originator, you want to accomplish just several key things. You want to close the deal and get your commission check, and you want that client to have a very good experience so that you are generating referral and repeat business. That client sees you, the loan originator or the real estate agent sometimes, depending on the dynamic, they see you as the quarterback of that entire transaction. So if anything goes wrong, it doesn't matter what it is, the title company, the insurance, the appraisal on the home, anything goes wrong in that process, it looks bad on you. And like I said, most often -- times when things go wrong, it's the insurance. So we have figured out a very sophisticated way, leveraging technology, leveraging years of experience and kind of training that we provide and support to our agents, a way to integrate into that process, we're developing relationships with referral partners that can provide us with a high volume, sustainable volume of wave flow, homeowners lead flow. And leading with the home is something that's very attractive because these homeowners have other assets that we can cross-sell. But it's that go-to-market strategy that has allowed us to see very high levels of productivity and very low client acquisition costs.

Yes. Makes sense. Geographically, how many states are you in now? And is this going to be a national company at some point in every state?

We're less worried about the number of states and more worried about the coverage of human beings. So right now, we're in...

North Dakota may not be a big one.

That may not be a big one, but we cover about 85% of the U.S. population right now. So we're focused on going deep in those states. And really, we don't even think of it as states. We go deep in those markets as opposed to looking to open an office in Fargo in North Dakota.

Are these mostly in urban areas? And you're more suburban?

It's both urban and suburban.

Total number -- the last disclosed total number of franchisees?

It's 614.

Operating.

Operating.

948 total signed, plus operating.

And so those signed people, they will become operating?

They are in the process of launching.

And that's over a 3-month period?

It's anywhere from 1 month to 18 months. I'd say, on average, it's within 1 year when they sign up. And to our earlier point about the higher caliber of agents that are coming online, those agents also tend to have kind of a longer implementation period, really, because they have more to unwind. We have a successful -- Allstate agency, but they need to unwind in order to invest here and take their business to the next level.

Got it. That makes sense. Can you talk about your comparative rating technology? It's a relatively new thing in the last couple of years, I guess. How does it work? And what are you using it for?

So one of the challenges of being an independent is just the complexity of working with so many different distributors or suppliers. And you have to engage each of those different insurance companies in a unique way. So the comparative rating tool, on the front end, when we're working with a client and trying to determine what's the right fit for them, what's the price going to be, this tool allows us to -- and along with multiple, like, database, data source integrations with a very limited number of data points, name, address, data of birth, pull in all of the information that we need to provide a home and auto quote. So including vehicles, VIN numbers, driver's license numbers, to pull it in and get -- and then push that out to all of the different companies and bring back initial rate indications. So it dramatically improves the efficiency of the agent's time, a much better client experience. Over time, that tool gives us rate -- a rate that we didn't have to bridge into the carrier system to finalize and issue the policy. Over time, and what we're working at right now, where we're investing today is to integrate that last mile to say, not just to get your initial rate call, but your final rate and the issuance of that policy is all done in the -- in our single interface which, again, improves the efficiency for the agent, but also, gives us a tool that we can point directly to the consumer, which we believe we will be the first truly choice model that we can make available direct to the consumer online.

With a competitor, they -- don't most independent agents have access to some off-the-shelf competitor rating platform?

Sure. That in itself is not anything unique and innovative. But what happens is, agents, you're working in multiple different interfaces. So you're working in whatever your agency management system is, you're working in a comparative rating solution, you're working in a web browser to get all the details of the property that you're quoting, then you're working on the carrier side. And the tools that you're using that are available off the shelf to agents, as you can imagine, because of where we're at, our industry is at, they're not very capable. They're super rigid. They're hard to customize. So what we've done is built our own on the Salesforce platform that gives us complete customization control, and it gives us the ability to work in all of these publicly available data sources. So in the off-the-shelf solution, it's going to take you 150 to 200 data points to get a rate indication, okay? There's not a lot of customers today that would want to sit through an interview and answer 200 questions. And a lot of times, they don't even know. "What stage is a home?" I don't know. "What's the roof material? What's the build type? What's your VIN number?" These are things that just are -- it's a really painful process to go through. Having this, the data source integrations that answer all of those questions, we're asking 5 questions, 3 to 5 questions. We bring all of that information in, and we're not having to go into a different system to get the actual rate. It's a much better experience for the agent and for the consumer.

Yes. Let's talk margins. So obviously, the top line growth has been robust. As you rightly pointed out, there's good visibility to suggest it shouldn't slow down much, but you're also investing heavily in the business to drive this growth. At some point in the future, investors will want to see bottom line results mimic the top line results. When do we start to see real margin improvement in your model, do you think?

I'll just start by saying that if you look at us compared to the commercially traded brokers, we're growing 10x as fast as they are with equal or better margins. So -- and the other side of that is, we're always thinking about how to maximize profit dollars over the long term. Right now, that means investing for top line growth. We know, mathematically, margins expand as new business converts to renewal. So over time, as that mix shifts from new to renewal, we expect some margin expansion. However, we're always, as of this time, trying to outrun that mix shift and add as much new business as possible.

Yes. I think it is also important, though, to emphasize that the -- kind of the other publicly traded insurance brokers are primarily growing through acquisition, which consumes a lot of capital. Almost all of our growth -- not almost, 100% of our growth is organic, and all the investments that we make to achieve that growth run through the P&L. There's almost nothing that hits the balance sheet. So if you look at sort of the underlying fundamental profitability per dollar invested, ours is much, much and much higher than anyone else in the space.

And I think it's also worth mentioning the runway for growth that we have. And we're in a $365 billion U.S. personal lines, property and casualty market. We finished the year in 2019 at $739 million in total written premium. So how long can we focus on growth? Forever, for all of our lifetimes.

Yes. It's a massive market. Go international at some point.