Let's move on. Next session is with Goosehead. Goosehead is a second time presenter at our conference, having just gone public in 2018. From the company is Mark Jones, CEO, Michael Colby, COO, and Mark Miller, Goosehead's CFO. For those of you who are not familiar with the company, Goosehead is really unlike any publicly traded insurance organization. It has been reporting organic revenue growth that is also unlike any other company. Independent agency distribution of personal lines. This really hasn't changed much over the years. Goosehead is leveraging a centralized service capability to free up agents to produce new business. Sounds pretty easy. It's really not. What we're going to do is start with a video that the company has produced. We'll show that now, and then we'll get into some Q&A. You can roll the video. That's a new video. From last year?
Yeah.
Fantastic. That's great. By the way, as I look at that, remember, they're competing against other independent agents. Some of you may use an independent agent. Some of the stuff, they wouldn't even know what you're talking about. It's just so far beyond what most of their local competitors can even envision doing. It's a very different kind of company. It's hard to really capture all this in the 30 minutes we have, but I need to take a step back to make sure people do understand the model. Maybe if we can just start with talking about your corporate agents and also the franchise model as well, just so for those folks that haven't seen you before, they have some sense of the different avenues.
Sure. Let me give kind of the 30,000-foot overview of where we started, because that is highly relevant as to what our human capital looks like now. My background was not in the insurance business. I was a longtime partner at Bain & Company, and in addition to having heavy client responsibilities, I was also global head of recruiting. My wife, Robyn, started Goosehead because we had a real estate investment portfolio that she was managing, and she couldn't find a decent insurance agent. She just said, "Well, I'm going to start my own agency." I didn't think much of it because I was really, really busy at Bain.
We have six kids, they were starting to grow up and go off to college, and I thought, "Well, this would just be a nice hobby business for Robyn." I was interviewing a young kid for an associate consultant job at Bain, and I looked at this guy's resume before he came in the room, and extremely impressive. Rhodes Scholar nominee, number 2 in his class, lots of leadership experience. He walked in the room, and first of all, before he got there, I thought, "Okay, I got 45 minutes with this kid. I'm going to spend five minutes evaluating, 40 minutes selling. He's obviously a lock." He came in the room, and my mind changed. Firstly, his physical appearance was quite striking. His hair stood straight up like Kramer on Seinfeld.
He came in the room, I said, "Lee, how are you doing?" I'm not exaggerating when I say this, he's waving his arms. "I'm great. Everything's awesome." I thought, "I don't care if you are a Rhodes Scholar nominee." My key client at that time was Jacques Nasser when he was CEO of Ford, and there's none of this in Jacques's office. I said, "Well, we can't give you an offer at Bain, but I'm involved in this other thing, this insurance thing. Would you be interested?" He said, "Well, I don't know anything about insurance, but yeah, I'll take a flyer on you." That gave me the idea that we can hire people like that. People that under any other circumstances wouldn't be selling personal lines insurance. There was this sort of huge avoidance that the industry has for young, talented people.
When you think about it, if your son or daughter goes off to college and they call you in the spring of their senior year and say, "Mom, I've got a job." You're thinking, "Yes, this is wonderful." Your daughter says, "I'm going to go sell insurance." Your hair starts on fire and you're thinking, "Why did I waste all this money on a college education?" It's a different story when your son or daughter calls and said, "I'm going to go work for this Bain guy. They're doing something completely different. It's growing at 35% a year. There's incredible career opportunities, incredible financial opportunities, incredible learning opportunities." You say, "Okay, that makes sense." What that did is it opened up a talent pool that heretofore had been closed to the rest of the industry, and that's how we built our corporate agency.
In 2012, we were looking at opportunities to accelerate growth and better leverage our back office, I came up with the idea of let's try franchising. We did. Our corporate agents and our franchise agents function very similarly. We separate sales and service, so the agent spends all their time generating new business. We do that the same for our franchise agents. There's some magic there, in that we take all that service burden off their plates, so they're able to continue to grow even as their book of business gets larger, and under any other circumstances, they'd get bogged down with service. Those two agent groups function very similarly. We use our corporate agency as a key strategic tool to do research and development, training, and mentorship with our franchisees. As a result, our franchisees are almost double as productive as industry best practice.
Just maybe quickly talk about the economics of the franchise channel, because that is also fairly unique.
Yeah, sure. Each franchisee pays us an initial franchise fee. It averages about $30,000, this covers all of our costs to recruit, train, onboard, and support the agent for their first year. It's really a cost recovery tool. After that, our compensation is variable depending on how much they sell. The first term of any policy that they sell, we keep 20% of the commission and they keep 80%. Every single year that that policy renews, it's a 50/50 split. We retain our business at 88% historically. What that does is creates a 120% mechanical revenue increase just by retaining at 88%.
Highly visible.
Extremely visible, predictable. The beauty of it is, I think it's about 60% of our franchisees are less than one year of tenure with us.
Yeah.
We know there's also a two to three-year ramp-up. We're continuing to kind of fill the top of the funnel with what we need to be filling it with and knowing that it's going to be very predictable. The other thing on that is the margin on the renewal business is much higher than on new business. The cost of service is less, the amount of commission we pay is less. Creates some very nice economics down the road.
When I first met you guys and heard the story, I said, "Well, you have to go find these people that are willing to come work for you." I knew on the corporate side you've been able to do that, and you're recruiting out of school, and you have a differentiated story. The franchise side, you got to take a guy who's already working at a State Farm or an Allstate and convince them to come over in a very different model. The question is, how have your recruiting efforts evolved relative to what you might have expected if we go back three years?
Right. Well, first, it's a huge pool to recruit out of. At State Farm, Farmers, Allstate, the big three captives, there's over 100,000 agents across those three insurance companies, and they're feeling very acute pain points, single product platforms, so they have one set of underwriters, one product to offer their clients. Their addressable market is much smaller, their ability to win, their close rates are a lot lower. They're also operating in a traditional model. The faster and the better they are at sales, the sooner they work themselves out of a sales job and into basically an administrative role doing all of the ongoing customer service work. I also think it's probably lost on a lot of folks from outside the space on how far behind their frontline folks are from a technology perspective. They are literally working on green screens.
The tools they have are very limited. For us, that has been a very attractive recruiting ground. 65% of our new agents in the franchise channel are coming from that specific recruiting pool. I'd say over the last three years, what have we learned? One is we've been better at evaluating the talent. Both our ability to evaluate the talent has improved, but also our presence and the brand recognition has improved, so we're capturing the attention of a different caliber of agent. We've also learned along the way, what do we need to be doing to set these agents up for the fastest ramp, for the highest likelihood of success? We've made a lot of changes in our onboarding efforts and our initial training and the support that takes place after that initial training, to ensure the success.
We're seeing the results of that in higher productivity. We're seeing the results of that on a trending down of our agent attrition, all very positive things.
Relative to your expectations, again, if I pick three years ago, it's been at least in line with what you expected and if not, somewhat better.
For sure.
Is that fair?
For sure.
Yeah.
For sure. The results that we're seeing today, Jay, they're taking place today because of investments we've made three years ago.
Right.
A lot of it was, these are returns that we expected to get, but I would say certainly probably exceeding our expectations.
Got it. In the video, there's a quick reference to referral partners. Maybe so folks understand that, just explain what you're doing, because other agencies, local agencies, would love to have these referral partners.
Right.
They try all the time.
For sure.
You're able to make a much more robust relationship with these folks.
Right. If you look at the big three captives that I mentioned, each of them has a billion-dollar ad budget direct to consumer. If you watch an hour of network television, you're going to see five State Farm commercials, three Allstate commercials, several Farmers commercials. It's not an area that we want to go spend money. We had to figure out what's a playing field that we can compete on and win against these juggernauts. What we learned was that by integrating into the home buying process, we solve pain points for the customer, but we also solve pain points for the professionals in that space, the realtors, the loan originators.
Believe it or not, the insurance piece of the puzzle in buying a new piece of real estate is oftentimes the most difficult part of the process, and it's the primary reason why a deal may fall apart at the closing table. If you're a commissioned real estate agent, if you're a commissioned loan originator, you want to accomplish just several key things. You want to close the deal and get your commission check, and you want that client to have a very good experience so that you are generating referral and repeat business. That client sees you, the loan originator or the real estate agent sometimes, depending on the dynamic, they see you as the quarterback of that entire transaction.
If anything goes wrong, it doesn't matter what it is, the title company, the insurance, the appraisal on the home, anything goes wrong in that process, it looks bad on you. Like I said, most often times when things go wrong, it's the insurance. We have figured out a very sophisticated way of leveraging technology, leveraging years of experience, and training that we provide and support to our agents, a way to integrate into that process, where we're developing relationships with referral partners that can provide us with a high volume, sustainable volume of lead flow, homeowners lead flow, and leading with the home, is something that's very attractive because these homeowners have other assets that we can cross-sell. It's that go-to-market strategy that has allowed us to see very high levels of productivity, and very low client acquisition costs.
Yeah. No, it makes sense. Geographically, how many states are you in now? Is this going to be a national company at some point in every state?
We're less worried about the number of states and more worried about the coverage of human beings.
right now we're in.
North Dakota may not be a big one.
That may not be a big one. We cover about 85% of the U.S. population right now. We're focused on going deep in those states, and really, we don't even think of it as states. We go deep in those markets as opposed to looking to open an office in Fargo, North Dakota.
Are these mostly in urban areas? Are you more suburban?
It's both urban and suburban.
The last disclosed total number of franchisees?
I think it's 614.
Operating.
Operating.
948 total signed plus operating.
Those signed people, they will become operating.
They're in the process of launching.
That's over a three-month period?
It's anywhere from one month to 18 months. I'd say on average, it's within one year, when they're signed.
Okay.
To our earlier point about the higher caliber of agents that are coming online, those agents also tend to have kind of a longer implementation period, really because they have more to unwind.
Yeah.
They have a successful Allstate agency, but they need to unwind in order to invest here and take their business to the next level.
Got it. That makes sense. Can you talk about your comparative rating technology? It's a relatively new thing the last couple of years, I guess. How does it work, and what are you using it for?
One of the challenges of being an independent is just the complexity of working with so many different suppliers. You have to engage each of those different insurance companies in a unique way. The comparative rating tool on the front end, when we're working with a client and trying to determine what's the right fit for them, what's the price going to be, this tool allows us to, and along with multiple database and data source integrations with a very limited number of data points, name, address, date of birth, pull in all of the information that we need to provide a home and auto quote, so including vehicles, VIN numbers, driver's license numbers, to pull it in and then push that out to all of the different companies and bring back initial rate indications. It dramatically improves the efficiency of the agent's time.
A much better client experience. Over time, that tool gives us a rate that we then have to bridge into the carrier system to finalize and issue the policy. What we're working at right now, where we're investing today, is to integrate that last mile to say, not just to get your initial rate call, but your final rate and the issuance of that policy is all done in our single interface, which again improves the efficiency for the agent, but also gives us a tool that we can point directly to the consumer, which we believe we will be the first truly choice model that we can make available direct to the consumer online.
With a comparative rating, don't most independent agents have access to some off-the-shelf comparative rating platform?
That in itself is not anything unique and innovative. What happens is, agents, you're working in multiple different interfaces. You're working in whatever your agency management system is. You're working in a comparative rating solution. You're working in a web browser to get all the details of the property that you're quoting. You're working in the carrier site. The tools that you're using that are available off the shelf to agents, as you can imagine because of where our industry's at, they're not very capable. They're super rigid. They're hard to customize. What we've done is built our own on the Salesforce platform that gives us complete customization control, and it gives us the ability to work in all of these publicly available data sources. In the off-the-shelf solution, it's going to take you 150 to 200 data points to get a rate indication.
Okay? There's not a lot of customers today that will want to sit through an interview and answer 200 questions. A lot of times, they don't even know. What's the age of the home? I don't know. What's the roof material? What's the build type? What's your VIN number? These are things that just it's a really painful process to go through. Having the data source integrations that answer all those questions, we're asking five questions, three to five questions. We bring all of that information in, we're not having to go into a different system to get the actual rate. It's a much better experience for the agent and for the consumer.
Yeah. Let's talk margins. Obviously the top-line growth has been robust. As you rightly point out, there's good visibility to suggest it shouldn't slow down much. You're also investing heavily in the business to drive this growth. At some point in the future, investors will want to see bottom-line results mimic the top-line results. When do we start to see real margin improvement in your model, do you think?
I'll start by saying that, if you look at us compared to the commercially traded brokers, we're growing 10 times as fast as they are with equal or better margins. The other side of that is we're always thinking about how to maximize profit dollars over the long term. Right now, that means investing for top-line growth.
Right.
We know, mathematically, margins expand as new business converts to renewal. Over time, as that mix shifts from new to renewal, we expect some margin expansion. However, we are always, as of this time, trying to outrun that mix shift and add as much new business as possible.
Yes.
Yeah, I think it is also important, though, to emphasize that the other publicly traded insurance brokers are primarily growing through acquisition, which consumes a lot of capital.
Yeah.
Almost all of our growth, not almost, 100% of our growth is organic, and all the investments that we make to achieve that growth run through the P&L. There's almost nothing that hits the balance sheet.
Right.
If you look at sort of the underlying fundamental profitability per dollar invested, ours is much, much, much higher than anyone else in the space.
I think it's also worth mentioning the runway for growth that we have. We're in a $365 billion U.S. personal lines property and casualty market. We finished the year in 2019 at $739 million in total written premium. How long can we focus on growth? Forever. For all of our lifetimes.
Right. Yeah. It's a massive market.
Yeah.
Go international at some point.
Maybe that'll be five, six generations.
I wanted to make sure we did touch on revenue recognition. You're going to be adopting the new ASC 606, I guess, at the end of this year.
On the 10-K.
On the 10-K.
Yes.
My guess is it's going to be a little confusing to people, and it may not be as reflective of your economics as the old standard, but I'll let you talk about it. That's an important topic, I think you should probably address.
No, definitely. We're doing a lot of work right now on the 10-K to help kind of walk investors through as best we can. On the earnings call, we'll definitely hammer it home. Take a step back, though, how we think about revenue in general is really kind of three different tiers of revenue. The top tier is kind of the core revenue for us, and these are commissions and fees that we get from selling insurance. They're renewable. We renew them at 88%. They're highly predictable. Take a step down to tier 2, and it's kind of this cost recovery revenue with initial franchise fees, as I discussed. There's also an interest income component related to the franchise fees that are on a payment plan.
Then you have a bucket of ancillary revenue, where these are contingent commissions that are high margin, but they're a lot of times out of our control. We can control the growth component, but we can't control the weather or the underwriting component for the carrier. The core revenue, so these commissions and fees, really won't be materially touched by 606. There's not a big impact there. The cost recovery revenue, specifically franchise fees, is probably where we're going to see the biggest change. Historically, we recognized that initial franchise fee when they came to training, which is when it's fully earned according to the contract. However, under 606, we have to defer that over a 10-year period and recognize it over the 10-year life of the contract. It's really just going to spread that out over 10 years rather than recognizing it all up front.
Even though it's fully earned.
It doesn't change cash flow.
No cash flow changes, correct.
It's not a refundable-
Non-refundable, fully earned when they
Your money, no matter what happens.
I've fought their auditors on this, but yeah.
What they're trying to do is just match that revenue with, I guess, expenses over time.
there's some weirdness to it though.
At least when I was in the accounting business, you matched expenses to revenue, not revenue to expenses.
Yeah.
My personal opinion is that 606 is going to create a little bit more obscurity, in terms of communicating our underlying economics.
Definitely. Again, we're going to try to get the investors back to 605 for as long as we can. The other piece is this, the ancillary revenue, so the contingent commission piece. Really, we recognize those currently because they're so unpredictable when we get the cash or the statement from the carrier saying, "Here's how much your contingency bonus is going to be," typically in the first quarter of any year. Under 606, we have to accelerate that to the year over which they're earned. I would envision those being recognized, for instance, in Q1 2019 would be recognized during 2018, probably most of them in Q3 and Q4 of that year. It's accelerating them a little bit.
we get more data
we get more data and as the loss ratio data becomes evident for the year, and we can start making reasonable estimates.
Right.
Again, not a huge change there, just changing by one or two quarters, when they're being recognized. The bigger change is the franchise fees, which will be recognized over 10 years rather than month one.
The important point is that cash flow is not being affected.
Absolutely.
Not at all.
Investors, at the end of the day, care about cash.
Exactly.
Maybe that would be somehow in your disclosure, focus on the cash and well, we'll see what you guys put in the K. We'll look forward to it.
Yep.
Thanks for going through that. That I think is going to be something people will have to at least pay attention to. How sensitive are your revenues to changes in the housing market? You're going after the home purchase transaction or refinance transaction. Bad housing market, is that bad for your business?
If you look at our revenue bar, only about 30% is made up from new business revenue. The rest is renewals, contingencies, franchise fees, et cetera, which aren't really tied to the housing market. Of that new business, about two-thirds are tied to the housing market. The other third comes from client referrals. We have an NPS score of 89. It's industry-leading in any industry that we know about, the best-in-class NPS scores. Those generate about a third of our new business just from client referrals, so friends and family that were happy with our services.
18% would be subject.
Correct. About 20% in any given period.
It's also worth pointing out the limited market share we have because in Texas, where we've been deploying that strategy for the longest period of time with the most agents in the most sophisticated way, we were involved in less than 14% of new home sales in 2019. You look at nationally what our market share is of new home sales, it doesn't even register. In an event where you see a major decline in the housing market, we're able to pivot and use our resources to develop new relationships and grab share to kind of maintain stable revenue. If you look back at 2008, from 2008 to 2010, worst housing crisis of recent generations, we grew total written premium over that period of time over 30% a year. We feel like we're pretty well insulated.
Yeah. For auto insurance, do you write any new business auto, or is it just always we write the home and we throw in the auto after?
Almost exclusively are we cross-selling the auto. We're leading with the home.
Leading with the home.
When we see all these GEICO ads, save 15%.
Right
They're trying to bundle it.
Yeah.
Yeah. We're running low on time. Let me just open it up to see if there are questions out there. We have one right down here.
Thanks, Jay. One thing you might have not talked about yet, but we saw in the video was technology. When we think of insurance companies and brokers, they have so many different systems, and you guys are using the Salesforce system. What does that allow you to do? It probably really makes you so efficient, and it makes it easier for your agents.
Well, you hit on it when you said the typical insurance company or insurance broker, they're working across so many different tech platforms. It really creates unnecessary complexity and makes you slower to respond, slower to innovate. Being built exclusively on this Salesforce platform, which is best in class, completely customizable to our business, it allows us to rapidly innovate, to be super agile, respond to market changes very quickly. At a very fundamental level, being on that single platform is what enables us to be a leader in technology in our space.
On the client referrals, you mentioned that that was one-third of your new business. That seems rather high. How are you able to generate that from loyal customers?
We have the best Net Promoter Score in the world of any company in any industry. We can't find another company anywhere with a higher NPS score than us.
NPS of 90, overwhelmingly, your clients are saying they're willing to send, refer you to a friend or family member. That manifests in retention, also in client referrals.
Why don't we end it here? Great having you guys here. Thank you so much for coming.
Thanks, Jay.
Thanks, Jay.
Loved the video. Great hearing an update on the story. Thank you.