Business Breakdowns
· Geoff Collette, Matt Reustle
[00:00:00] S1: Generally speaking, a given insurance carrier can only effectively underwrite a certain segment of the market. IAs are able to increasingly provide insurance product across a wider and wider swath of insurance carriers. So while State Farm is the largest, they're still less than 20% of the total market. And in the context of a consumer going to a Goosehead versus a captive, the likelihood, depending on product availability in that given geographic location, you're likely to find a much better rate, or at least a better rate for a given level of coverage through an independent agent relative to a captive provider. But that is somewhat situation dependent. There has been quite a bit of volatility in the product availability aspect of the marketplace in the last few years. [00:00:00] S0: I think headlines show you things like what's happening in Florida and the challenges of insurance underwriting there. Your earlier point on their Texas exposure, can you tap into that a bit more just in terms of it being the early foundation of the business? I'm sure they're evolving partially away through growth in other markets, but what's the backstory to their concentration in Texas and were there unique dynamics about that market that allowed for them to capture share?
· Geoff Collette
[00:00:00] S1: That's where the business began. I'm not sure that there's a secret sauce related to Texas itself. There is a dynamic around insurance regulation on a state-by-state basis whereby certain states can be more amenable or more difficult in terms of getting the appropriate rates approved. And on the street, so to speak, for consumers, states like California are much more difficult. Ironically, California has created an environment where a lot of carriers have actually stopped writing new business and Goosehead has a very compelling value prop because some of those captive carriers are no longer competing there. But to your point around Texas, the way to think about geographic concentration is through the lens of product availability, and I think that historically it was a fertile area for Goosehead to grow and more recently that's been a more challenging environment from a product availability perspective. The thing to understand about product availability is it can pressure retention rate and conversion for new business. Goosehead has been experiencing this pressure in Texas, particularly in the home insurance market due to very significant increases in loss trends for the carriers. To give you a sense, in 2023 Texas experienced an all-time high in severe weather, the highest since 1980. Fifteen severe storms caused combined losses between 20 and 50 billion. So practically speaking, if there's a dearth of competitively priced product or even product available at all, Goosehead can lose customers to captive insurance companies, products not offered by Goosehead. And sometimes those carriers may be writing unprofitable business that is priced inappropriately relative to the risks in the market. There is considerable nuance with respect to insurance. And one thing to just keep in mind is certain captive carriers are structured as mutual insurance companies, which means they're owned by their policyholders. And so as long as they have adequate surplus, they can compete in a manner that others typically won't. But that's only sustainable for so long. And as I mentioned before, insurance is regulated by state. And so carriers need to go through a process whereby they file for increased rates. There may be changes to policy structure. It takes time for that new paper to basically become available on the market.
· Geoff Collette, Matt Reustle
And so Texas is one of the more amenable states in approving carriers, but it has basically created a win for Goosehead in the interim. They have been diversifying away from Texas for years and they continue to push on that as more states open up from a product perspective. For example, they just recently opened a new corporate office in Arizona in Q4. So Texas remains a big part of the story, but they're increasingly diversified. [00:00:00] S0: And I think you got into some of the dynamics of the industry. There's everyone loves the idea of insurance and everyone goes into Warren Buffett and Berkshire and the float and what that can offer. And sometimes they overlook the risk of underwriting policies and how difficult that actually is. Can you talk through in a typical underwriting process what Goosehead is doing, what risk they're taking, if any at all? And the cleanest way to maybe look at this might be through a dollar of policy underwriting or whatever it might be, but just to frame some sense of how the economics are working and where the risk is sitting.
· Matt Reustle, Geoff Collette
[00:00:00] S0: And I think you got into some of the dynamics of the industry. There's everyone loves the idea of insurance and everyone goes into Warren Buffett and Berkshire and the float and what that can offer. And sometimes they overlook the risk of underwriting policies and how difficult that actually is. Can you talk through in a typical underwriting process what Goosehead is doing, what risk they're taking, if any at all? And the cleanest way to maybe look at this might be through a dollar of policy underwriting or whatever it might be, but just to frame some sense of how the economics are working and where the risk is sitting. [00:00:00] S1: Happy to do so. The average annual homeowner's policy premium is, I believe, around $2,100. For every hundred dollars of insurance premium, roughly $60 of that goes to claims and reinsurance costs. $29 goes to operating expenses, including 12 to $14 for agent commissions. Goosehead receives 14% commissions on new business, 12% on renewals, and then there's 15 to $16 of opex. Think underwriting administrative costs. That leaves basically a low single-digit percent for underwriting profit, excluding investment income. And so effectively Goosehead occupies a part of the value chain that's actually producing the most economic value, particularly in periods when there's volatile underwriting results. That is a very attractive place to be.
· Geoff Collette, Matt Reustle
[00:00:00] S1: Happy to do so. The average annual homeowner's policy premium is, I believe, around $2,100. For every hundred dollars of insurance premium, roughly $60 of that goes to claims and reinsurance costs. $29 goes to operating expenses, including 12 to $14 for agent commissions. Goosehead receives 14% commissions on new business, 12% on renewals, and then there's 15 to $16 of opex. Think underwriting administrative costs. That leaves basically a low single-digit percent for underwriting profit, excluding investment income. And so effectively Goosehead occupies a part of the value chain that's actually producing the most economic value, particularly in periods when there's volatile underwriting results. That is a very attractive place to be. [00:00:00] S0: I can see where that 68 cents of claims would be something that could probably swing depending on the market and underwriting. And you have to price it right to actually have somebody take the policy. But I'm sure there is some ability to make more margin from that $0.68. Out of curiosity, do you know how much that can swing for various providers?
· Matt Reustle, Geoff Collette
[00:00:00] S0: I can see where that 68 cents of claims would be something that could probably swing depending on the market and underwriting. And you have to price it right to actually have somebody take the policy. But I'm sure there is some ability to make more margin from that $0.68. Out of curiosity, do you know how much that can swing for various providers? [00:00:00] S1: It's actually proven to be very difficult. You'd think that home insurance is a business where a lot of these companies can make money in, but it's actually proven quite difficult for a lot of even the large carriers to consistently make money in homeowners insurance. I think one of the points that is worth understanding is how Goosehead, their business is actually very naturally hedged in terms of their ability to deliver growth and improving margins in varying macro environments. So as product availability constricts and premiums rise, that is prices going up, it places some challenge on new business production, but it drives up the value of their entire renewal book, which is very profitable. And as premium growth rates level off, product becomes more available, allowing for significant new business production growth, retaining a higher percentage of the existing book and earning more favorable contingent commissions, which are often based on production levels and the underwriting profit of the business that the agency writes.