Business Breakdowns
· 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.
· Geoff Collette, Matt Reustle
[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. [00:00:00] S0: Can you share a bit more about what renewal looks like in terms of whether the policies are being renewed at a certain term or duration of the contract or whatever might be entailed when it comes to renewals?
· Matt Reustle, Geoff Collette
[00:00:00] S0: Can you share a bit more about what renewal looks like in terms of whether the policies are being renewed at a certain term or duration of the contract or whatever might be entailed when it comes to renewals? [00:00:00] S1: So homeowners insurance is typically on an annual renewal cycle. For Goosehead, the client retention is currently 84%, but premium retention, which includes the ability to attach incremental policies as well as the premiums going up, is around 98%. Historically, client retention was around 89% with premium retention around 93%. So you can kind of see quantitatively what I was referring to just a moment ago in terms of the hedging dynamics around their business. [00:00:00] S0: In some ways, Goosehead acts as an extended sales force or an external sales force for a lot of these insurance underwriters. Would you say there's anything else unique about the go-to-market? I think you gave a pretty good overview. Is this making a lot of phone calls? Are there very unique relationships with the real estate agents? Is there anything else that gets into the special sauce that's allowed them to get where they are today?