One of the fun parts of this job is meeting a new company and learning about a new company. The problem I have is I've been around so long that that doesn't happen very often. It did last year. We were involved with the IPO of Goosehead, so I got a chance to go down to Texas and meet with the management team. Not only was it a new company, it was a remarkably different company than anything I had encountered before. It was a fun deal to work on. It's been fun to cover the stock, and it's great to have you guys here. Just a quick introduction. They're obviously a first-time presenter at the conference. From the company, we have Mark Jones, CEO, Mark Colby, CFO, and Michael Colby, COO.
For those of you not familiar with the company, it's an intermediary, not an insurance company. We'll have a video to show you to introduce the company. With that, let me turn it over to Mark.
Yeah. Well, we appreciate all of you being here. We'll show a quick video that'll give you a little bit of a taste of who we are. We are a personal lines property and casualty insurance broker. If we can cue the video.
As soon as you start as a Goosehead agent, it's almost like here's a Ferrari, how fast do you want to go?
My dad had a Farmers agency, and in five years, I had grown a larger Goosehead agency than what he had in 28 years.
We're disrupting an industry that's been around forever.
Well, we started Goosehead to solve a problem that we had. My wife and I had built a real estate investment portfolio, and she was trying to insure our buildings, and she finally threw up her hands and said, "I'm starting my own insurance agency.
Goosehead Insurance is a personal lines property and casualty independent insurance agency. We aim to be the leading player in the country, and we offer both corporate opportunities as well as franchise opportunities.
Goosehead is disrupting the insurance space, making it easier for clients to purchase the right insurance coverage at a fair price. We work with over 80 insurance carriers across the country. We take a truly different approach. We have a partnership approach to our carrier relationships.
Our focus is on personal lines property and casualty insurance. We represent a variety of carriers that will sell home, auto, and everything in between, whether you need an umbrella policy, a boat policy, a motorcycle policy, you have multiple homes, investment properties, we have you covered.
Some of the benefits of representing a broad set of carriers are our ability to customize a product solution for a client based on their unique risk needs.
If you look at the average age of an insurance agent in the U.S., it's 55. If you look at the average age of one of our corporate insurance agents, it's 26. What we do is we focus on bringing young, aggressive talent into the business, investing like crazy in them. It's a very compelling value proposition from those people.
The biggest difference between the Goosehead agency model and the traditional agency model is the separation of sales and service.
The reason we're more efficient and we're able to focus on new business is because our service team handles everything on the back end for us. Anytime we need anything insurance related, they handle it immediately. That makes it to where I'm able to sell more policies because I'm not weighted down on old items.
We entered the franchise business about six years ago, our franchise model doesn't look like anything else in the industry. It's about how we provide the maximum value, and that has driven extraordinary growth.
We're excited about rolling out our franchise model nationally. Currently, we're in California, Texas, Florida, Illinois. We'll be expanding across the Midwest and into the Northeast.
Goosehead's value proposition to prospective agency owners is that we deliver a choice platform of insurance carriers for them to sell, and we also handle all the back office, including customer service, so that they can focus on marketing and sales. This allows them to build a larger book of business faster.
When I was with Allstate, 75% of my day was spent doing service work and putting out fires. I don't have that problem with Goosehead anymore. I could focus my entire day based on just selling insurance. I mean, that's why I got into this business, was to sell. They take care of the service.
Service has never been my main focus, and I thought they did such a good job servicing the business that it really allowed me to focus on what I'm really good at, which is the sales piece and building a sales team. By doing that, we've been able to more than double our previous sales at our prior agency.
Goosehead Insurance has achieved world-leading customer service, and we're real proud of that.
Our service team helps generate revenue by really engaging the client with our brand. Our service agents are fully licensed, and so we can resolve a problem from point A to point Z, and we truly listen to the client feedback.
When you call a regular call center or you call just any service center, you get those robotic answers to your questions. We don't want that here. We want personality. We want the best of the best, and that's how we always deliver those great results.
Goosehead has industry-leading client retention rates. As of the end of 2017, we're sitting at 88%. The recurring revenue compounds year-over-year and provides us with strong visibility into revenue growth in the out years. Ultimately, that's going to enhance our margins. We're harnessing technology to deliver a better client experience and more efficiency in our operations. Goosehead's technology is built on the salesforce.com platform. The strength of our technology is that it's completely integrated and highly customizable, which allows us to be agile and rapidly adapt to changing market dynamics.
If we had to do this by ourselves, we would still be stuck in the Stone Age.
Goosehead's technology and their continuous development of their technology is putting us far ahead of everyone else.
We've had strong performance over the years, and what's exciting is we're only getting started.
We believe that Goosehead's not like any other insurance agency. We're a high-growth, high-energy, high-ambition company with a very bright future and a very aggressive and committed group of people, and we're going after it.
Should've brought some popcorn.
There you go.
Very slick. As I'm watching it, I realize we have a lot of ground to cover in that 27 minutes. I think it might be helpful, though, to start talking just about the structure of the company, your two main channels. Describe those, we can get into a bit more detail on them.
Yeah. Well, we built a corporate-owned agency where we have W2 employees that are P&C producers. About seven years ago, I was lying in bed at night thinking, "Okay, what is it that we do really well?" We're really good at sales. We've driven 33% compound annual growth rate for premiums over a very long period of time. What we were most extraordinary at is the back office. We've built a sort of service function that has the highest Net Promoter Score of any company of which we've been able to find in the public domain. That has allowed our agents to be highly productive, really productive because they can focus all of their time on sales. Trying to think of how do we get more leverage out of that back office, we decided to try our hand at franchising.
Market reception has been extraordinary, our franchise agents function very similar to our W2 employees. They focus all of their time on sales. We handle all the back office. There's been strong demand for the franchise model. We've got, as of the end of Q3, a little over 550 franchise offices and ones that are actively operating and in the process of going live.
I think one of the interesting thing from the Goosehead standpoint is the economics of the franchise channel. Can you just discuss that? Give a sense of how you guys make your money.
Sure. When a franchise comes on board with us, they pay an initial franchise fee, that covers the cost to recruit them, train them, onboard them, and really give them support for their first year. Day one, when they come to training, they're accretive to us. After that, we get royalty fees based on the amount of commission income they sell. We get 20% of all policies in their first term, so typically one year, then 50% every year that we're able to renew that business. Just by retaining our business at 88%, like we have historically, we see a mechanical 120% revenue increase from year one to year two on those policies. It's pretty tremendous.
If you look at the average tenure of our franchisees, I think Q3 data was 58% of our franchisees are less than one year of tenure with us or are waiting to come on board. It's very exciting if you think about the future of Goosehead and the transparency of that future revenue.
Having that 58% suggests more revenue, it also suggests a newness to the model. You have to retain these people. Can you give us a sense of what the retention has been or turnover has been among the franchise agents?
On a strictly a per-unit basis, we typically have seen approximately 15% attrit every year. If you look at their contributions to the new business production, it's really anywhere from 1%-3% that is leaving. It's the underperformers, the ones that were not successful in our model that are walking out the door.
We're managing them out.
We're managing them out, correct.
That 15%, has that been fairly consistent over the past several years? Is it rising?
It's been pretty consistent. It has trended down recently.
Trended down recently.
Closer to 10% recently.
Who are these people you guys are trying to recruit all over the country? You've got 550 franchise agents. What's a typical franchise agent look like?
About two-thirds of our new franchise agents are coming from the captive agent model. State Farm, Allstate, Farmers. We're recruiting agents who aren't too tenured to where they've built a big book of business that they have to walk away from because our agents are coming on board starting from scratch. They're not rolling in any business into Goosehead. The average tenure is about five to seven years, and again, it's in that sweet spot where they're trained and licensed insurance agents who are experienced, but they don't have the large book of business with the golden handcuffs, but they've been in the system long enough to really start feeling the pain points. The pain points of low close rates because they're representing one product that's designed only for a specific segment of the consumers.
They're not able to offer a competitive insurance solution to a high percentage of their customers. They're also starting to feel the burden of the book of business that they've built.
They get into the business because they're sales and marketing savvy. That's what they like to do. That's what energizes them. The better they are at sales and marketing, the faster they work themselves out of a sales job and into an administrative role. They're managing the ongoing book of business, and they're managing a customer service staff that's sub-scale, and it's a huge opportunity cost. Really what they see is they start to see their book of business and their growth start to flatten out. Their revenue starts to flatten out, and their growth opportunities are more limited.
That's really kind of what we address, is taking all of that non-sales related activity off of their plate, providing them with a choice product portfolio so they can be more competitive with the clients they're working with, and then giving them really smart technology to go to market and run their sales office efficiently.
If I'm a 58-year-old State Farm agent with a big book of business, getting a lot of renewal commissions, and I'm not working that hard, I'm probably not coming to Goosehead.
Probably not our target.
You don't want that person.
I'll tell you who we want, though. We want the person running their office who's driving the sales, managing the business while that 50-year agent is out playing golf three days a week.
Yeah. What's the pushback? Before I ask that, let me get a sense of numbers. There's thousands and thousands of agents out there, independent or captive agents. What's the size of your target market, if you will, that you're trying to recruit from?
Just between State Farm, Allstate, and Farmers together, they have over 100,000 agents. Now, not all of those agents are going to fit our mold, but we've developed a database that our franchise recruiting team has developed that consists of, I believe, over 40,000 new potential opportunities that have passed an initial screening process from us that we're constantly working and marketing to.
Potential population, let's say, about 40,000. Roughly how many per year have you been appointing?
In 2017, we launched, I believe, just over 200 new franchise locations.
Well, of the 40,000, that's kind of your goal is to get a couple of hundred out of them.
It's growing. We have strong growth projections, a lot of that's being driven by our ability to recruit and integrate these franchise sales folks into the organization. Currently, that team sits at about 35 sales professionals who they're hands-on managing territories, recruiting agents. They're out in their territories every other week, interviewing these agents, observing their operations, doing, again, more of that initial screening before they bring them to our corporate headquarters for Discovery Day, which is where our franchise partners, or potential franchise candidates rather, are able to come to our office and observe the operations, meet the leadership team, and at the same time, we're doing a lot of evaluating and screening as well.
That's the franchise side. On the corporate side, you're not hiring experienced salespeople. Who's your target market to hire for the corporate side?
On the corporate side, we are hiring, in general, either kids straight out of college or within their first two or three years of their career. That may sound kind of strange, because becoming a personalized property and casualty insurance agent isn't sort of high on a lot of people's lists. When we started the company, my background was not in insurance, and even to this day, I've never been inside an insurance agency. I don't know how anyone else does it. I don't care how anyone else does it. My background is I was a long-term Bain & Company partner, and one of my administrative responsibilities is I was global head of recruiting for the last several years I was at the firm. We just took that recruiting model and plunked it down into our business.
When you think about it, those of you that are old enough to have kids that go to college, you send your son or daughter off. You get a call January of his senior year. He says, "Dad, Mom, I got a job." You're thinking, "Great. This is awesome. All this work is going to finally pay off." You say, "What is it?" The answer is, "Well, I'm going to go sell insurance." There's a calculus that goes on in your head of, do I fly to that city and kill that kid today? Do I wait till spring break? Do I hire it done? It doesn't matter when, but infanticide will occur when you get that answer. When those kids answer that question to their mother or dad, what they say is, "I'm going to work for this Bain guy.
They're doing something completely different. It's growing at 40% a year. This is very exciting." The parent says, "Okay, that makes sense." What we do is we bring in, we attract people who would, under any other circumstances, would never be selling personal lines property and casualty insurance. Because our business model is geared to support them to be hyper-productive, these kids are able to earn really, really attractive compensation. Without kind of investment banking hours.
How much are the good ones making after, say, three years?
The average agent with three or more years of experience makes over $150,000 a year, and that's working between 40, typically 40, 45 hours a week and no travel. Our highest-paid agent is a guy that's been with us for 13 years now, and again, on a heavy week, he might work 45 hours. He'll make between $500,000 and $600,000 this year. No travel.
You mentioned productivity and making them hyper-productive. You're taking this kid out of school saying, "Go sell insurance." How do they become hyper-productive so quickly?
We have technology tools that support the execution of their job. The most important thing to become productive quickly is to find people to sell insurance to. Our, excuse me, our go-to-market strategy is focused on solving pain points in the home closing process. We are marketing primarily to mortgage lenders and realtors. For these individuals, a significant part of their personal compensation is tied up in every deal. As crazy as this may sound to you or I, one of the real pain points is insurance in the home closing process. The two things that typically can go wrong or cause a deal to go sideways are the appraisal doesn't support the mortgage, so the lender has inadequate collateral protection, or there's a problem with the insurance binder.
When they're working with a typical insurance agent, if there's an issue with the binder, they'll call the office. The receptionist will say, "Oh, I'm sorry, the agent's out golfing this afternoon, but he'll call you back tomorrow." The agent calls back tomorrow and says, "I can get you a new binder on Thursday." With us, if there's an issue with the binder, they call our service center, boom, five minutes, you've got a new binder. It doesn't even slow down the closing process. These people send us lots and lots of recurring leads that are high quality, that close at a really high rate. Now, finding those people is the challenge. What we've done is we have developed a proprietary database where we've actually, we're pulling in data from a bunch of different databases and scrubbing it.
We have visibility into every mortgage that's written in the U.S. down to the human being. We know what every loan officer is writing. Our people come and start work for us. We train them on how you develop these mortgage lender relationships, and then we point them precisely to where the volume is, and with people that aren't already working with us. It allows them to get productive really quickly. Because there's no service burden, as they come down that experience curve, they can be super productive. Our average corporate agent is three and a half times as productive as industry best practice, not industry average, industry best practice.
I'm assuming for these corporate agents, and I guess for the franchise side, there's a similar go-to-market solution strategy.
Exactly the same, yeah.
If the housing market is robust and there's a lot of turnover going on, there's a lot of mortgage activity, that's got to be pretty good for you. That's a tailwind.
The opposite, unfortunately, can happen, too, where housing is slowing down. Arguably, in some parts of the country now you're seeing that. How much of a headwind is that for you?
We are seeing that was a headwind I highlighted on our third quarter conference call. I will readily admit to all of you, rookie mistake on my part, being sort of a newly public company CEO, is I thought I would just be very transparent and say, "We're seeing housing market headwinds that are affecting us in the third quarter, and they're going to affect us in the fourth quarter." That's when everyone stopped listening. The but was, we have this tool that allows us to find additional volume and replace the leads that were lost. We haven't done our fourth quarter release yet, but for those of you that are interested, listen in on that call and see how we did.
We have flexibility, we are such a small portion of the market that when the market turns against us, we just take share. Takes a little bit of time, but not a lot of time for us to take share.
Who's your competition? Is it just the local independent agent? Do you think of GEICO as your competition? Is it State Farm?
Do you want to address that?
Yeah. I think it's anyone who is offering personal lines insurance services to consumers is a potential competitor. The way we differentiate ourselves is by integrating into that home buying process and meeting our customer at a point-of-sale transaction and having a transfer of trust from one of their current advisors to us, which allows us to have very high close rates with those clients, but also leading with the home allows us, homeowners typically have other assets that need to be insured, so it sets us up for a much better cross-sell opportunity into the auto and other lines of business.
On the map you showed, you're not in that many states at this point. I guess the growth will come from deeper penetration in the states you're in. This is on the franchise side, and then entering new states. Maybe I'll start with, how many states will you be entering, say, a year for the next 10 years? Do you have some sort of vision for that?
We're in 21 states right now that cover three-quarters of the U.S. population.
Okay.
Really the growth opportunity is expanding and going deep within those states. We'll launch a few states this year. We have some spillover demand, adjacent states like Georgia, for instance, where you have seen strong organic demand in Georgia from our operations in the kind of northern part of Florida and from South Carolina, and that will pull us into that state.
Is the goal to be a national company?
Yes.
You're getting there already.
Yep
Is it every state?
Over time. It's much more important for us to kind of drive revenue growth than it is to say we have sort of a landing spot in every state. It's also, it's much more valuable and strategically defensible to drive strong regional relative market share. It's much better for us to have 150 offices in New York than it would be to have one in New York, one in Connecticut, one in Massachusetts, one in Vermont, and so forth. The states that we're in now are the states that represent the biggest profit pools for us. Our priority is going to be continuing to develop and drive that regional relative market share. Over time, we'll cover all the lower 48.
We have a lot of runway in those states that we're currently in.
Right.
You look at Texas, we've been in Texas for 15 years. It's by far our largest market. We were involved through the third quarter of 2018 in only 12% of new home sales. We're in less than 1% of Texas households. We have a lot of room to grow in Texas, and certainly a lot of room to grow in our expansion areas.
When you're recruiting new franchise agents, unless you find a person that fits the mold, right? They're that 33-year-old second guy in the office, doesn't have a big book of business yet. You find them, you make your pitch, and they end up saying, "No, thanks." What's the typical pushback you're getting? Why are they saying no?
I think what we typically see on the pushback is, never does an agent say, "This doesn't make sense." A lot of times if it's no, it's not no forever, it's not now. This is a very personal journey for them. A lot of them are having to invest a lot of their personal capital, and these aren't people that have a lot of capital or access to a lot of capital. These are major life-changing decisions. Some that own their agencies have to unwind that, and they want to make sure that their existing clients at State Farm and their existing staff are in good hands as they exit and come into our business model. I would say more often than not, it's not an agent saying no, it's us saying no.
I mean, we want to find agents who are highly capable sales and marketing savvy folks who are philosophically aligned with us. There's a big difference from an agent who built a large book of business rapidly from scratch at the captive agency from an agent who was maybe seeded that book of business and has built their career just answering the phone and cross-selling current clients. That's something that only our vetting process and our recruiting process can uncover. Typically when an agent declines us, it's more of a not now than no, not ever. There's some very personal things that they have to get into order before the timing's right for them to move over to us. Overwhelming majority of the time, it's us passing on the opportunity.
Yeah. Let me open up to the floor if you have any questions. Just raise your hand, we can get you a mic. Oh, we have one here. Sorry.
You've been hiring these people effectively away from State Farm, et cetera. They form the backbone of this franchise part of your business. What have those companies been doing in response to your inroads into their business? Presumably, some of their better employees. Just curious what you're seeing from them.
By and large, nothing. State Farm has blocked the Goosehead URL on their system, so agents can't look up Goosehead. They can't send or receive emails to or from Goosehead. All that does is validate us. It makes people more curious. That was kind of a mistake on their part. The others, they're not doing anything.
The business model is so fundamentally broken, and it just hasn't evolved with the evolving consumer demands, that even with some of the response that we may get from a district sales leader at Allstate who we're recruiting their top agent, they may say, "Look, we're going to throw some extra compensation at you, or we're going to seed some more clients to you to help improve your economics." Even with that, our target agent understands it's very short-lived, and that it's for longer-term growth and success, and to compete more effectively in today's world, and more importantly, tomorrow's world, they need to be at a firm like Goosehead.
Any other questions? The economics for the franchise agents, that's been consistent, correct?
Yes.
That you haven't changed that. What would cause you to change that? Would that be a recruiting tool if you tweaked that formula at all?
We've got a formula that works really well and that's attractive, and is very lucrative for the agent, and it's very lucrative for us. We're not feeling any pressure to change that.
Okay. I got time for one more question. Let me sneak it in. You obviously have to continue to invest in the business.
Yeah.
That does limit your margin expansion. The size and scale growing, obviously, you'll get those economies. Is there a natural longer-term cap to the margins? Have you studied the business to say, "Well, we'll never get above blank percent"?
Well, again, margins are affected by growth. I can tell you, at least as long as I'm alive, that we're going to continue to push and grow as aggressively as we can. That is going to limit margins, maybe in the mid to high 30s. If we stop growing tomorrow and just milk the book, our margins would be a lot greater. That's not how you create the most shareholder value. We're going to continue to push. We'll see margin expansion over time. I will say that there will be some bumpiness in our margins as well, because when we make investments, those investments flow through the P&L. Almost nothing hits the balance sheet because we're investing in people, we're investing in technology, that the way you account for it is you flow it through the P&L.
There is going to be some bumpiness, and we have always and will continue to grab opportunities that come to us. We're also confident that over the long term, we can deliver really nice margins and continue to have really aggressive growth.
Why don't we end it here? Guys, thank you for the video. Thank you for being here as well. Great presentation.
Thank you. Appreciate it.