Goosehead Insurance, Inc
Q4 2020 Earnings Call Transcript

Published: 23 Feb 2021

[Operator:]

Welcome to the Goosehead Insurance Fourth Quarter 2020 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Dan Farrell, VP, Capital Markets for opening remarks.. Please go ahead.

[Daniel Farrell:]

Thank you, and good afternoon. With us today are Mark Jones, Chairman and Chief Executive Officer of Goosehead; Michael Colby, President and Chief Operating Officer; and Mark Colby, Chief Financial Officer. By now, everyone should have access to our earnings announcement, which was released prior to this call, which may also be found on our website at ir.gooseheadinsurance.com.

[Mark Jones:]

Thanks, Dan, and welcome to our fourth quarter 2020 earnings call. I'll provide a summary of our results in 2020 and highlight our overall value proposition and unique competitive advantages in the market. I will then hand it over to Mike Colby, our Chief Operating Officer, to update you on some of our technology and human capital investments. Our CFO, Mark Colby, will then go into greater detail on our fourth quarter results and outlook for 2021.

[Michael Colby:]

Thanks, Mark and hello to everyone on the call. 2020 was an era of unprecedented challenges facing businesses around the world. But these challenges also provided an opportunity to demonstrate the strength of our strategy and the expanding competitive moat we're building in the marketplace. Despite the unique operational challenges the pandemic presented, we were able to meet or exceed all of our targeted key performance indicators set at the start of the year. Further validating the significant technology and human capital investments, we made over many years and positioning us to be responsive, agile and externally focused on our clients and referral partners. Our cloud based technology platform allowed us to pivot to an entirely virtual work environment rapidly and seamlessly, and then gradually transition back to a hybrid in person work environment as health conditions and recommendations evolved.

[Mark Colby:]

Thanks, Mike and good afternoon to everyone on the call. For the fourth quarter of 2020, total written premiums, the key leading indicator of our future core and ancillary revenue growth increased 45% to $285 million. This included franchise premium growth of 52% to $202 million in corporate segment premium growth of 31% to $83 million. For the full year, premiums also grew 45%, exceeding the high end of our initial guidance range of 32% to 40% growth. This growth has been driven by continued high retention rates, strong new business generation, increasing agent productivity in the franchise channel and by leveraging the resources and intellectual capital of a corporate channel. The continued shift in our mix of business towards the faster growing franchise channel implies significant embedded future revenue growth, as new business premiums convert to renewal premiums after year one, at which time our royalty fees increased from 20% to 50%, for ongoing renewals. At quarter end, we had over 713,000 policies in force, a 48% increase from one year ago. Revenues were $34.7 million for the quarter, an increase of 48% from the year ago period, while core revenues increased 46% to $25.7 million. Ancillary revenue, which includes contingent commissions grew 63% to $7.5 million for the quarter, and more than tripled to $16.9 million for the full year. We had a tremendous year for contingent commissions, driven by COVID related lower loss ratios with our carriers. And now we'll discuss our outlook for 2021 contingent commissions shortly. For the fourth quarter, franchise channel total revenue was $16.9 million, an increase of 54% from the year ago period. Core revenues in the franchise channel were $10.8 million, up 55% from a year-ago with growth being driven by increasing franchise count, improving productivity and continued strong retention. In Texas, during 2020 new business production per franchise with more than 1-year of tenure was up 27%. And we continue to see opportunity for additional productivity improvements, as we further leverage our corporate agents in training and mentoring efforts. At the end of the fourth quarter, we had 1,468 total franchises, up 55% from the prior year, and 891 operating franchises, up 45% from a year ago. Non-Texas operating franchises now represents 74% of our total operating franchises compared to 68% a year-ago. We are continuing to invest in our recurring team, which currently stands at 98 people and our future pipeline remains very strong. Corporate channel revenues were €17.7 million in the fourth quarter, an increase of 43% from the year-ago period. Core revenues in the corporate channel were $14.9 million, an increase of 40% from a year ago, with growth driven by an increase in agents and continued high levels of retention. Corporate sales headcount at the end of the fourth quarter was 364, an increase a 47% from the year ago quarter. As a reminder, because of college recruiting for the corporate channel, the summer months are historically our largest for corporate sales onboarding, with the fourth quarter and the first quarter of the year, having limited new agent additions. We continue to invest in the success of our franchise channel agents via our corporate agents, through our virtual sales coach program. Our corporate agents virtual coaching efforts help drive an increase in productivity of over 30% among franchise participants. This is a highly leveraged area of investment not only for productivity gains, but further retention impacts from both our franchisees being more successful, and our corporate agents having additional coaching opportunities, leading to attractive career paths in leadership. Despite the increasing demands, we are putting on our corporate agents in training and mentoring of the franchise channel. In 2020, our corporate agents with more than one year of experience, were able to maintain their already exceptionally high levels of new business productivity. Total operating expenses for the fourth quarter of 2020 were $29.2 million, up 73% from $16.8 million in the prior year period. The increase from the prior period was due in part to an 81% increase in employee compensation and benefits expensed related to ongoing investments in our corporate agents franchise sales team, and information system developers. These investments should fuel our growth for many years to come. Also, strong performance from our corporate sales and recruiting teams during 2020 lead to higher variable compensation for the year, primarily during the fourth quarter. General and administrative expense increased 55% as we continue to expand our real estate footprint and invest in our technology roadmap with enhancements to our client facing portal, which we expect to unveil in 2021 and numerous additional carrier integration projects. We also continue to invest in our finance and accounting function during the year to meet our Sarbanes-Oxley requirements. Adjusted EBITDA for the quarter was $7.9 million compared to €7.5 million in the prior year, primarily due to the difference in timing of contingent commissions from 2019 to 2020. For the full year 2020, EBITDA was $27.8 million, an increase of 59% compared to 2019, with 24% EBITDA margin for the year versus 23% a year ago. Given the volatility and timing differences that can occur with expenses from quarter to quarter, we encourage investors to focus on a full year, we're trailing four quarter basis. As a reminder, our business model has natural operating leverage, and should continue to see gradual margin improvement over the long-term. But we do not manage the business on a short-term quarterly basis. We focus on maximizing overall profits over the long-term, and we are continuing to make investments for future growth that will have a moderating impact on near-term margin growth. Our business continues to generate significant cash with operating cash flow for the year of $24.6 million, an increase of 16% compared to 2019. As of December 31 2020, the company had cash and cash equivalents of $24.9 million, and an unused line of credit of $19.7 million. Now looking ahead to 2021. We expect the total written premiums placed to be between $1.48 billion and $1.55 billion, representing organic growth of 38% to 44%. Total revenues for 2021 are expected to be between $144 million and $155 million, representing organic growth of 23% on the low end of the range to 32% on the high end of the range. This assumes continued strong growth in core revenue, partly offset by potential challenges to ancillary revenue growth from 2020. Ancillary revenue which consists primarily of contingent commissions, can swing considerably from year to year. Contingent commissions, which benefited from low COVID related loss ratios were 155 basis points of total written premium in 2020, representing our best contingency year on record. However, in 2019, contingencies were 73 basis points of total written premium for the year. As such, we encourage investors to look at trends over the long-term. Also, while it is still too early to know the impact of the recent winter storm in Texas, the event could have an impact on contingencies in 2021. Regarding the quarterly timing of contingent commissions, we would expect the majority of contentions to be recognized in the back half of the year, with the fourth quarter being the strongest in the first quarter showing minimal revenue from contentions. As a reminder, while contingent commissions can be difficult to accurately predict this early in the year, our core revenue growth represents the long-term business trends and is much more transparent with stable growth rates. We are confident that our strong 2020 in the significant investments we made during the year position us well to deliver consistent strong growth in both revenue and earnings for many years to come. I would like to thank everyone for listening. And with that, let's open up the lines for questions. Operator?

[Operator:]

The first question comes from Ryan Tunis with Autonomous Research. Please go ahead.

[Ryan Tunis:]

Hey, thanks. Good evening. I guess my first question is just trying to unpack the total written premium growth guide for next year. I noticed that coming into 2020, the midpoint of your guide coming into 2020 was actually a little bit higher than your operating agent growth in '19. But if I look at the midpoint of the total written premium growth this year, it's 42%. That's below the mid 40s operating franchise growth that you've achieved here in 2020. So I just tried to get a better feel for what you're assuming there. I wouldn't think you assume less productivity, but just what's going into that 42.5% midpoint?

[Mark Jones:]

Yes, good question, Ryan. And I guess first of all, we always tried to be really disciplined and realistic on how we give guidance. We want to make sure that we can deliver for you guys. There's a lot of factors that go into that number, geography tenure franchisees et cetera. We're definitely -- not necessarily planning on any kind of productivity decreases in 2021. But we kind of model all those things out for the year. The range we give them is where we feel comfortable that we can achieve this year. If you look at our geographic expansion, the overwhelming majority of that expansion is coming from outside of Texas. And insurance rates are generally lower outside of Texas. So is that mix of business changes over time, you see a slight it's not a degradation, but it's the revenue profile is just a little softer.

[Ryan Tunis:]

Got it? And I think I heard you give a productivity statistic for agents greater than one year within Texas. Curios what that looks like outside of Texas. And along those lines, can you remind us what was your total market share of Texas originations? And maybe just some indication of like some of your other new big states like Florida, Illinois, California, like what are your mortgage origination market shares look like in some of those newer states as well?

[Mark Colby:]

Yes, so we'll have a lot more detail in the 10-K that's coming out this week about the productivity in Texas outside of Texas less than one year greater than one year. So I would say kind of wait and see on there. That the point of us getting that number for Texas. Texas is just to show how well we were able to kind of move the needle by applying our corporate resources to our franchisees nationally, but especially in the state of Texas.

[Ryan Tunis:]

Got it? I will re-queue. Thanks.

[Operator:]

The next question comes from Mark Dwelle with RBC Capital Markets. Please go ahead.

[Mark Dwelle:]

Yes good afternoon. A couple of questions and the contingent commissions. I mean, you've mentioned combined ratio, what are the main inputs to that drive? The contingency is there. I mean, I know combined ratio is certainly part of it. But are there other volume and other factors that go into play as well?

[Mark Colby:]

Yes, volume growth rates are a part of almost every contingent commission plan we have.

[Mark Jones:]

Underwriting profitability.

[Mark Colby:]

Underwriting profitability is a …

[Mark Jones:]

component loss ratios -- and buying ratio.

[Mark Colby:]

Loss ratios are part of the majority of our contingent commission plans as well.

[Mark Dwelle:]

Okay.

[Michael Colby:]

We haven’t -- Mark, we haven’t assumed the same kind of lost profile for 2021, as we saw in 2020 just because the country was shut down for a good chunk of the year in 2020. And our contingents benefited from that. At this point, we honestly don't know what 2021 is going to look like. And so we've tried to be as realistic as we can be in estimating what contingents are going to be. But it's a -- that's a big question mark, which is one of the reasons why we really encourage people. If you're really trying to understand the underlying health of our business, look at two things. One is premium growth, because that's what is going to be most reflected in long-term revenue growth and core revenue growth. The other pieces of revenue, cost recovery revenue was just franchise fees. Those aren't designed to be profitable. They're designed to allow us to recover costs of recruiting, training and supporting new franchises. And then ancillary revenues are contingent. And those can just be unpredictable. Like as Mark said, we had 155 basis points of premium as contingents in 2020, and roughly …

[Mark Colby:]

73.

[Mark Jones:]

… 73 in 2019. So they can swing. They’re elements of it that are in our control the overall volume and the growth rate, but there's not a lot we can do about losses.

[Mark Dwelle:]

That makes sense. I mean, clearly the auto loss ratios are going to be probably all, but impossible to duplicate. I mean, the homeowners, it's far too soon to tell and indeed, based on recent weather, which I'm sure you know well. You're probably off to a bad start, rather than a good start. So that'll make sense.

[Mark Jones:]

But it's only …

[Mark Dwelle:]

My second question really ….

[Mark Dwelle:]

Sorry, say that again.

[Mark Jones:]

I said it's only February. I mean, it's just huge question mark. We just don't know.

[Mark Dwelle:]

Agreed. That actually brings me on to a second question. I mean, you guys were -- the state was heavily impacted by weather, obviously, you have a lot of your agency base in the state. You mentioned the impact, it may or may not have ultimately on contingents. Are there any -- is there anything from an expense or cost standpoint that you're incurring, in order to field claims and service your customers during a very difficult time?

[Mark Jones:]

So Mark, the way we look at this recent weather event in Texas and our hearts go out to our customers, employees and people all over the state that were struggling, through -- really an unprecedented event. We look at the demand -- the customer demand is more backlog, not lost demand on new policy sales. So something that as we go into the back half of February and into March, we think we'll be able to keep up on. Where we're focused right now is the surge in demand in the service center. And I compare it to Harvey and in fact, a lot of the analysts expect losses to be at the same level as hurricane, Hurricane Harvey. So we have our team focused on expedient service to our customers, prioritizing those that are in need and have claims. We’re -- again, this is not anything new to us. We've been through many weather events from all over the country. So we feel like we're very well equipped to respond to these type of events. And I think it also emphasizes our business continuity strategy, both equipping our folks to work virtually as we did in the pandemic, but also continuing to expand our service operations in different parts of the country. Like we have continued to grow out west in Henderson, Nevada. So very confident in our ability to manage through these types of events. It's certainly not the first time that we've had to manage large events like this. In fact, it's interesting statistic in -- during Hurricane Harvey, when we saw a surge in call volume, our net promoter score actually increased, which I think is a testament to the capabilities of our service centers and our service team and leadership to manage through these types of events. I'll let Mark hit more on the cost implications.

[Mark Colby:]

Yes, we really didn't see any marketing, nothing material, at least. We -- it's more of a switching of our teams to focus on claims rather than other areas where they may be focused. So I don't anticipate any large material costs to come from this.

[Mark Dwelle:]

Okay, that's helpful detail. And then one last question, if I could. You mentioned a couple of times about the planned rollout of the customer facing enhancements to the customer facing portal. Do you have any more detailed guidance as to kind of when that's going to roll? Is that sort of a second half? Is it any minute now or anywhere in between, I suppose. You say anything that might help us to think about when that one kid might hit the tape.

[Mark Jones:]

Yes, it's all we're guiding to Mark on that is 2021. And as we've said before, there's nothing within our development capabilities that would get in the way of any type of progress there. But we're relying on multiple carriers, across the country to accomplish what we're setting out to do there. But we're very, very confident that we'll be able to present this in connection with a completely new rebuild of our kind of digital engagement platform that'll be led by Ann Challis, our Chief Marketing Officer, we're very confident we can bring this to market in 2021.

[Mark Dwelle:]

Got it. Thanks. That's all the questions.

[Operator:]

The next question comes from Meyer Shields with KBW. Please go ahead.

[Meyer Shields:]

Great. Thanks so much and assuming that everyone is doing well, despite the recent bad weather in Texas. If I can drill one more question on the ancillary revenues. Is there a significant margin differential between those revenues and core revenues?

[Mark Jones:]

Yes, I mean, they're very unreliable, but they're very high margin. I mean, straight to the bottom line. We don't share those costs with our agents. So, yes.

[Meyer Shields:]

Okay. That makes sense. Mark, when you were in your opening comments, you talked about hitting 140 carriers and having a number of Insuretech or direct players on the platform, or something you can talk about. Is there a point when there are too many carriers and there are inefficiencies from your perspective?

[Mark Colby:]

Meyer, our approach has always been to work with the most meaningful carriers and be relevant to those carriers not to aggregate every carrier. All of the 433 underwriters, personalised underwriters in the United States. Yes, that's been our approach. We picked very strategic partners. Now we have to be hyper aware of local market needs. So the product that we distribute in the Gulf Coast region is very different than what we distribute in the South Florida region, which is different than the West Coast and the Brushfire risk in California. So, these -- when we talk about our carrier portfolio, we're talking broadly across the nation, addressing all sorts of nuanced risk in different regions, different product lines, like flood insurance, or jewelry insurance, etcetera. That -- in aggregate, what any one agent would be working with in their market is in that kind of 15 to 20. Carrier range. And really, even within that, they're going to concentrate their production with less than 10. The remaining being focused on niche, type of risk. So our goal is to work with the most reputable underwriters that can address the full range of personal lines risk in the United States, no matter where agents are located.

[Mark Jones:]

Meyer, we are also in 43 of the 50 states, but we covered 97% of the U.S population. So I wouldn't expect this run rate to continue forever of us just adding carriers. So that would probably start to normalize over time.

[Michael Colby:]

The product portfolio is very dynamic. So the carriers that make up kind of our new business profile today look very different than 5 years ago. So as carrier appetites change that plays into kind of your product strategy, as well.

[Meyer Shields:]

Okay. That's actually perfectly into my, I guess, final follow up and that is, as the number of carriers expands or stabilizes, does that itself have any impact on either the basic commission, the core commission revenues or contingent commission arrangements?

[Mark Jones:]

Well, I mean, I think theoretically, if we were to slow down growth, you would see underwriting profitability improve, which may help your contingence, I mean, it would hurt you on the growth side, but we have no intention on slowing down growth. We feel like the commission rates and the compensation agreements that we've negotiated with are across the entire product spectrum and across the country are very stable, though.

[Meyer Shields:]

Okay. That makes sense, perfect sense. Thank you very much.

[Operator:]

The next question comes from Josh Shanker with Bank of America. Please go ahead.

[Joshua Shanker:]

Good afternoon, everybody.

[Mark Jones:]

Hi, Josh.

[Joshua Shanker:]

A quick question and it might be my fault. Did you say how many operating franchises do you have under coverage, in this quarter? under contracts?

[Mark Jones:]

890. Yes, operating was 891 as of 12/31.

[Joshua Shanker:]

contract?

[Mark Jones:]

And contract was 1,468, 55% growth.

[Joshua Shanker:]

Okay, thank you. And so you made the comment that the premium per policy is lower outside of Texas than in Texas. Is that discernible? Are we going to see that pressure? I mean, I don't have anything modeled for that, but is that pressure going to be material, do you believe?

[Mark Colby:]

On the property, I don't think material. The -- we're talking about property specifically. You have a -- Texas has some of the highest property insurance rates, with -- along with Florida, and maybe even New York. But on the auto side, I think, rates are pretty consistent across the states that we're kind of grabbing, sharing and growing and -- but we've been diversifying across multiple states outside of Texas now for 6 years, 7 years. So I don't think -- I think a lot of that's already baked in -- baked into the numbers.

[Joshua Shanker:]

Yes, that's what I would have thought because you mentioned, that's why I'm asking. That's how I would think about too. And then finally, in terms of sort of layering in new revenues, obviously a big hiring year in 2020, a lot of training for people who aren't yet ready for production. When should we expect those newer revenue producers, their contribution to really start hitting the calendar?

[Michael Colby:]

I mean, the trajectory of growth has remained consistent. So I think you can look backwards and anticipate, what we'll see going forward with these folks. We're certainly not seeing a slowdown in their ability to ramp up.

[Mark Colby:]

It's important to note too, that their contributions to our P&L won't be felt for several years, right, especially in the franchise channel, where our growth last year 45% growth and operating franchises contributed, I think, 7% to our royalty revenue.

[Mark Jones:]

Right.

[Mark Jones:]

And next year as they continue to ramp up their production as the royalty fee on the policies they wrote last year, it goes from 20% to 50%. All that will continue to mechanically increase revenue.

[Michael Colby:]

But their contributions are baked into the premium guidance that we …

[Mark Jones:]

Right, right.

[Joshua Shanker:]

All right, I'm just driving, I just try and best do it on a production per person basis is how I my model works, and some trying to not reverse engineer that if I can avoid it.

[Mark Jones:]

Yes, again, we'll have some details in -- excuse me in the 10-K, coming out this week that shows productivity by employee and by franchise, less than one year, greater than one year, Texas, non Texas, etcetera. And I think as you digest those numbers in the 10-K, I think it's important to remember kind of our strategic approach to leveraging our corporate assets to drive success, sales and growth and the franchise channel. And we've certainly kind of seen the productivity results of that investment manifest with franchise productivity over the last several years.

[Joshua Shanker:]

Well, thank you very much.

[Mark Jones:]

Thanks, Josh.

[Operator:]

The next question comes from Ryan Tunis with Autonomous Research. Please go ahead.

[Ryan Tunis:]

Yes, just a couple quick follow ups. The first one, could you give us a number on franchise churn here in 2020, remind us how that compares to what you had been doing and what you think you can do?

[Mark Jones:]

Sure, yes. That any given quarter in a given year, that's going to range from 10% to 15%. Just the franchise count for the year. It's important to remember though, that 10% to 15%, that is leaving only contributes about 1% of our new business being produced. So it's the bottom performers that are being managed out. And that's true of both corporate and franchise very stable.

[Michael Colby:]

Okay. This would be a stable one .

[Ryan Tunis:]

Okay. And then just one other one, it might be missing in, I'm not sure if it's my model, or it's just not a number you guys have given but can you give us some feel for what was the contingent rate back in '17 when we had Harvey? I think this year was close to 1.5%, but it'll be a stress test that for 2017 when there's a lot of Texas cat activity, what did that look like then?

[Mark Jones:]

Yes. So unfortunately, I don't have that number because we weren't reporting under 606. So it wouldn't be apples-to-apples anyway, which is kind of, unfortunately, why I can only give 2 years of '19 and '20 in that script.

[Ryan Tunis:]

Thanks, guys. Appreciate it.

[Operator:]

This concludes the question-and-answer session. I would like to turn the conference back over to Mark Jones, Chief Executive Officer for any closing remarks.

[Mark Jones:]

I would like to thank everyone for their participation and your interest in Goosehead. Good day.

[Operator:]

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.