Business Breakdowns
· 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.
· Matt Reustle
[00:00:00] S0: Are there other risks that stand out to you? I think we've talked through a variety of different times of stress for the business historically. But what do you view as risks that maybe we haven't talked about as much?
· Geoff Collette
[00:00:00] S1: The company did experience some pressure last year with a couple isolated instances where two younger carriers that were suffering from elevated losses that we talked about in terms of the Texas homeowners insurance market. Those companies got to a point where they were effectively not wanting any new business while they needed to reprice themselves and change the structures of their policies. And honestly, we're also in the midst of shifting their own business models. And so Goosehead did feel pressure on renewal commissions being cut by those two players. I would say that that's not been something that has happened outside of those isolated instances. Carriers generally need quality distribution partners, and that requires paying competitive commissions. Given that many agencies are much less efficient than Goosehead, and those agencies represent the vast majority of the industry, significantly reducing commissions would be very impactful and potentially shift the competitive dynamics even further into a scale player's hands. That risk will always exist in theory, but the level of partnership and the ability to drive profitable business keeps Goosehead in a good place. With respect to that, there is some level of carrier concentration that exists. It's still a very fragmented industry. There are a few carriers that represent a meaningful portion of Goosehead's business, but not something overly concerning, I think from a disintermediation perspective in terms of the agent's role within personal lines insurance. We kind of walked through the statistics around the IA channel, taking share or at least maintaining it, and the captives really being the share donors. I think Goosehead's technology, with its digital agent and its ability to bring large amounts of proprietary data to bear in a future state, state where AI becomes a greater risk and opportunity for the business, they are pretty well positioned with respect to that. The truth is, and younger people may not appreciate this, but there's a lot of nuance to homeowners insurance. It's different than auto, where there's maybe only a certain number of factors to understand about coverage. Whereas homeowners insurance, there's a bunch of elective coverages that you would not necessarily understand and can be recommended by an agent.
· Geoff Collette
And if you have poor coverage, you can really be in a financially disastrous situation if you're not covered correctly. And effectively, you're not really paying anything for that agent's advice. So I think the agent's role will continue to exist. But there is definitely an opportunity within that partnership structure that we referred to earlier in terms of that third distribution channel where more technology and more data can be brought to bear in a way that hasn't existed before for the industry. What's interesting about that as a final point is carriers have been extremely reluctant to create a dynamic where there's an online travel agent-type situation where pricing is widely available in a comparison setting. That can really hurt profitability. Goosehead has built a business based on profitable growth for carriers with agent and quality control elements to it that have gotten them to a point where they've been able to partner with this QTI technology and the digital agent to create these bindable quotes. And I think that's not really been seen in other parts of the industry. There is some innovation in embedded insurance in areas like home builders, where there are other players that are attacking that market. Those are the various risks, I would say, and really just their ability to continue to attract agents that can be productive and have a culture and philosophy around winning effectively.
· Matt Reustle, Geoff Collette
[00:00:00] S0: On valuation, there's a lot of different ways to look at insurance businesses, businesses that revolve around franchising. What's just the general approach from the market for valuing Goosehead, whether it's a certain metric or methodology that's used? [00:00:00] S1: My perspective on this may be somewhat limited relative to what the overall market assesses the business as, but it's really considering a range of outcomes in terms of the free cash flow per share that the business can generate over the long term. Assessing what that is informs judgment on valuation multiples that would be reasonable or not today or a few years out. I think that's the easiest way to think about it. There's not really tricky working capital dynamics that impact EBITDA to free cash flow conversion. A lot of that is pretty straightforward and so that's, I think, how it's generally approached. [00:00:00] S0: That makes sense and it's cleaner and more straightforward that way. So I can understand that. We close out these conversations with the lessons that you can pull away and this is an interesting business in an interesting market doing interesting things. What stands out the most to you in terms of a key lesson or lessons that you could take away from Goosehead?
· Matt Reustle, Geoff Collette
[00:00:00] S0: That makes sense and it's cleaner and more straightforward that way. So I can understand that. We close out these conversations with the lessons that you can pull away and this is an interesting business in an interesting market doing interesting things. What stands out the most to you in terms of a key lesson or lessons that you could take away from Goosehead? [00:00:00] S1: I love this question. I'll answer it in a personal way and start with the question itself. When it comes to the investment research process, will you be a detective or a newspaper reporter who gets an edge over dust-bound colleagues who don't solve crimes or break stories? Approaching your research and investment process with a beginner's mind and genuine gratitude toward those involved helps unlock insights and open doors, particularly in situations where an industry is evolving and technology is being brought to bear on the distribution of that product. I'd say there's an important thread of trust that can extend from a client to their investment manager and to portfolio company management teams that can make a material difference in driving outsized investment returns, returns that may be unattainable otherwise. Think of situations like when the stock became dislocated and the company was buying back shares. Was that a buying opportunity or was it not? And ultimately for me, the key lesson here is you find what you look for and doing the hard work yourself is really the shortcut.