Business context and reporting period
Goosehead Insurance, Inc. filed this Form 10-K for the fiscal year ended December 31, 2020. It distributes primarily personal-lines property and casualty insurance through company-operated Corporate and Franchise channels. Results are consolidated with Goosehead Financial, LLC; Goosehead Insurance, Inc. owned 49.8% of the LLC at year-end, with the balance held by non-controlling members.
The company reported 2020 and 2019 results under ASC 606. Comparisons with 2018 may be affected by the company’s adoption of that revenue standard in 2019.
Financial and operating performance
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $117.0 million | $77.5 million |
| Income from operations | $19.9 million | $14.1 million |
| Consolidated net income | $18.8 million | $10.4 million |
| Net income attributable to Goosehead Insurance, Inc. | $9.3 million | $3.6 million |
| Basic / diluted EPS | $0.55 / $0.51 | $0.24 / $0.22 |
| Adjusted EBITDA (non-GAAP) | $27.8 million | $17.5 million |
| Adjusted EBITDA margin (non-GAAP) | 24% | 23% |
| Net cash from operating activities | $24.6 million | $21.2 million |
| Cash and restricted cash at year-end | $26.2 million | $15.3 million |
| Total debt at year-end | $82.9 million | $46.2 million |
Revenue rose 51%; Core Revenue, a non-GAAP measure, increased 41% to $95.1 million. Total Written Premium grew 45% to $1.074 billion. Policies in Force increased 48% to 713,000. Operating franchises rose 45% to 891, and corporate sales agents increased 47% to 364. The company also had 577 additional franchises under contract but not yet open.
Revenue growth included higher renewal revenue and a substantial increase in Contingent Commissions. Renewal Revenue grew 37% to $58.2 million; New Business Revenue grew 46% to $36.9 million. Contingent Commissions increased to $16.7 million from $5.4 million. They are variable and depend on carrier growth and profitability results.
Cash used in investing was $10.3 million, primarily for property, equipment and growth-related office buildout. Cash used in financing was $3.3 million. The company’s balance sheet included $36.1 million of operating lease liabilities and $61.6 million of tax receivable agreement liabilities, in addition to debt.
Material changes versus the prior comparable period
- Corporate Channel premiums grew 31%; Franchise Channel premiums grew 52%.
- Client retention remained 88%; premium retention was 89%, down from 91% in 2019. Net Promoter Score increased to 92 from 89.
- Employee compensation and benefits rose 60% to $66.8 million, reflecting higher headcount and stock-option grants. General and administrative expenses rose 34% to $25.5 million, including technology investment and public-company costs.
- Contingent Commissions were materially higher, which management attributed in part to premium growth and favorable carrier loss ratios.
- The company refinanced debt in March 2020, increasing its term loan facility to $80 million and revolving facility to $25 million. Year-end borrowings were $78.5 million on the term loan and $5.0 million on the revolver; $19.7 million remained available under the revolver after a letter of credit.
Unaudited fourth-quarter revenue was $34.7 million versus $20.4 million in fourth-quarter 2019; net income was $5.5 million versus $2.4 million. Fourth-quarter basic EPS was $0.16 versus $0.06.
Outlook, commentary, risks and unusual items
- Management expects to continue recruiting agents and franchisees, expanding its footprint, investing in technology and service capacity, and growing the Franchise Channel. It highlighted the potential for higher productivity and margins as newer business renews. The filing provides no quantified financial guidance.
- Management said the 2020 remote-work transition did not materially disrupt operations or key performance indicators. It also cautioned that COVID-19’s future effects remained uncertain; reduced loss ratios during 2020 may have increased Contingent Commissions.
- The company declared and paid a $42 million extraordinary dividend in August 2020, equivalent to approximately $1.15 per Class A share. Future dividends remain at the board’s discretion and are subject to cash availability, debt covenants and the holding-company structure.
- Key risks include dependence on carrier relationships and commission rates, unpredictable Contingent Commissions, competition, economic and housing-market conditions, regulatory and franchise compliance, cybersecurity and technology availability, and the ability to scale support for a rapidly growing franchise network. Three carriers each contributed more than 10% of 2020 revenue, at 20%, 13% and 12%.
- Debt bears floating interest tied to LIBOR, with a $68 million term-loan maturity scheduled for 2023. The filing discusses LIBOR transition uncertainty and debt covenants; the company reported compliance with its covenants at year-end.
- The auditor issued an unqualified opinion on the financial statements and internal controls. Commissions and royalty-fee revenue estimates were identified as a critical audit matter, particularly estimates of policy changes, cancellations and constraints. The company reported no material legal proceedings currently pending.
Important facts for investors to verify
- How much of reported growth and profitability depends on Contingent Commissions, including collection of the $15.1 million receivable at year-end.
- Whether retention, premium retention and service quality remain strong as policy and franchise counts scale.
- The pace at which the 577 contracted but unopened franchises launch and reach productive operations.
- Carrier concentration, renewal economics, and any changes in carrier commissions, appointments or underwriting capacity.
- Debt repayment and refinancing capacity, floating-rate exposure, and the 2023 maturity; also assess the $61.6 million tax receivable agreement liability and other contractual commitments.
- The effects of revenue-recognition estimates and non-GAAP adjustments when comparing reported results across periods.