10-K: Goosehead Insurance Reports Strong 2023 Growth, Revenue Up 25%

Goosehead Insurance's 2023 annual report reveals a 25% increase in total revenue and a 34% rise in total written premiums, driven by strategic investments and efficient operations.

Summary

• Goosehead Insurance, Inc. reported a 25% increase in total revenue, reaching $261.3 million in 2023.
• Total written premiums placed grew by 34% to $3.0 billion.
• Net income increased significantly to $23.7 million, representing 9% of total revenues.
• Adjusted EBITDA rose by 90% to $69.8 million, accounting for 27% of total revenues.
• The company's client retention rate remained strong at 86%.
• Policies in force increased by 16% to 1,486,000.
• The company's Net Promoter Score (NPS) was 92, indicating high customer satisfaction.
• Corporate sales headcount decreased by 6% to 300, while operating franchises decreased by 13% to 1,226.
• The company is focused on expanding its national footprint and investing in technology to drive efficiency.

Sentiment

Score: 8

Explanation: The document presents a positive outlook with strong financial performance and strategic growth initiatives. While there are risks, the overall tone is optimistic.

Positives

• Significant growth in total revenue and written premiums.
• Substantial increase in net income and Adjusted EBITDA.
• Strong client retention rate, indicating customer loyalty.
• High Net Promoter Score (NPS), reflecting excellent customer service.
• Strategic investments in technology and national expansion.
• Increased earnings rate on commissions generated by franchise sales from the initial term of the policy to the first renewal term.
• Premium retention rate of 101%.

Negatives

• Decrease in corporate sales headcount by 6%.
• Decrease in operating franchises by 13%.
• Client Retention decreased modestly to 86% at December 31, 2023 when compared to 88% at December 31, 2022.
• New Business Commissions decreased by $0.7 million, or 3%, to $23.4 million for the year ended December 31, 2023 from $24.1 million for the year ended December 31, 2022.
• Revenue from Agency Fees decreased by $2.7 million, or 25%, to $8.2 million for the year ended December 31, 2023 from $10.9 million for the year ended December 31, 2022.

Risks

• An overall decline in economic activity could have a material adverse effect on the financial condition and results of operations of our business.
• Volatility or declines in premiums or other adverse trends in the insurance industry may seriously undermine our profitability.
• Contingent Commissions we receive from Carriers are less predictable than standard commissions, and any decrease in the amount of the commissions we receive could adversely affect our results of operations.
• Our business is subject to risks related to legal proceedings and governmental inquiries.
• Conditions impacting Carriers or other parties that we do business with may impact us.
• Competition in our industry is intense and, if we are unable to compete effectively, we may lose clients and our financial results may be negatively affected.
• Our business, financial condition and results of operations may be negatively affected by E&O claims.
• Our business is dependent upon information processing systems.
• Our inability to successfully recover should we experience a disaster or other business continuity problem could cause material financial loss, loss of human capital, regulatory actions, reputational harm or legal liability.
• If we are unable to apply technology effectively in driving value for our clients through technology-based solutions or gain internal efficiencies and effective internal controls through the application of technology and related tools, our operating results, client relationships, growth and compliance programs could be adversely affected.
• Damage to our reputation could have a material adverse effect on our business.
• Climate risks, including the risk of an economic crisis, risks associated with the physical effects of climate change and disruptions caused by the transition to a low-carbon economy, could adversely affect our business, results of operations and financial condition.
• Our inability to retain or hire qualified employees, as well as the loss of any of our executive officers, could negatively impact our ability to retain existing business and generate new business.
• Non-compliance with or changes in laws, regulations or licensing requirements applicable to us could restrict our ability to conduct our business.
• We have debt outstanding that could adversely affect our financial flexibility and subjects us to restrictions and limitations that could significantly impact our ability to operate our business.
• Changes in our accounting estimates and assumptions could negatively affect our financial position and operating results.
• Because our business is highly concentrated in Texas, California, Florida and Illinois, adverse economic conditions, natural disasters, or regulatory changes in these states could adversely affect our financial condition.
• Changes in tax laws could impact our operations and profitability.
• We derive a significant portion of our commission revenues from a limited number of Carriers, the loss of which would result in additional expense and loss of market share.
• The failure by Mark Jones and Robyn Jones to maintain either a minimum voting interest in us or the ability to elect or designate for election at least a majority of our board of directors could trigger a change of control default under our Credit Agreement.
• Our results may be adversely affected by changes in the mode of compensation in the insurance industry.
• We may require additional debt financing in the future, which may not be available or may be available only on unfavorable terms.
• The failure to attract and retain highly qualified Franchisees could compromise our ability to expand the Goosehead network.
• The nature of franchise relationships can give rise to conflict.
• Our financial results are affected directly by the operating results of Franchisees and agents, over whom we do not have direct control.
• Our Franchisees and agents could take actions that could harm our business.
• We are subject to a variety of additional risks associated with our Franchisees.
• Failure to support our expanding franchise system could have a material adverse effect on our business, financial condition or results of operations.
• Our franchising activities are subject to a variety of state and federal laws and regulations regarding franchises, and any failure to comply with such existing or future laws and regulations could adversely affect our business.
• We are subject to certain risks related to litigation filed by or against us, and adverse results may harm our business and financial condition.
• We may not be able to manage growth successfully.
• Our business depends on a strong brand, and any failure to maintain, protect and enhance our brand would hurt our ability to grow our business, particularly in new markets where we have limited brand recognition.
• Infringement, misappropriation, dilution or other violation of our intellectual property by third parties could harm our business.
• Improper disclosure of confidential, personal or proprietary information, whether due to human error, misuse of information by employees or vendors, or as a result of security breaches, cyberattacks or other similar incidents with respect to our or our vendors systems, could result in regulatory scrutiny, legal liability or reputational harm, and could have an adverse effect on our business or operations.
• We are subject to complex and evolving laws, regulations, rules, industry standards and contractual obligations regarding data privacy and cybersecurity, which can increase the cost of doing business, compliance risks and potential liability.
• We are a holding company and our principal asset is our 65.8% ownership interest in Goosehead Financial, LLC, and we are accordingly dependent upon distributions from Goosehead Financial, LLC to pay dividends, if any, taxes, make payments under the tax receivable agreement and pay other expenses.
• In certain circumstances, Goosehead Financial, LLC will be required to make distributions to us and the other holders of LLC Units, and the distributions that Goosehead Financial, LLC will be required to make may be substantial.
• We have Pre-IPO LLC Members who own a significant portion of our common stock and whose interests in our business may be different than yours, and certain statutory provisions afforded to stockholders are not applicable to us.
• The Pre-IPO LLC Members interests may not be fully aligned with yours, which could lead to actions that are not in your best interests.
• We will be required to pay the Pre-IPO LLC Members for certain tax benefits we may claim, and the amounts we may pay could be significant.
• Some provisions of Delaware law and our certificate of incorporation and by-laws may deter third parties from acquiring us and diminish the value of our Class A common stock.
• Future sales, or the possibility of future sales, of a substantial number of our shares of Class A common stock could adversely affect the price of our shares of Class A common stock.
• We may not be able to successfully maintain effective internal controls over financial reporting.
• We expect that our stock price will be volatile, which could cause the value of your investment to decline, and you may not be able to resell your shares at or above your investment price.
• Our ability to pay dividends to our stockholders may be limited by our holding company structure, contractual restrictions and regulatory requirements.

Future Outlook

The company aims to achieve long-term returns for stockholders by becoming the premier national distributor of personal lines insurance products, focusing on expanding corporate sales recruiting, penetrating franchisee markets, driving productivity, managing renewal business, and investing in technology.

Management Comments

• Insurance buyers desire to have the right coverage, based on their risk tolerance, at the lowest possible price, written with a reputable company who will respond quickly and fairly when they need to file a claim desires that we believe only an independent insurance agent can fulfill.
• Clients want to accomplish this in a simple, fast, and convenient way that leverages technology to make the client experience effortless.
• We have built a model that combines a choice product portfolio, knowledgeable sales and service agents, and proprietary technology to deliver on these expectations.
• We believe that most clients currently buying through single-product platforms are either over-paying or not properly covered because 1) their current insurance company does not offer the appropriate coverage or 2) valuable coverages were removed to make the pricing competitive.
• We are able to solve that by partnering with over 150 carriers and using technology to shop for our clients and quickly identify the Carrier who is targeting their segment of the market.
• This allows us to provide value by finding the right coverage at the lowest price, and to do so in one phone-call so that the client does not have to spend hours shopping for themselves.
• Clients will have vastly different insurance needs throughout their lifetime, and our model allows us to serve them at every stage of life.
• We have leveraged our scale to empower our agents and now our clients with technology that allows them to run quotes and place business quickly and accurately.
• After signing their documents electronically, clients can engage with Gooseheads industry leading service team via phone, text, online chat, or email.
• Our choice model, superior sales and service agents, and proprietary technology have led to 86% client retention during 2023, which we believe is among the best in our industry.
• Instead of expensive retail space and spending money on ineffective marketing strategies, they follow our proven go-to-market strategy by developing Referral Partner relationships.
• This strategy allows them to spend much less on marketing and can yield dozens of high-quality clients referred directly to them, driving higher levels of productivity.
• All policy fulfillment and servicing is handled by our centralized service team, which retains our clients at 86%, unlocking the agents time to focus on new sales.
• We have proven that this system delivers superior results as demonstrated by agents, who with a few years tenure, are 2.8x more productive than industry best practice according to Reagan Consulting's 2023 Best Practices Study .

Industry Context

Goosehead operates in the competitive U.S. personal lines insurance distribution industry, competing with independent agencies, captive agencies, and direct distribution channels. The company differentiates itself through its technology platform, service model, and agent productivity.

Comparison to Industry Standards

• Goosehead's corporate sales agents with more than three years of tenure averaged 2.8x as much New Business Production per Agent as the industry best practice, according to the 2023 Best Practices Study by Reagan Consulting.
• Franchise sales agents with more than three years of tenure averaged 1.8x as much New Business Production per Agent as the industry best practice.
• Goosehead's 2023 and 2022 service expenses as a percentage of gross commissions were 2.5x and 2.7x lower than the industry best practice according to the 2023 Best Practices Study.
• Goosehead's NPS score of 92 is 2.6x the 2022 P&C industry average according to Statista.

Corporate Governance

Legal Proceedings

• A stockholder class action complaint was filed in the Court of Chancery of the State of Delaware, alleging certain corporate governance documents adopted by the Company were invalid under Delaware law.
• The parties entered into a proposed settlement providing for certain non-monetary benefits to the class (i.e., revisions to the Company's Stockholder Agreement).
• A hearing is set for February 22, 2024 to, among other things, consider whether to grant final approval of the proposed settlement.

Stakeholder Impact

• Shareholders: The company aims to achieve long-term returns for stockholders.
• Employees: The company strives for a one-of-a-kind company culture and offers a competitive compensation and benefits package.
• Customers: The company aims to provide consumers with superior insurance coverage at the best available price and in a timely manner.
• Carriers: The company aims to deliver a better client experience, offer a more compelling business opportunity to agents, and drive more value to carrier partners.

Next Steps

• Continue to expand recruiting in corporate sales.
• National penetration of the Franchisees.
• Continue to develop innovative ways to drive productivity.
• Maximize our effectiveness in managing renewal business.
• Continue to invest in technology to drive efficiencies in all areas of our business.

Key Dates

Keywords

insurance, premiums, revenue, franchise, commissions, growth, agents, policies, client retention, financial results