Business Breakdowns
· Matt Reustle, Geoff Collette
[00:00:00] S0: Incredible backstory. I'm just still focused on having five children in the middle of your business school education. But that didn't stop their entrepreneurial journey together. On the point of them entering the market again, focusing a little bit on this theme of independence versus captive, would you say that has been a trend that's evolved over the years? Just thinking about positioning of captive players versus positioning of independent players, has there been a broader shift in the industry towards more independent or more captive over a period of time? [00:00:00] S1: In the past decade, the IA channel, the independent agent channel, has increased its market share from 2013 to 2023 in terms of homeowners premium as a percentage of total distribution. The IA channel increased from 41 to 51%, the captive channel shrunk from 53 to 34%, and direct has grown from 6% to 15%. Similar story on the auto side, a little bit different though in terms of the IA channel growing slightly from 31 to 33%. The captive channel has shrunk from 50 to 36%, and direct has grown from 19% to 31%. And there importantly have been shifts with carriers themselves in moving into the IA channel and away from the captive channel. There are examples including Nationwide, Liberty Mutual, and Allstate making those shifts over the last decade.
· Geoff Collette, Matt Reustle
[00:00:00] S1: In the past decade, the IA channel, the independent agent channel, has increased its market share from 2013 to 2023 in terms of homeowners premium as a percentage of total distribution. The IA channel increased from 41 to 51%, the captive channel shrunk from 53 to 34%, and direct has grown from 6% to 15%. Similar story on the auto side, a little bit different though in terms of the IA channel growing slightly from 31 to 33%. The captive channel has shrunk from 50 to 36%, and direct has grown from 19% to 31%. And there importantly have been shifts with carriers themselves in moving into the IA channel and away from the captive channel. There are examples including Nationwide, Liberty Mutual, and Allstate making those shifts over the last decade. [00:00:00] S0: If I'm just thinking about from the consumer perspective, the options of going through captive versus IA, I would think of captive as you're going to see one thing. You might get an advantage price if you go to the right captive provider. The IA is going to be much more bespoke in nature and can tap into many different policy providers, but pricing, I would imagine given there's two players involved, you might not necessarily see better pricing. But take that rough framing from the little that I know and tell me where I might be right and more importantly where I might be wrong on that.
· Matt Reustle, Geoff Collette
[00:00:00] S0: If I'm just thinking about from the consumer perspective, the options of going through captive versus IA, I would think of captive as you're going to see one thing. You might get an advantage price if you go to the right captive provider. The IA is going to be much more bespoke in nature and can tap into many different policy providers, but pricing, I would imagine given there's two players involved, you might not necessarily see better pricing. But take that rough framing from the little that I know and tell me where I might be right and more importantly where I might be wrong on that. [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.
· 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.