Goosehead Insurance(GSHD) - 2021 Q4 - Annual Report

PART I Business Goosehead operates as a rapidly growing independent insurance agency in the U.S. personal lines market, utilizing a differentiated model with two main channels: a Corporate Channel with employed agents and a Franchise Channel with independent franchisees - Goosehead is a rapidly growing independent insurance agency focused on personal lines, using a differentiated business model and proprietary technology to deliver a superior customer experience[18] - 2021 Performance Highlights | Metric | 2021 Value | 2020 Value | % Change | | :--- | :--- | :--- | :--- | | Total Written Premium | $1.6 billion | $1.1 billion | 45% | | Total Revenue | $151.3 million | $117.0 million | 29% | | Net Income | $8.3 million | $18.8 million | -55.8% | | Policies in Force | 1,011,000 | 713,000 | 42% | | Total Franchises | 2,151 | 1,468 | 47% | - The company's model is viewed from three perspectives: the insurance buyer (choice, knowledgeable agents, technology), the agent (access to carriers, proven marketing, centralized service), and the carrier (scale distribution, quality control, profitable growth)[18][19][28] Company Overview Goosehead is a fast-growing independent insurance agency that differentiates itself through a superior client experience, a compelling value proposition for agents, and efficient distribution for carriers - The company's model separates sales and service functions, enabling agents to focus on selling and service personnel to deliver superior client service, achieving a Net Promoter Score of 91, 2.3x the industry average[18][21] - Goosehead provides agents with access to a wide array of carriers, a proven go-to-market strategy focusing on referral partners, and a centralized service team, leading to agent productivity 1.7 times higher than the industry best practice[26] - For carriers, Goosehead offers scale distribution with a single point of contact, standardized training, and quality control, resulting in higher retention rates and underwriting profitability[28] Our Segments The company operates through two distinct segments which each contributed 50% of total revenue in 2021: the Corporate Channel and the Franchise Channel - The Corporate Channel, with 506 sales agents across 15 offices, focuses on recruiting and training new talent, serving as an R&D hub for the company It generated 50% of 2021 revenue[48][50] - The Franchise Channel, with 2,151 total franchises (1,198 operating), targets experienced agents by offering access to multiple carriers, centralized servicing, and a lean startup model It also accounted for 50% of 2021 revenue[51][55] - Franchise Royalty Fee Structure | Policy Term | Royalty Fee Rate | | :--- | :--- | | New Business (First Term) | 20% of commissions & agency fees | | Renewal Business | 50% of commissions | - Total franchises grew 47% to 2,151 in 2021, with operating franchises increasing by 34% to 1,198[55][70] Our Competitive Strengths and Growth Strategy Goosehead's competitive strengths are rooted in its highly motivated and young corporate agent workforce, a franchise model that addresses the flaws of traditional agencies, a unified proprietary technology platform, and efficient service centers that drive high client retention - A key strength is the young, tech-adept Corporate Channel workforce, with agents generating 2.9x more new business than top industry performers after three years[58] - The Franchise Channel solves traditional agency flaws by offering choice, removing the service burden, and providing an economic interest in the business, attracting high-performing agents[58] - A single, proprietary cloud-based technology platform drives efficiencies, with service expenses being 3.4x lower than the industry best practice[59] - Growth strategy includes national penetration of the Franchise Channel, with agreements signed in 47 states and a pipeline of approximately 137,000 potential candidates[60] - Maximizing renewal business is critical, as renewal royalty fees from franchisees are significantly higher (50%) than new business fees (20%) This is supported by an 89% client retention rate[62][69] Regulatory Matters and Human Capital The company is subject to extensive regulation, including FTC and state franchise laws, state-specific insurance licensing, and evolving data privacy laws like the CCPA - The company's franchise operations are regulated by the FTC's "Franchise Rule" and various state laws, requiring specific disclosures (FDD) and registrations[75] - Goosehead and its employees must maintain insurance licenses in the states where they operate, and are subject to regulations on agent compensation and data privacy[76][78][82] - As of December 31, 2021, the company had approximately 1,238 full-time and 52 part-time employees The workforce grew by over 500 individuals in 2021[83][84] - The company promotes diversity and inclusion, with more than half of its employees being women and over one-third identifying as racially diverse It established a Women's Professional Development Program in 2015[92][94] Risk Factors The company faces a range of risks that could materially affect its business, including economic downturns, premium volatility, carrier dependence, operational challenges, and structural financial obligations Risks Relating to Our Business Business-related risks include the potential negative impact of the COVID-19 pandemic and general economic downturns on insurance demand and premium payments - The COVID-19 pandemic and economic downturns could reduce demand for insurance, affect clients' ability to pay premiums, and decrease contingent commissions[107][114] - Revenue is subject to volatility as it depends on premiums and commission rates set by carriers, which are cyclical and can be affected by intense price competition[117][120][121] - A significant portion of commission revenue is derived from a limited number of carriers In 2021, two carriers represented 17% and 11% of total revenue[184][66] - The business is highly concentrated in Texas, California, Florida, and Illinois, making it vulnerable to adverse economic, natural disaster, or regulatory events in these states[180] Risks Relating to Our Franchise Business The franchise model's success depends on attracting and retaining high-quality franchisees, whose operational success directly affects the company's financial results - The company's success depends on its ability to attract and retain high-quality franchisees, as its financial results are directly tied to their operational performance[189][191] - Franchisees are independent businesses, and their actions (e.g., poor service, misconduct, legal violations) could harm the company's brand, reputation, and lead to vicarious liability claims[193][194] - Franchising activities are subject to extensive state and federal regulations (e.g., FTC Franchise Rule), and non-compliance could result in adverse business impacts[199] Risks Relating to Intellectual Property, Data Privacy and Cybersecurity The company's success is tied to its strong brand and intellectual property, which could be harmed by infringement or failure to protect these assets - Failure to maintain, protect, and enhance the "Goosehead Insurance" brand could hurt business growth, especially in new markets[204] - Improper disclosure of confidential or personal information, whether from human error or cyberattacks, could result in regulatory scrutiny, legal liability, and reputational harm[211][213] - The company is subject to complex and evolving data privacy and cybersecurity laws (e.g., GLBA, CCPA, CPRA), which can increase compliance costs and potential liability[217][219][220] Risks Relating to Our Organizational Structure Goosehead Insurance, Inc. is a holding company dependent on distributions from its subsidiary, Goosehead Financial, LLC, with significant voting power concentrated in Pre-IPO LLC Members - As a holding company, Goosehead Insurance, Inc. is dependent on distributions from Goosehead Financial, LLC to pay dividends, taxes, and expenses, including payments under the Tax Receivable Agreement[223] - Pre-IPO LLC Members control approximately 46% of the combined voting power, allowing them to approve or disapprove most major corporate actions[227] - The company is required to pay Pre-IPO LLC Members 85% of the cash tax savings realized from increases in tax basis resulting from redemptions or exchanges of LLC units These payments could be substantial[234][235] - Upon a change of control, the company could be required to make accelerated payments under the tax receivable agreement that are greater than actual cash tax savings, which could negatively impact liquidity[238] Properties The company's headquarters is in a leased 177,000 square foot office in Westlake, Texas, with a lease expiring in January 2031 - The company's headquarters is located in a leased office of approximately 177,000 square feet in Westlake, Texas, with the lease expiring in January 2031[252] - As of year-end 2021, the company-owned insurance brokerage leases a total of approximately 393,000 square feet of office space under 15 leases across Texas, Nevada, Illinois, North Carolina, and Ohio[252] Legal Proceedings The company may be involved in various legal proceedings incidental to its business from time to time, but as of the report date, Goosehead is not a party to any material legal proceedings - The company is not currently a party to any material legal proceedings[253] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Goosehead's Class A Common Stock trades on NASDAQ under the symbol "GSHD," while its Class B stock is not traded - Class A Common Stock is traded on NASDAQ under the symbol "GSHD" Class B Common Stock is not traded[255] - As a holding company, Goosehead Insurance, Inc.'s ability to pay dividends is subject to the ability of its subsidiary, Goosehead Financial, LLC, to provide distributions[258] - Stock Performance Since IPO (May 1, 2018) | Index | 5/1/2018 | 12/31/2021 | | :--- | :--- | :--- | | GSHD | $100 | $914 | | S&P 500 | $100 | $192 | | Russell 2000 | $100 | $153 | - Equity Compensation Plan Information (as of Dec 31, 2021) | Metric | Value | | :--- | :--- | | Securities to be issued upon exercise of outstanding options | 2,069,000 | | Weighted-average exercise price of outstanding options | $34.68 | | Securities remaining available for future issuance | 2,126,000 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) In 2021, Goosehead's total revenue grew 29% to $151.3 million, driven by a 40% increase in Core Revenues to $133.4 million Financial Highlights and Key Performance Indicators For fiscal year 2021, Goosehead reported a 29% increase in total revenue to $151.3 million and a 45% increase in Total Written Premiums to $1.6 billion - Key Financial Metrics (FY 2021 vs. FY 2020) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $151.3M | $117.0M | +29% | | Core Revenues* | $133.4M | $95.1M | +40% | | Total Written Premiums | $1.6B | $1.1B | +45% | | Net Income | $8.3M | $18.8M | -56% | | Adjusted EBITDA* | $20.8M | $27.8M | -25% | | Adjusted EPS* | $0.48 | $0.68 | -29% | - Key Operational Metrics (as of Dec 31, 2021) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Policies in Force | 1,011,000 | 713,000 | +42% | | Corporate Sales Headcount | 506 | 364 | +39% | | Operating Franchises | 1,198 | 891 | +34% | | Client Retention | 89% | 88% | +1 ppt | | Net Promoter Score (NPS) | 91 | 92 | -1 pt | - The decrease in profitability (Net Income, Adjusted EBITDA) was primarily driven by a significant $6.7 million (39%) decrease in high-margin but unpredictable Ancillary Revenue (mainly Contingent Commissions) and continued investments in growth[309][311][312] Consolidated Results of Operations For the year ended December 31, 2021, total revenues increased 29% to $151.3 million, driven by growth in both commissions and franchise revenues - Consolidated Statement of Operations Summary (in millions) | Line Item | 2021 (in millions) | 2020 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $151.3M | $117.0M | 29.3% | | Employee compensation and benefits | $93.0M | $66.8M | 39.2% | | General and administrative expenses | $41.7M | $25.5M | 63.4% | | Total operating expenses | $142.6M | $97.1M | 47.0% | | Income from operations | $8.7M | $19.9M | -56.5% | | Net Income | $8.3M | $18.8M | -55.8% | - Revenue from Renewal Royalty Fees in the Franchise channel grew 57% to $46.1 million, driven by an increasing number of policies in their renewal term where the company earns a higher royalty rate (50% vs 20% on new business)[325] - Contingent commission revenue decreased 40% to $9.9 million, primarily due to increased loss ratios experienced by carrier partners[324] - The 39% increase in employee compensation and benefits was due to higher headcount and additional stock option grants The 63% increase in G&A was driven by eased travel restrictions and continued investment in technology[329][330] Liquidity and Capital Resources As of December 31, 2021, the company held $30.5 million in cash, with net cash from operations increasing to $35.4 million - Comparative Cash Flows (in millions) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $35.4M | $24.6M | | Net cash used for investing activities | ($15.4M) | ($10.3M) | | Net cash used for financing activities | ($15.8M) | ($3.3M) | | Net increase in cash | $4.2M | $11.0M | - On July 21, 2021, the company refinanced its credit facilities, resulting in a $100 million term loan and a $50 million revolving credit facility As of year-end, $98.8 million was outstanding on the term loan and $25.0 million was drawn on the revolver[337][444][445][446] - The liability under the Tax Receivable Agreement increased to $101.0 million as of December 31, 2021, up from $62.1 million in 2020, due to redemptions of LLC units by Pre-IPO members[357][462] - In July 2021, the company declared and paid an extraordinary dividend of $60 million to all holders of LLC Units and Class A common stock[484] Quantitative and Qualitative Disclosure of Market Risks The company is exposed to market risk primarily through insurance premium pricing cyclicality and interest rate changes - The company is exposed to insurance market cyclicality, where a "soft market" (declining premium rates) can negatively affect commissions[359] - There is carrier concentration risk, as two carriers represented 17% and 11% of total revenue in 2021[360] - As of December 31, 2021, the company had $123.8 million of floating-rate debt tied to LIBOR, creating exposure to interest rate risk[361] Financial Statements and Supplementary Data This section contains the audited consolidated financial statements for Goosehead Insurance, Inc. for the fiscal year ended December 31, 2021, including the independent auditor's unqualified opinion - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of the company's internal control over financial reporting as of December 31, 2021[366][367] - A critical audit matter was identified related to the estimation of commissions and royalty fees revenue, specifically the judgments required for estimating policy changes, cancellations, and constraints for renewal business[371][372] - Consolidated Balance Sheet Summary (in millions) | Account | Dec 31, 2021 (in millions) | Dec 31, 2020 (in millions) | | :--- | :--- | :--- | | Total Assets | $267.8M | $185.8M | | Total Liabilities | $337.0M | $224.2M | | Total Equity | ($69.2M) | ($38.4M) | Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021, with no material changes to internal control over financial reporting during the year - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[497] - Management assessed internal control over financial reporting based on the COSO 2013 framework and concluded it was effective as of December 31, 2021[500] - The independent registered public accounting firm, Deloitte & Touche LLP, audited and issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2021[501][505] PART III Directors, Executive Officers, and Corporate Governance Information regarding the company's directors, executive officers, and corporate governance is incorporated by reference from the company's definitive Proxy Statement for its 2022 Annual Meeting of Stockholders - The information required for this item is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement[514] Executive Compensation Details concerning executive compensation are incorporated by reference from the company's Proxy Statement for its 2022 Annual Meeting of Stockholders - The information required for this item is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement[515] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership by certain beneficial owners and management, as well as related stockholder matters, is incorporated by reference from the company's 2022 Proxy Statement - The information required for this item is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement[516] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related-party transactions, and the independence of the company's directors is incorporated by reference from the company's Proxy Statement for its 2022 Annual Meeting of Stockholders - The information required for this item is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement[517] Principal Accountant Fees and Services Details regarding the fees paid to and services provided by the principal independent accountant are incorporated by reference from the company's Proxy Statement for its 2022 Annual Meeting of Stockholders - The information required for this item is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement[518] PART IV Exhibits and Financial Statement Schedules This section lists the documents filed as part of the Annual Report on Form 10-K, including consolidated financial statements and an index of all exhibits - This section provides an index of all exhibits filed with or incorporated by reference into the Form 10-K[520][522] - All financial statement schedules are omitted because the required information is included in the consolidated financial statements or the notes thereto[520]