Goosehead: Insuring Coverage - [Business Breakdowns, EP.212]
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This is Matt Russell, and today we are breaking down Goosehead Insurance. I'm joined by Jeff Collette, founder and PM of Aon Capital Partners. Now, insurance isn't exactly a new industry, and I always enjoy hearing about how a new entrant has effectively carved out a niche in a world of incumbents.

And Goosehead fits that billing perfectly. So Jeff walks us through the story of Goosehead identifying a bottleneck in that home buying process that was a good old fashioned problem to be solved. And then we cover the evolving market where the captives like State Farm and Allstate are leaving opportunity for independent players like Goosehead to provide value.

Now, Goosehead is particularly interesting in terms of how they went about this market, really targeting the real estate agents and their distribution engine. And there's just a lot in general to learn from Goosehead, how they've evolved with notable themes like technology, the franchising model, an emphasis on speed. But this is a business where the evolution is still ahead. So we get into that as well. What will the next chapter look like for Goosehead?

So please enjoy this breakdown on Goosehead Insurance. Jeff, we are here to talk about Goosehead. Thank you for joining us. I think this one will require a bit of an introduction into what Goosehead is. Maybe we could just start with

A simple example of how a customer might come across Goosehead or interact with Goosehead in any given circumstance. So maybe you could kick us off there. Approximately 80% of Goosehead's new business comes in the form of a customer,

Coming across the company, typically through the home purchasing process, whereby a mortgage loan officer, which I'll refer to sometimes in our conversation as an LO or a real estate agent, refers the client to a local Goosehead agent during the mortgage underwriting process to get homeowners insurance. These loan officers and real estate agents are known as referral partners to Goosehead agents.

And then the balance, the other 20% of new business comes from client referrals. So they're not really doing any direct to consumer marketing whatsoever. In terms of the market that they operate in, it's insurance. Is it 100% homeowners insurance? Do they move out into any of the other insurance fields? It's pretty much strictly homeowners and auto. Personal lines is, I believe, a very small portion of commercial insurance.

but they really don't compete in that space. So it's tilted a little bit majority to homeowners. They lead with homeowners insurance and then attach auto and other umbrella type policies as well.

I've seen the add-on options and opportunities come in from my insurance providers in the past, and I know that is common in the industry. Can you paint Goosehead via numbers in some way, whether it's the business size and market cap or how big they are in the market? Anything that can just give us a sense of the scale of the business? The company is roughly a $4.5 billion market cap business.

In 2024, written premiums totaled roughly $3.8 billion. That was about a 29% increase year over year. They're one of the largest independent personal insurance agencies in the United States, yet they only comprise less than 1% market share of the overall personal lines market.

In their go-to market strategy within the home purchasing process, in 2023, they had roughly 18% market share in Texas, their largest state, and about 5% nationwide. Just to give you a sense for its growth trajectory historically, on a five-year and 10-year total written premium compound annual growth basis, that was 39% and 42%, respectively.

They've got roughly 2,500 agents, a little over 400 on the corporate agent side, about 1,100 operating franchises that have about 2,100 total franchise producers. This compares to over 39,000 agents among the three largest captive insurance companies, State Farm, Farmers, and Allstate. And the financial profile of the business is...

a rule of 50, so 20% revenue growth in 2024 and 32% EBITDA margins. They're aiming for that profile to increase to a rule of 60 and be sustainably at that for ideally many years.

Well, get rid of that rule of 40. We got bigger aspirations here. You mentioned captive insurance providers. Can you just define the difference between captive in that term versus what Goosehead might be doing? Captive means essentially that an agent sells product from only one carrier. Historically, this was a primary way of doing business for the large insurance companies.

Independent agents can distribute product from many carriers, except for those that choose to only distribute through captive method, as well as there are some predominantly on the auto side, direct-to-consumer carriers. Think of Progressive's direct business and GEICO. And there's also USAA, which distributes directly as well.

I'm going to get into a little bit more about the differentiation, but I think given these growth numbers, this history of a business, there's going to be some interesting people behind the scenes here, key players, an origin story. Can you walk through that? What is the backstory of Goosehead? Has there been a key player that has propelled it on this path that it's gone on to where it is today?

The backstory is an important aspect. The founders are a couple, Robin and Mark Jones, and I'll give you a little backstory on them as well. So they were teenage sweethearts in Alberta, Canada. They got married when they were just out of high school. Mark initially went to work driving trucks for Robin's father's fertilizer business, and a couple years later went to the University of Alberta.

By 1985, they were living in Calgary with three children on Mark's $18,000 Canadian dollar salary as a CPA. He borrowed money to go to Harvard Business School. His fifth child was born on the day of his first midterm.

Mark joined Bain after graduating in 1991, essentially became a road warrior. By 2002, his wife Robin started flipping a few homes and realized a pain point in dealing with insurance agents as part of that process and believed she could do it better and became an agent herself. In 2003, Goosehead was founded on the premise that the client should be at the center of its universe

At its founding, they set a goal of becoming the number one distributor of personalized insurance in the U.S. during Mark's lifetime, and they remain committed to doing what it takes to get there. Just to give you a sense for what that means, State Farm is the largest personalized insurance distributor at over $80 billion of auto and home direct written premiums via the captive agency model that we discussed. That's roughly 20 times VUSAT's current size.

In 2004, Mark left his role as a partner at Bain to join Robin at Goosehead. Neither Mark nor Robin took a salary for the first couple of years. And the business really started hitting its stride in 2006 with the hiring of its first customer service agent.

And really, there are a few early insights and decisions that shaped Goosehead's business model. The first being splitting the sales and service functions. It's often required of agents in other agencies to perform both of those functions.

But it's really often the case that those roles are better served by different personality profiles. Another aspect is that rather than spending money on advertising, Goosehead could focus on relying on referrals. Informed by Robin's experience and the need for homeowners insurance when closing mortgage,

That motivates a loan officer to line up an insurance agent. And I think lastly, and one of the most important aspects too that might not be fully appreciated is Goosehead really created a business that could hire young employees right out of college, the opposite of what Robin was seeing while she was getting licensed as an insurance agent. Goosehead's leadership approach and growing success could make the company unique and

in making insurance a more lucrative and exciting career path to attract young professionals. They began franchising the business as well in 2012. They completed their IPO in 2018, and net founders remain at the helm of the business and own 35% of the company.

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? In the past decade, 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 in direct sales.

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.

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. 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 goose head versus a captive, the likelihood, depending on product availability in that given geographic location, is

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.

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? 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 running 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. Gooset has been experiencing this pressure in Texas, particularly in the home insurance market, due to very significant increases in loss trends for the carriers there.

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, i.e. priced inappropriately relative to the risks in the market.

There's considerable nuance with respect to insurance. And one thing to just keep in mind is certain captain 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

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. And so Texas is one of the more amenable states in approving carriers, but it has basically created Edwin's for Goosehead in the interim. They have been diversifying away from Texas for years now.

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.

And I think you got into some of the dynamics of the industry there. 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 risks 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.

Happy to do so. The average annual homeowner's policy premium is, I believe, around $2,100. For every $100 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, GUSED 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.

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 68 cents. Out of curiosity, do you know how much that can swing for various providers?

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, i.e. 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.

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? So homeowners insurance is typically on an annual renewal cycle for Goosehead. The client retention cycle

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 that business.

In some ways, Goosehead acts as a 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?

Goosedead has a differentiated business model and innovative proprietary technology that effectively offers a superior value proposition to its various constituents. I can kind of walk through that across insurance buyers, agents, their referral partners, and carriers. So for insurance buyers, Goosedead provides unrivaled product choice, over 200 carriers.

expert sales and service agents, and proprietary technology that enables very fast quoting.

They're effectively simplifying the complexity of insurance to help buyers find the right coverage at the best price in a superior experience, as evidenced by its 89 net promoter score, which is four times the industry average. For agents, GUSED provides best-in-class productivity. Corporate sales agents and franchise sales agents with over three years of tenure are

averaged 2.8 times and 1.9 times greater productivity than industry best practice, respectively. Those results are driven by the unrivaled product choice that improves close rates and benefits client retention. They have a centralized high quality service team that enables sole focus on sales and benefits from high retention rates. And to your point around the go-to market strategy,

That's centered on these referral partner relationships, which is a highly efficient go-to-market approach, and it's supported by its proprietary technology platform. So they're effectively getting very high-quality leads at very low costs.

Goosehead agents don't compensate referral partners for leads. Rather, their referral partners benefit from Goosehead's servicing capabilities for a given client that also help generate repeat business that's critical for that referral partner. Its industry-leading proprietary technology empowers agents to improve efficiency and client satisfaction by streamlining workflows. I'll give you a few examples.

So they've built out a referral partner search tool, which is a unique database of home transactions tied to specific individuals across the nation. So their agents can be very targeted in their marketing efforts to maximize lead flow. And they're able to coordinate amongst view set agents so people aren't going after the same referral partners.

They have an agent-facing comparative rater that simplifies and speeds up the quoting process, improving the client experience and conversion, supported by agent-driven machine learning for predictive coverages based on tens of millions of quotes since 2018.

They've created what's called a digital agent, which is a unique self-serve consumer shopping experience that matches clients to best coverage in under two minutes with as little as three data points. Clients can bind quotes through a brief call with local agents that have expertise in their specific market. All client data is treated confidentially. This type of experience does not exist on the market today, aside from Goosehead.

And they are also increasingly building out what's called quote-to-issue or QTI technology, whereby you can actually bind a carrier's policy within Goosehead's proprietary agent-facing radar rather than the carrier systems, which just speeds up the process that much more. In terms of recruiting corporate agents,

They basically have a value prop where it's a 18 to 24 month paid apprenticeship to master insurance and develop this referral partner network offering compelling career growth with multiple opportunities. And on the referral partner side,

They're really offering that unrivaled product choice that maximizes the likelihood for their client to get best pricing. It's particularly important these days with the affordability challenges in the housing market. They have best-in-class service that basically provides these binders that are part of the home closing process within an hour of receipt, preventing the insurance from ever holding up a closing deadline.

And they help those loan officers grow their own business by giving them insights from the technology that they have that has the details around additional real estate agents that they could be working with. And lastly, on the carrier side, Viewset efficiently drives profitable growth where and when carriers need it most through its broad scale distribution capabilities that have centralized quality control by leading with that home insurance

customer, Gusset's bringing high-quality bundled clients to carriers who retain well, supporting more favorable loss ratios.

And by working very cohesively with them, they're able to understand a carrier's risk appetite and basically use their technology to deliver the exact type of client that those carriers are looking for through one scale distribution partner. And in that sense, effectively, Goosehead is getting...

increasingly scarce capacity in certain instances where carriers may be shutting off distribution to all but Goosehead, which can be particularly important given the discussion we had around the availability of product and what that means with respect to retention and writing a business.

I want to break down a few things in that. On the point about 200 providers that are in the network, how does that compare to some of the competition? If you think about the typical mom and pop, they don't have the scale to essentially support

as many carriers. At the end of the day, you don't necessarily need an endless amount of carriers, but you need enough product choice. There are instances where excess and surplus insurance that's less regulated has actually become a critical product to have in markets like Texas, where the traditional insurance market has become

so scarce in terms of product availability that that ends up being a critical thing that Goosehead can bring to bear for its clients. Whereas I think a lot of other insurance agencies may not have the wherewithal to really stand up those relationships and offer to their clients, forcing clients to look elsewhere for business and creating difficulties in retaining existing clients.

Is there a segment of the market that is outside of the small mom and pops, not captive, but looks similar to Goosehead in some way, shape or form? Breaking down what you mentioned, the 200 providers, let's say if it's even 50 or 100 providers, are there a lot of competitors that kind of operate in that scale? There's certainly competition, without question. I think

The important thing to understand is all the different components that go into the value proposition within their specific go-to market approach. So by focusing on the home purchasing process, winning in that specific channel,

That's how they're driving success, whereas many other agencies are basically spending a lot of money on mailers or internet leads, which are highly inefficient relative to what Goosehead's doing. And by bringing to bear not just product choice, but the technological capabilities and the service levels, it's the totality of what they do that...

leaves them in somewhat of a category of one within their preferred way of going to market. I sometimes try to overpower and isolate things, which I understand can't really be isolated because it all operates in a system together. On the referral partner aspect,

aspects, and what that's doing. I thought it was interesting you mentioned there's not actually a payment made. It's much more about what they can do. In my mind, I'm thinking if I am one of those referral partners, maybe I'm the real estate agent, I would certainly prefer to get dollars in if I can. Is Goosehead really just filling a void in the market?

where those underwriters that might pay that referral don't have policies, but you know you can rely on Goosehead for it. How would you describe that? Because it is an interesting dynamic when there's not dollars and cents being exchanged.

You have to really think about the different types of competitors that they're competing against. A captive, as we discussed before, they're not able to compete in the vast majority of situations in terms of the best price for a given coverage. If you were a referral partner that's relying on a captive,

your clients are being underserved from a product choice and pricing perspective. I think that with the affordability challenges today in the housing market and the dynamics around monthly payments, if you're able to bring down that insurance cost, it can really move the needle with respect to people being able to get into the homes that they need. So that part is really important.

A more traditional IA lacks the service capability that Goosehead is so known for.

Go back to the business model design of separating sales and service. A lot of traditional AIs are overwhelmed with the various aspects of running their business, including servicing their clients, that they're not able to be as responsive as Goosehead. And so in the context of their referral partner,

They want to solve for that financial aspect to it. They want the service aspect to the binder and the closing process to always go off without a hitch. And effectively, they want their client to feel really well-served and be willing to refer that loan officer or real estate agent to their friends or do business with them again. And so I think that in my discussions with referral partners and Goosehead agents,

The cohesiveness with which they work together in shared outcomes is really paramount relative to what's really a nominal fee that someone could be paying them to get business that really isn't matching up against everything I just described. And on the individual agent side...

Are they compensating their agents any differently? I understand there's a separation in terms of they let their hunters be hunters and not have to worry about the harvesting aspect as much, which I think is an extremely valuable strategy, especially with something like this. But is there anything else when it comes to compensation that differs from the rest of the industry?

I don't know that that's particularly different. I think what's different is the productivity levels result in an ability to scale a business either as an individual corporate producer or as a business owner in the context of the franchise channel.

that's otherwise much more difficult to do. And so I think the way that the franchise commission splits work is Goosehead will receive 20% of new business commission as revenue, and then 50% of renewals. And so I think that

The value proposition as a franchisee is that Goosehead's effectively providing this proven go-to-market strategy and all this infrastructure training support in order to grow their business in a relatively unfettered way that's much less capped in terms of the profitability that they can generate relative to many other franchise opportunities and other ways of operating as an insurance agency.

I want to transition a little bit into that franchising franchisee dynamic. Is this common in the insurance space? And what would you point to in terms of the value prop of creating franchises and why it makes sense versus just having individual agents that are corporate level agents under one umbrella? It's not very common.

Goosed Head introduced their franchise operation in 2012. There's a company called Brightway that began its franchise model in 2008. Goosed Head has scaled its franchise business at a much more rapid clip. As with all franchise businesses,

The franchisor, in this case, Goosehead Corporate, is effectively able to grow its distribution in a much more capital-efficient manner.

There's a symbiotic nature that Goosedead has between its corporate agency and its franchise, and to have built a very successful corporate agency and then later on franchise, which has increasingly become the main thrust for the economic engine.

In combination, that is a superior way for Goosehead to thrive longer term. Effectively, the aspects that corporate has proven out can be taught as best practices, and they work side by side and cohesively in order for the franchisees to be successful and

And in recent years, they've really leaned on adding additional producers to franchisees that are ready to scale. And one thing that Goosehead has done very well is create effectively a recruiting machine across various lines of business.

in order to add very productive capacity to its go-to-market efforts. The franchise model in the context of insurance works particularly well for them. Other than Brightway, I don't believe it's very common outside of those two companies, given the history basically of the captive structure that they've kind of been disrupting.

When I think about the growth of the franchisees, you mentioned it a little bit there in terms of the recruiting tool, is what you're typically seeing insurance agents from other agencies,

come over and create new franchises under the umbrella? Are they joining existing franchisees? I know it's going to depend a little bit, but is there anything else that goes into it besides a traditional recruiting process to open up a traditional franchise? From the time of its IPO through 2021, call it, the efforts on the franchising side have

leaned heavily on recruiting folks out of captive agencies that weren't necessarily the owners, but were motivated producers that could fit well into Goosehead's system and make a better livelihood for themselves in the context of what Goosehead was able to sort of unleash with them.

There's definitely always been a portion of folks that have no insurance background that can fit well into GUSED's franchise system. But I think increasingly, the company has been focused much more on high-quality franchise partners that have ambition to grow their business to be

significant beyond one or two producers. And we can get into some of the components around that, but there was a pivot readjustment phase starting in late 2022 that has really been impactful to the level of profitable growth that the company has pursued and continues to pursue going forward.

Maybe we can jump into that. What was the driver and the ultimate decision around what happened? Effectively, the company ran into a challenging period in 2021 and 2022 where recruiting standards had

deteriorated, as they put it, resulting in a rising level of unproductive corporate and franchise agents. In addition to that, service hold times became elongated. These dynamics were amplified by a historically difficult real estate and insurance market environment.

The company responded pretty forcefully with that, but I'll just walk through some of the dynamics on the housing market really quickly because that's really important to the go-to-market motion. And effectively, existing home sales dropped from 5.5, 6 million in 21 and 22 to near 4 million more recently. And Goosed Head has actually been able to more than offset this drop in lead flow per referral partner.

by adding more referral partners and actually generating materially higher lead flow per agent.

Their value prop has become stronger to referral partners and clients with the housing affordability challenges that I mentioned. But it's worth noting that only 20% of BUSED's revenue is new business and 80% of that is referral partner driven. So only call it 16% of their revenue is driven by the housing market. So what happened in 2022 was Mark Miller joined as COO in May of 22 and

He was a board member since the IPO. He has since become CEO in July of 2024. Mark Jones Jr.,

was promoted to CFO in September 22. And in the second half of 2022, they basically developed a plan to refocus efforts and resources on growth that's more profitable and to strengthen its competitive moat. In short, an intense focus on operational excellence, putting in a firmer foundation for the company to scale to be a much larger business.

They reorganized the sales management function, consolidating corporate and franchise sales management teams to drive significant improvements in productivity. They went through a very meaningful period of calling underperforming corporate and franchise agents and franchisees starting in late 22 that abated largely in early 24. To put some numbers around that, the corporate agent headcount peaked at over 500, which

in the middle of 22, troughed at around 275 in Q1 of 23, and has ramped significantly in the back half of 2024 after productivity reached excellent levels. In 23, corporate productivity was up 27% year over year, despite those difficult housing and insurance market challenges.

On the franchise side, operating franchises peaked at over 1,400 at the end of 22 and has stabilized around 1,100. And this is where it gets really interesting. More importantly, franchise producers has remained relatively stable.

Peaking at around 2100 near the end of 22 and only dipping down by about 7% in early 24 and now back up to 2100. And the company's really leaned in on partnering with a subset of franchisees who are in a position to scale further by helping them recruit new producers.

So producers per franchise has increased from one and a half in 22 to 1.9 by year end 24. And franchise producers were up only 7% year over year, yet franchise new business productivity was up 49% in 24.

And what's really interesting is that when a new producer is added to a franchise, it improves the productivity of everyone in the agency. And every new producer added to a high-performing franchise is equivalent to launching almost two new franchises.

So what they've effectively done is taking a much closer look at where to add productive capacity into their system in the most efficient manner to drive success. And another way that they've done that is creating a pathway for very successful corporate agents to launch franchises, beginning with a very high level of productivity and ambitions to scale.

In 23, 30 corporate conversions yielded the equivalent of 200 typical new franchises. And this pathway from a corporate agent to a franchise owner is now a key part of the campus recruiting effort that they bring to bear. And so in 2024, they onboarded over 800 sales agents across the business, a record recruiting effort.

EBITDA margins expanded from 14% in 2021 to 32% in 2024. EBITDA dollars increased nearly 5x over that time period. One of the things that's most interesting is the next evolution for the company, where they're building out a third distribution channel.

I want to just focus on the financials for a little bit and then move on. It sounds like they had this period of time where they re-evaluated the business, trimmed some fat, really focused on leading into strengths. On that EBITDA margin expansion, what did it look like in 22, 23? Was there a drop before you saw that increase again in 24th?

The margins really dropped. The company generated EBITDA margins through 2020. In 2021, they dropped to 14% and scaled from there. It's important to understand high-end corporate producers initially weighs on profitability. They ramp pretty quickly within two years.

Whereas if you're putting new producers into the franchise system, there's very little cost running through the P&L that's associated with that. Effectively, management's attention was being drawn to unproductive parts of the system. And so that calling process created a much healthier system and they just became more efficient.

in sort of every way. One other aspect that's important to understand just from a P&L perspective that we sort of hit on before, but it's worth highlighting this, is franchise new business, 20% of the commissions go to Goosehead in year one, and the renewals, 50% go to Goosehead. So there is a mechanical increase that's very significant for the renewal side of the business,

And really all the money is made in the renewal side. As the business continues to mix shift to renewal, that's what's really driving the increased margin profile of the business, as is the continued mix shift to franchise and away from corporate.

That all makes a lot of sense just in terms of understanding the ins and outs. If we focus on the top line, obviously there's the underwriting of policies, there's a renewal of policies. How do you just think about that formula for top line growth, whether it's recruiting new franchisees, bringing them into the system, policies, anything that you can get into that describes what a reasonable rate of growth is for revenue?

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

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 that agent staffing program, whereby Goosehead has dedicated recruiters that are helping existing franchises 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 a partnership in nature where Gustad'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.

Is there a way to quantify the opportunity that would exist in that third leg? 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 and 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 grew.

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 QSED's proprietary technology. It's digital agent and it's QTI technology really enhance the productivity of

of those efforts and accelerate the onboarding of new agents. Gustav'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 non-standard 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.

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? 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, then

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 are

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. 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 or 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.

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? 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 it 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 QSED, 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.

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? 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. There's 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? Or

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

of the business over time.

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? 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 investments

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 like the agent's role within personal 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 shared donors. I think GUSED's technology with its digital agent and its ability to bring people

large amounts of proprietary data to bear in a future 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. And if you have core 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 a

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.

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?

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.

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 and 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? 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 dustbound 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 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, yes.

For me, the key lesson here is you find what you look for and doing the hard work yourself is really the shortcut. This has been a great conversation. I've learned a lot about the industry and about this business. Thank you very much for joining us, Jeff. Thank you, Matt.

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