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. [Operator Instructions] I would now like to turn the conference over to Dan Farrell, VP, Capital Markets for opening remarks.. Please go ahead.

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. Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements, which are based on the expectations, estimates and projections of management as of today. The forward-looking statements in our discussion are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict, and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of Goosehead Insurance. We disclaim any intentions or obligations to update or revise any forward-looking statements, except to the extent required by applicable law. I would also like to point out that during this call, we will discuss certain financial measures that are not prepared in accordance with GAAP. Management uses these non-GAAP financial measures when planning, monitoring and evaluating performance. We consider these non-GAAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons from period-to-period by excluding potential differences caused by variations in capital structure, tax position, depreciation, amortization and certain other items that we believe are not representative of our core business. For more information regarding our use of non-GAAP financial measures, including reconciliations of these measures to the most comparable GAAP financial measures, we refer you to today's earnings release. In addition, this call is being webcast. An archived version will be available shortly after the call ends on the Investor Relations portion of the Company's website at www.gooseheadinsurance.com. With that, I'd like to turn the call over to CEO, 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. We delivered an outstanding fourth quarter which capped off a phenomenal year for Goosehead Insurance. We continued our exceptional record of profitable growth in 2020 with premiums placed up 45%; revenues increasing 51% and EBITDA up 59% for the year. We also kept our foot firmly on the gas pedal investing heavily in people and our disruptive technology platform, which we believe will drive strong growth in 2021 and beyond. But we are pleased with our success in 2020. It is important to remember that we've delivered consistently high levels of growth since the inception of our company. So driving high growth is not a recent phenomenon for us. Over the last 10 years, we've grown premiums placed at a CAGR of 37%. In more recent years, we've been able to drive accelerating growth through our technology and human capital investments, while leveraging the benefits of our accumulated experience. Over the last 3 years, which represent our history as a public company, we've grown premium at a CAGR of 45% and ASC 606 revenue at a CAGR of 38%. Our investments have been meaningful, consistent and disciplined, having grown our franchises and corporate agents at a CAGR of 51% and 48%, respectively over that time. We are very proud of our consistent strong growth. It validates our unique and time tested strategy and…

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. We now have virtually all of our workforce in the office for at least 50% of the work week. We put a priority on the successful training and onboarding of our new hires and have fully resumed in person training for our new corporate recruits. We also provided an option for franchisee trainees to attend in person. While we fill an in-person work environment remains critical to maintaining the strength of our culture and successful onboarding of talent, there are many lessons that have been learned in the pandemic. And our operating model can look to integrate the best practices and benefits from both in-person and virtual work environments as we go forward. Now, let me turn to some of our 2020 accomplishments and efforts moving forward. We made substantial and consistent progress on our technology roadmap in 2020, improving on our already powerful platform that agents utilize to engage with clients and carriers. We remain focused on providing an…

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…

[Operator Instructions] The first question comes from Ryan Tunis with Autonomous Research. Please go ahead.

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?

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.

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?

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.

Got it? I will re-queue. Thanks.

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

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?

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

Underwriting profitability.

Underwriting profitability is a …

[Indiscernible] component loss ratios -- [indiscernible] and buying ratio.

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

Okay.

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 …

73.

… 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.

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.

But it's only …

My second question really ….

Sorry, say that again.

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

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?

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.

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.

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.

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.

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

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

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?

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.

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?

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.

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.

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.

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?

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.

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

[Operator Instructions] The next question comes from Josh Shanker with Bank of America. Please go ahead.

Good afternoon, everybody.

Hi, Josh.

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?

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

[Multiple speakers] contract?

And contract was 1,468, 55% growth.

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?

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.

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?

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.

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.

Right.

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.

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

Right, right.

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.

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.

Well, thank you very much.

Thanks, Josh.

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

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?

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.

Okay. This would be a stable one [indiscernible].

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?

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.

Thanks, guys. Appreciate it.

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.

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

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