Business Breakdowns
· Geoff Collette
[00:00:00] S1: Gross written premiums are the leading indicator of revenue growth. Agent count is really the key driver, but really productive capacity, as mentioned before, highly productive agents versus low productive agents can have a really big difference. Aside from agent count, productivity per agent is also key. There's also a component to policy premiums growing over time. In recent years that's been very significant double digits but should trend down to a more moderate single-digit pace that will improve retention. And so the way to think about the way the company is growing is across the different programs that they have. So Corporate is roughly 20% of total producers. They are hiring more quality corporate agents with a large university recruiting program. On the franchise side, which is really the main focus, they have an agent staffing program whereby Goosehead has dedicated recruiters that are helping existing franchise accelerate their growth. They're launching additional franchises with a greater focus on franchises that have the willingness and ability to scale. They've doubled the franchise development team recently. There's corporate conversions that I mentioned before launching high-performing corporate producers into new franchises. Roughly 35 or so I believe have done that since 2023. And there's also these middle-market franchises that are partnership in nature where Goosehead's effectively embedding a franchise into other businesses that have built-in lead flow companies within real estate such as mortgage servicers. And this is actually an area of the business that's effectively going to turn into like the third leg of the stool in terms of their go-to-market strategy, which I find really interesting and is supported by a lot of what they've built over time. And it's hard to replicate their value prop that they are bringing to bear.
· Matt Reustle
[00:00:00] S0: Is there a way to quantify the opportunity that would exist in that third leg?
· Geoff Collette
[00:00:00] S1: It's massive. Anyone with a mortgage is effectively going through a mortgage servicing process. Those businesses are seeking to integrate insurance economics by embedding a franchise into their existing operations or partnering with Goosehead in what they call their enterprise corporate agents where those agents are effectively being fed inbound leads rather than the core referral partner go-to-market strategy. An example of this is a partnership with Vivint Smart Home. At year end 2024, enterprise agents grew to 65, roughly doubling year over year. That embedded middle-market franchise category is really unlocking new customer pools that are distinct from their existing go-to-market approach. They have an embedded franchise with a national bank that spans both its mortgage origination and servicing divisions. These efforts are being powered by Goosehead's proprietary technology. Its digital agent and its QTI technology really enhance the productivity of those efforts and accelerate the onboarding of new agents. Goosehead's seen a significant uptick in inbound interest from national mortgage servicers to integrate with them through one of these different options. They have a unique ability to provide product access effectively nationwide with extraordinary client service and technology that helps those brands cross-sell and makes Goosehead kind of the natural partner of choice. The pipeline for those types of partners is quite large. There's really a potential for the enterprise agent production to exceed Goosehead's traditional corporate agent approach over time. Mortgage servicers could be a massive unlock. Relatedly, DTC Auto, which we touched on earlier as part of the industry, is predominantly so-called nonstandard customers. Goosehead could potentially use its digital agent, its QTI and its partnership approach to be a leader in a different segment of the market in a manner that doesn't currently exist in the market today. They're talking about all these different aspects and today they're relatively small, but they could certainly grow in terms of the size of the overall mix and it would further temper the company's exposure to the housing market dynamics that we walked through previously.
· Matt Reustle
[00:00:00] S0: It's always interesting when you have an industry that's evolving and a player that's sitting in the front row seat to drive that evolution, even if they are smaller in size today. On that point, just in terms of navigating certain market exposure, housing exposure, what type of cyclicality do you see in the top line? I think you described a little bit from an EBITDA margin perspective, but how sensitive is this business to the economy when you see swings? I know we haven't seen a material swing necessarily in a while, but any gauge for that?
· Geoff Collette
[00:00:00] S1: It's worth mentioning at the outset of the answer to that question that anyone with a mortgage or that drives a car must have homeowners and auto insurance. It is a required purchase. It's not something that people can typically stop having in times of economic stress. Goosehead as a business is still relatively small in the context of the industry and within the home purchasing side of the business. So what they've been able to effectively do is focus on geographies that have product availability where they can match productive capacity to that. That has allowed them to navigate a historically tough environment relatively well. We didn't go into this in a lot of detail before, but effectively an agent develops these relationships with the referral partners. Well, if the lead volume per referral partner is going down because of housing market transactions, they've been able to go out and cultivate additional referral partner relationships and more than offset the decline in the home transaction market. That's been a particularly impressive aspect to the business. The most important aspect to the trajectory of the business is really around the insurance market cycle, that product availability piece. The hard market cycles are when loss trends basically unexpectedly increase such that the insurers are no longer profitable and need to go through that filing process on a state-by-state basis. As mentioned before, that can really hurt the ability to convert new business. But what we've been seeing more recently is that there is a healing process that has taken shape. Auto is out in front of homeowners insurance. The first nine months of '24 the industry statutory auto direct loss ratios were about 65% versus 75% a year ago. Many of the large auto insurance carriers are pursuing growth. Homeowners direct loss ratios were 67% versus 81% a year ago. There is that process that happens where carriers on an individual basis need to stop pursuing growth to heal their profitability. And I would just go back to like the natural hedging that Goosehead's business model has whereby as that product availability becomes more scarce, premiums are actually increasing. So while it places challenges on the new business production and can hurt retention, it's driving up the value of that renewal book.
· Geoff Collette, Matt Reustle
And as that cycle turns, it's clear that the product availability aspect, when it's pronounced, hurts them more than the increase in the premiums that they're getting. And now they're going through a cycle where through the course of '25, the premium increases are going to come down. The rate at which the renewal book improves may not happen on a one-to-one basis, but effectively their client retention should go back to historical levels and they should be able to grow on a much more unfettered basis going forward. And so we've really gone through this particularly intense period of time and the company has been able to grow very effectively right through it. [00:00:00] S0: Piecing it all together. You talked about the capital efficiency associated with the franchise model. Does the business produce cash flow? How does it manage the various capital allocation opportunities that it has?