Business Breakdowns
· 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?
· Matt Reustle, Geoff Collette
[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? [00:00:00] S1: The business does produce free cash flow, generated about $60 million in 2024. The bigger the business becomes, the larger that renewal book is. Particularly as it becomes more weighted to franchise, the higher the margin the company will have and the more free cash flow will produce. Historically, the company had not pursued share repurchases. They did in fact do so in 2024 when the stock became dislocated for some period of time, which was great to see them make that choice. They've done special dividends periodically. They just did one recently. I think the company's effectively committed to increasing margins on an annual basis, but they're really squarely focused on that long-term target of becoming the leader in the industry. And there's not a real big trade-off between growth and profitability, particularly as you add productive capacity on the franchise side. That cost isn't really being borne on their P&L. And there's that delay effect that we talked about in terms of the new business being 20% to Goosehead, but then flipping to 50% on renewals. And so you've seen revenue growth come down because the corporate agency side has slowed where franchise has remained a fast grower. But there's that effect on the accounting side where it will then catch up as that renewal takes place.
· Geoff Collette, Matt Reustle
[00:00:00] S1: The business does produce free cash flow, generated about $60 million in 2024. The bigger the business becomes, the larger that renewal book is. Particularly as it becomes more weighted to franchise, the higher the margin the company will have and the more free cash flow will produce. Historically, the company had not pursued share repurchases. They did in fact do so in 2024 when the stock became dislocated for some period of time, which was great to see them make that choice. They've done special dividends periodically. They just did one recently. I think the company's effectively committed to increasing margins on an annual basis, but they're really squarely focused on that long-term target of becoming the leader in the industry. And there's not a real big trade-off between growth and profitability, particularly as you add productive capacity on the franchise side. That cost isn't really being borne on their P&L. And there's that delay effect that we talked about in terms of the new business being 20% to Goosehead, but then flipping to 50% on renewals. And so you've seen revenue growth come down because the corporate agency side has slowed where franchise has remained a fast grower. But there's that effect on the accounting side where it will then catch up as that renewal takes place. [00:00:00] S0: On the risk side of the equation, thinking about competition, how much of a threat is either existing competition or the potential for new entrants or incumbents in new markets that they try to enter?
· Geoff Collette
[00:00:00] S1: I think this is where it gets really interesting. There's no question that there's competition. There's zero barriers to entry in this market. But I would argue that there are increasing barriers to compete effectively with Goosehead in the channels in which they operate. And there's meaningful complexity across the multiple facets of the business model. I think it's helpful to think about competition at the various levels, whether it be referral partners, hiring corporate agents, franchise entrepreneurs and partnerships. And I think Goosehead's relative value propositions have strengthened over time. They're still less than 1% of the market. There's lots of room for multiple players. I would sort of pose a few questions here in the context of your question, which are: does Goosehead have the best business model, strategy and people powered and accelerated by innovative proprietary technology? At a certain point, did it become the case that its ability to execute matters most in determining the level of success it has had and will have over time? Over time, has it become the case that the people at Goosehead are actually the secret sauce and the most critical ingredient in strong execution? And how hard is it for someone to replicate their success? Is it becoming increasingly difficult, and is anyone really pushing hard on that? I think that all the different components of what they do are hard to replicate. You can't just throw money at it. It takes time. There's cumulative knowledge, there's reputation. There are relationships that are built. There's room for others to succeed, but it's largely down to execution for them that will determine the pace and ultimate size of the business over time.