What changed in this filing

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Item 1. Business

2021-02-26 compared with 2020-03-16 · 165 added, 164 removed, 288 unchanged (53% of the section changed)

Company overview

We are a leading independent personal lines insurance agency, based on personal lines revenue, reinventing the traditional approach to distributing insurance products and services throughout the United States.

We were founded with one vision:

to put our clients at the center of our universe and build the business around delivering them the best experience and value.

By leveraging our differentiated business model and innovative technology platform, we are able to deliver to consumers a superior insurance experience.

Our business model is unique in how we combine the following attributes to drive operation excellence:

• Choice Model :

We represent over 100 insurance companies that underwrite personal lines and small commercial lines risks, which typically enables us to provide broader insurance coverage at a lower price point than competing agents who represent only a few Carriers, Carriers with Captive Agents or Carriers that distribute directly to consumers.

• Best-In-Class Service Center :

In contrast to the traditional insurance agency model, we separate the sales function from the service function, thus enabling agents to focus on selling, and service personnel to focus on delivering superior client service.

We have achieved best-in-class net promoter scores for client service, nearly 2.4x the 2018 P&C industry average.

We are a rapidly growing independent insurance agency, reinventing the traditional approach to distributing personal lines policies throughout the United States.

Our differentiated business model and innovative technology platform, have enabled us to deliver insurance customers a superior experience, as evidenced by our 92 Net Promoter Score which is 2.3x the 2019 P&C Industry Average.

To fully appreciate the value of our model, there are three lenses with which you can view us – from the perspective of 1) the insurance buyer;

2) the agent;

and 3) the carrier.

Insurance buyer perspective

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.

Choice product platform

Today’s insurance buyer expects choice;

we believe that tomorrow’s insurance buyer will demand it.

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 140 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.

Knowledgeable sales and service agents

Our clients benefit from the value of having a knowledgeable agent explain and evaluate coverages to help the client make smart insurance buying decisions.

Clients will have vastly different insurance needs throughout their lifetime, and our model allows us to serve them at every stage of life.

While there are other independent agents who also provide choice, we believe that they lack the scale, talent, and technology of Goosehead, leading to a poorer client experience.

Additionally, in contrast to the traditional insurance agency model, we separate the sales function from the service function, thus enabling agents to focus on selling, and service personnel to focus on delivering superior client service.

This model has helped drive best-in-class net promoter scores for client service, nearly 2.3x the 2019 P&C industry average according to Satmetrix.

Proprietary technology

Our technology platform empowers our agents with tools to better manage their sales initiatives and provides our service personnel with real-time 360-degree visibility of client accounts.

Our business has grown substantially since our founding in 2003.

Today we are a rapidly-growing independent insurance agency and franchisor in the United States.

Our operations now include a network of seven corporate sales offices and 948 franchise locations (inclusive of 334 franchises which are under contract but yet to be opened as of December 31, 2019).

In addition, we have service center operations at our headquarters in Westlake, Texas and a second service center in Henderson, Nevada.

Our growth is reflected in our financial performance.

Independent agents typically are working on outdated technology platforms, leading to delays in insurance quotes and very limited ability to interact with their agent.

We have leveraged our scale to empower our agents with technology that allows them to run quotes and place business in one simple phone-call.

After signing their documents electronically through our online portal, clients can engage with Goosehead’s industry leading service team via self-service, phone, text, online chat, or email.

Our choice model, superior sales and service agents, and proprietary technology has led to 88% client retention during 2020, which we believe is among the best in our industry.

Agent perspective

Among the three largest captive insurance companies, State Farm, Farmers, and Allstate, there are over 100,000 captive agents in the United States, and these agents are facing some acute pain points in their businesses.

First, only having one carrier to sell leads to lower close rates and client retention as these companies lack options to move the business to another Carrier.

In addition, many agents will lose their ability to write certain lines of business in some areas due to underwriting rules from the carrier – this is especially true after a catastrophic loss in the agent’s city or county.

Low close rates are also due to the agents’ outdated and ineffective marketing playbook.

They typically pay for expensive retail store-front locations and spend significant amount of money on paper mailers and internet leads.

This broken marketing model leads to high overhead costs and limited success.

Additionally,

these captive agents are working on outdated technology platforms and many have no economic interest in their book of business.

Finally, and most importantly, these agents are responsible for processing all of their client’s service needs in house;

the more successful they are at sales, the quicker their growth stalls because of the time necessary to manage customer service work.

When agents join Goosehead, they immediately get access to sell a wide array of carriers so that they have product to accommodate most clients, which drastically improves close rates.

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 88%, unlocking the agent’s time to focus on new sales.

Our proprietary technology platform allows our agents to identify Referral Partners, run quotes in less than five minutes, and gives them all the analytics they need to make smart decisions around building a successful agency.

Our nine corporate-owned offices and 364 corporate sales agents serve as the blueprint for what is possible in the Goosehead model, and our corporate agents provide critical training and support to help the franchise agents reach their full potential.

We have proven that this system delivers superior results as demonstrated by agents, who with a few years tenure, are 2.3x more productive than industry best practice according to Reagan Consulting's 2020 Best Practices Study .

In addition to recruiting current insurance agents with a superior value proposition, we are also bringing in sales and marketing savvy professionals who are attracted to the recession-resistant and residual economics offered by a career in insurance.

The value and opportunity we provide to agents has led to our rapid growth to 1,468 franchise locations (inclusive of 577 franchises that are under contract but yet to be opened as of December 31, 2020).

Carrier perspective

Insurance carriers are seeking profitable growth, and their focus is on maximizing the ratio of client lifetime value to acquisition costs.

Carriers who distribute through independent agents have lots of complexity and costs dealing with thousands of independent representatives with no standard training, different levels of expertise, and no quality control functions.

Working with Goosehead allows them to have scale distribution with a single point of contact.

Goosehead handles all training and enforces standards through a centralized quality control team.

Because Goosehead can provide profitable growth without complexity, it has earned special product access in geographies where Carriers have heavily restricted capacity, and higher commissions than what agents normally earn.

Our 2020 average commission rate on new business premium was 14% and on renewal business premium was 14%.

Commission rates can vary across Carriers, states and lines of business, and typically range from 10% to 20% Many “insuretech” carriers saw the complexity of working with traditional agents and have sought to build models that eliminate the role of the agent.

As they have grown, many have realized that 80% of the market still prefers to work with an agent (according to the Independent Insurance Agents & Brokers of America, Inc.), and that Goosehead allows them to reach that segment of the market without all the traditional complexity.

We now distribute for many of the insuretechs, increasing the breadth of our product portfolio.

Distributing through Goosehead allows carriers to see higher retention rates and more underwriting profitability when compared with other distribution channels, increasing the client lifetime value for the carrier.

This value enables Goosehead to have a very competitive carrier portfolio, ensuring that clients find the best solution, and increasing agents’ close rates.

By delivering a better client experience, offering a more compelling business opportunity to agents, and driving more value to carrier partners, we have seen growth as reflected in our financial performance.

Beginning as of 2019, the Company adopted the new accounting guidance, ASC Topic 606, related to revenue from contracts with customers.

Under this new accounting standard, revenue grew period over period by 51% for the year ended December 31, 2020.

Total Written Premium, which we believe is the best leading indicator of future revenue growth because it drives our future Core Revenue and gives us potential opportunities to earn Ancillary Revenue in the form of Contingent Commissions, grew 45% to $739 million from $509 million in 2018.

This growth has been driven by our team’s ability to recruit talented agents to our platform, our agents’ leveraging of Goosehead's sales blueprint and proprietary technology leading to higher levels of productivity in winning new business, and our service centers’ ability to retain renewal business.

All of our growth has been organic;

This growth has been driven by several factors including (1) our team’s ability to recruit talented agents to our platform;

(2) our agents’ leveraging of Goosehead's sales blueprint and proprietary technology leading to higher levels of productivity in winning new business;

and (3) our service centers’ ability to retain renewal business.

All our growth has been organic;

we have not relied on mergers or acquisitions.

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Management's discussions and analysis of financial condition and results of operations - Key performance indicators" for additional information and a reconciliation to the most directly comparable GAAP financial measure.

Our insurance product offerings primarily consist of (i) homeowner’s insurance, (ii) auto insurance, (iii) other personal lines products, including flood, wind and earthquake insurance, (iv) excess liability or umbrella insurance, (v) specialty lines insurance, including motorcycle, recreational vehicle and other insurance, (vi) commercial lines insurance, including general liability, property and auto insurance for small businesses, and (vii) life insurance.

We do not take any insurance underwriting risk in the operation of our business.

We enter into contracts with our insurance Carriers called appointments that set the terms of engagement, define legal ownership of client accounts and client data, and determine compensation.

Our 2019 average commission rate on new business premium was 15% and on renewal business premium was 13%.

Commission rates can vary across Carriers, states and lines of business, and typically range from 10% to 20%.

Because we represent a broad set of Carriers that all have unique risk appetites and underwriting strategies, we can usually provide our clients with broader insurance coverage at a lower price point than competing agents who represent only one Carrier exclusively, or Carriers that distribute directly to insurance buyers.

We have two Segments that work together to drive our growth:

the Corporate Channel and Franchise Channel.

The Corporate Channel

The Corporate Channel consists of company-owned and financed operations with employees who are hired, trained and managed by us.

The Corporate Channel also serves as a research and development department, where we develop best practices and beta test new technology before implementing system-wide.

Additionally, the Corporate Channel serves as an invaluable support network for our Franchise Channel, providing sales coaching and mentoring for Franchisees.

In the Corporate Channel, we generate Core Revenue in the form of Renewal Commissions, New Business Commissions and non-refundable Agency Fees charged directly to clients for efforts performed in the issuance of new insurance policies.

We also generate Ancillary Revenue in the form of Contingent Commissions from Carriers related to the overall growth and loss performance of the Book of Business we have placed with them.

The Corporate Channel is comprised of employed sales agents located in six sales offices in Texas and one in Illinois.

We have experienced rapid growth in sales agents and revenue in this Segment.

During 2019, our Corporate Channel sales agent headcount increased by 49% and our Corporate Channel premiums placed grew by 28%, in each case, versus the prior year.

Corporate Channel premium growth trailed headcount growth due to the large renewal mix of our premiums placed and the ongoing ramp up of recently hired producers.

As of December 31, 2019, we had corporate sales offices operating in the following locations:

Westlake, Texas;

Irving, Texas;

Fort Worth, Texas;

Houston, Texas;

The Woodlands, Texas;

Austin, Texas;

and Rosemont, Illinois.

We expect to continue our expansion in 2020 with the addition of corporate sales offices in Charlotte, North Carolina and a new office in Fort Worth, Texas.

The Franchise Channel

The Franchise Channel consists of operations that are owned and managed by Franchisees.

These Franchisees have a contractual relationship with the Company to use our processes, Carrier appointments, systems, and back-office support team to sell insurance and manage their business.

In exchange, the Company is entitled to an Initial Franchise Fee and ongoing Royalty Fees.

In addition to managing our two Segments, our headquarters is responsible for overseeing our client service centers, our network of Referral Partners, our recruiting team and our technology functions which tie all aspects of our business together.

Our headquarters also provides various risk management, quality control, accounting, legal and finance functions in support of both the Corporate Channel and the Franchise Channel.

In the Franchise Channel, we earn Core Revenue in the form of New Business Royalty Fees and Renewal Royalty Fees generated by the franchise location.

New Business Royalty Fees are set in the Franchise Agreements at 20% of commissions and Agency Fees received during the first term of the policy, and 50% of commissions every year the policy is renewed.

This economic relationship creates a mechanical step-up in revenue at the first renewal of each policy, creating strong revenue and margin expansion opportunities.

Cost Recovery Revenue consists of non-refundable Initial Franchise Fees, which compensate us for the training and onboarding efforts to launch a new franchise location, and Interest Income related to Franchisees which elect the payment plan option for their Initial Franchise Fee.

Ancillary Revenue consists of Contingent Commissions and other income.

The Franchise Channel is comprised of Franchisees and sales agents that they hire as employees in their franchised businesses.

Our Franchise Agreement has a ten-year term and governs the terms under which we operate together, among other things, defining the Initial Franchise Fee, Royalty Fees and other costs a Franchisee pays.

Franchisees have contractual rights to revenue related to the Book of Business during the term of their agreement, but we retain ultimate ownership over the policies written in each franchised business.

We started franchising in 2012 and have since expanded rapidly.

Premiums in the Franchise Channel grew 56% during 2019.

As of December 31, 2019, we have 948 total franchises, including 614 franchises operating and 334 in implementation, a 47% increase in total franchises and a 34% increase in operating agencies in 2019 compared to 2018.

As of December 31, 2019, we had 334 signed Franchise Agreements that are in the implementation process.

We have franchise locations either operating or signed in the following states, which cover over 90% of the US population:z

Geographic footprint Operating or signed agencies

State December 31, 2019

California 101

Pennsylvania 45

North Carolina 34

New Jersey 28

South Carolina 29

(1) Number of franchise locations include 334 franchises which are under contract but yet to be opened as of December 31, 2019.

Our Go-to-Market Strategy

Our business model allows our sales agents in both Segments to concentrate on sales and marketing activities related to acquiring new clients and issuing new policies, thus growing New Business Revenue and Renewal Revenue more rapidly than in other systems.

Their primary marketing efforts are focused on establishing referral relationships with other financial services providers in their communities using our marketing strategy.

This strategy is effective primarily due to our world-class service team handling all service work related to the sales agents' existing Book of Business.

The nature of Referral Partner leads allows us to realize higher close rates and lower client acquisition costs than what we believe to be standard in the industry.

Furthermore, our agents are typically dealing with homeowners who own other assets, such as automobiles and therefore tend to be better insurance risks from a Carrier’s perspective.

Such clients often purchase additional policies, such as auto insurance, which allows us to capture additional revenue and increases the likelihood of retaining the client in the future.

Their primary marketing efforts are focused on establishing referral relationships with other financial services providers in their communities using our proprietary marketing strategy.

We do not compensate Referral Partners for leads, but rather rely on our servicing capabilities to generate repeat business.

We have significant room to expand our market share across the country.

Our biggest presence is in Texas where we have been operating the longest.

By leveraging our Referral Partners, we placed approximately 43 thousand policies related to mortgage originations in 2019.

This represents 12.1% of the approximately 357 thousand Texas mortgage originations in 2019, according to the Texas A&M Real Estate Center.

Our model, which allows agents to focus on New Business Revenue, is highly differentiated from the traditional insurance agency model.

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The burden of providing ongoing service distracts from the ability to acquire new clients, and ultimately limits an agent's opportunity for growth.

Our agents are not only freed from the burden of ongoing service, but also given technology tools that create efficiencies by allowing them to quote faster and prioritize marketing efforts to the highest producing Referral Partners.

As a result, agents in both Segments are substantially more productive than top performers in our industry as it relates to new sales.

Our agents are freed from the burden of ongoing service, and as a result, agents in both Segments are substantially more productive than top performers in our industry as it relates to new sales.

Compared to the 2020 Best Practices Study, which uses 2019 industry data, Corporate Channel agents with more than three years of tenure averaged 3.8x as much New Business Production per Agent as the industry best practice during 2019.

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time zones more broadly, and the ability to better manage business continuity risks.

We manage our service centers with the goal to maximize NPS, which we believe maximize retention.

This differentiated level of service has enabled us to earn an NPS of 89 in 2019 and 2018—greater than highly regarded brands like Ritz Carlton and Nordstrom and 2.4x the 2018 industry average, according to Satmetrix.

We manage our service centers with the goal to maximize NPS, which we believe maximizes retention.

This differentiated level of service has enabled us to earn an NPS of 92 in 2020, up from 89 in 2019, greater than highly regarded brands like Ritz Carlton and Nordstrom and 2.3x the 2019 industry average, according to Satmetrix.

Our high degree of client satisfaction drove our 88% Client Retention rate during 2020, which we believe to be among the highest in the industry.

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By maintaining this strong level of Client Retention, we are able to generate revenue that is highly predictable and recurring in nature.

The combination of expanding headcount in the Corporate and Franchise Channels, leveraging technology and maintaining our commitment to service led to revenue growth of 40% (net of revenue changes due to the adoption

of Topic 606) and Total Written Premium growth of 45% in 2019.

The combination of expanding headcount in the Corporate and Franchise Channels, leveraging technology and maintaining our commitment to service led to revenue growth of 51% and Total Written Premium growth of 45% in 2020.

As of December 31, 2020, our 10-year Total Written Premium CAGR was 37% and our 5-year premium CAGR was 45%.

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Carrier provided information

In addition to strong revenue and Total Written Premium growth, we have also experienced Franchise Channel and Corporate Channel Adjusted EBITDA margin expansion when adjusted for the impact of the adoption of ASC 606.

If reported under ASC 605, Franchise Channel Adjusted EBITDA margin was 37% in 2019, up from 33% in 2018 due to continue growth in our more profitable Renewal Royalty Fees and Contingent Commissions.

Corporate Channel Adjusted EBITDA margin, if reported under ASC 605, was 26% in 2019, up from 22% in 2018 due to our Corporate Channel sales agent headcount growth of 49%, high retention rates of 88%, and Contingent Commission revenue.

As reported under ASC 606, our Franchise Channel and Corporate Channel margins were 30% and 23%, respectively.

While we believe our margins will mechanically expand over time, we are focused predominately on maintaining our industry leading levels of strong organic growth as we increase our market share.

Channel Corporate

Channel Franchise

Channel Corporate

Revenue $ 34,650 $ 42,836 $ 25,861 $ 34,287

Segment Adjusted EBITDA 10,464 9,947 8,615 7,536

Segment Adjusted EBITDA margin 30 % 23 % 33 % 22 %

Industry trends

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The largest Carriers that sell directly to clients include Berkshire Hathaway Inc.

(via GEICO Corp.) and Progressive Corporation (Progressive also distributes through independent agencies, including GSHD).

(via GEICO Corp.) and Progressive Corporation.

Berkshire Hathaway and Progressive also distribute through independent agencies, including GSHD.

Personal lines insurance agents generate revenues through commissions, which are calculated as a percentage of the total insurance premium placed on behalf of clients, and through fees for other related services.

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A hard market is an insurance market characterized by a period of rising premium rates, which, absent other changes, can positively affect commissions earned by insurance agents.

We have two Segments that are managed by our headquarters and work together to drive our growth:

the Corporate Channel and Franchise Channel.

Our headquarters also provides various risk management, quality control, accounting, legal and finance functions in support of both the Corporate Channel and the Franchise Channel.

Our Segments are geared to leverage the strengths of two different talent pools to maximize productivity.

Our recruiting team, which included 61 people at December 31, 2019, is responsible for recruiting both Corporate sales agents and potential Franchise owners.

Our recruiting team, which included 98 people at December 31, 2020, is responsible for recruiting both Corporate sales agents, potential Franchise owners, and various back office employees.

The Corporate Channel recruits driven agents who are typically new to insurance distribution;

the Franchise Channel recruits agents with business or industry experience.

the Franchise Channel recruits agents with business or

industry experience.

The combination of our two Segments enables us to prudently expand our business model while providing differentiated service to our clients.

Corporate Channel (52% of 2020 total revenue)

The Corporate Channel is a key support structure for our Franchise Channel and a primary competitive advantage for the Company.

The Corporate Channel consists of company-owned and financed operations with employees who are hired, trained and managed by us.

The Corporate Channel also serves as a research and development department, where we develop best practices and beta test new technology before implementing system-wide.

Additionally, the Corporate Channel serves as an invaluable support network for our Franchise Channel, providing sales coaching and mentoring for Franchisees.

This channel primarily targets top college graduates or sales professionals who typically do not have experience in the insurance industry.

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After the recruitment team has selected candidates, they are placed into a training class that lasts approximately two weeks.

Both Corporate and Franchise Channel agents are required to become fully licensed P&C agents prior to training.

During the training class, Corporate Channel agents acquire a wide variety of skills including:

• knowledge of all available personal lines products and the trade-offs between pricing and coverage;

• the ability to fit their clients to the best insurance products at the right price point;

• the ability to leverage our well-established network of Referral Partners to win new business;

• the ability to leverage our service centers to service policies and handle renewal activities;

• the ability to leverage our technology tools to increase productivity.

All agents are required to become fully licensed P&C agents prior to training.

The combination of hiring highly motivated and talented individuals, giving them proper tools and training and removing the burden of ongoing client service allows our Corporate Channel agents to become significantly more productive than average personal lines agents.

Compared to the 2019 Best Practices Study, Corporate Channel agents with more than two years of tenure averaged 3.4x as much New Business Production per Agent (Corporate) as the industry best practice.

Compared to the 2020 Best Practices Study, Corporate Channel agents with more than three years of tenure averaged 3.8x as much New Business Production per Agent (Corporate) as the industry best practice.

We also generate Ancillary Revenue in the form of Contingent Commissions from Carriers related to the overall growth and loss performance of the Book of Business we have placed with them.

The Corporate Channel is comprised of employed sales agents located in nine sales offices across Texas, Illinois, and North Carolina.

We have experienced rapid growth in sales agents and revenue in this Segment.

During 2020, our Corporate Channel sales agent headcount increased by 47% and our Corporate Channel premiums placed grew by 31%, in each case, versus the prior year.

Corporate Channel premium growth trailed headcount growth due to the large renewal mix of our premiums placed and the ongoing ramp up of recently hired producers.

As of December 31, 2020, we had corporate sales offices operating in the following locations:

Westlake, Texas;

Irving, Texas;

Fort Worth, Texas;

Houston, Texas (2 locations);

The Woodlands, Texas;

Austin, Texas;

Rosemont, Illinois;

and Charlotte, North Carolina.

We expect to continue our expansion in 2021 with the addition of corporate sales offices in Denver, Colorado, San Antonio, Texas, Henderson, Nevada, and another office in the Midwest region.

Franchise Channel (48% of 2020 total revenue)

The Franchise Channel consists of operations that are owned and managed by Franchisees.

This channel is composed of Franchisees and sales agents that they hire as employees in their franchised businesses.

These Franchisees have a contractual relationship with the Company to use our processes, Carrier Appointments, systems, and back-office support team to sell insurance and manage their business.

In exchange, the Company is entitled to an Initial Franchise Fee and ongoing Royalty Fees.

The Franchise Channel primarily recruits agents with prior business or industry experience.

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Traditional agencies can become the victims of their own success as their increasing service burden crowds out time to sell new business.

• Franchise Channel agents use our well-established sales processes to win new business.

• Franchise Channel agents use our well-established and proprietary sales processes to win new business.

Franchise Channel agents are trained side by side with Corporate Channel agents to leverage our training program, to acquire product and Carrier knowledge and to utilize our technology and back office support.

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The recruiting team seeks applicants who have demonstrated a strong capacity to win new business and a desire to own their own business.

Our recruiting efforts have helped us create a franchise pool which is significantly more productive than average personal lines agents.

Our recruiting efforts have helped us create a franchise pool which is significantly more productive than most personal lines agents.

Compared to the 2020 Best Practices Study, Franchise Channel agents with more than three years of tenure averaged 2.3x as much New Business Production per Agent (Franchise) as the industry best practice.

Franchise Channel agents with less than two years of tenure maintained equally as much New Business Production per Agent (Franchise) as the industry best practice.

Franchise Channel agents with less than two years of tenure produced as much New Business Production per Agent (Franchise) as the industry best practice.

In the Franchise Channel, we earn Core Revenue in the form of New Business Royalty Fees and Renewal Royalty Fees generated by the franchise location.

This economic relationship creates a mechanical step-up in revenue at the first renewal of each policy, creating strong revenue and margin expansion opportunities.

Ancillary Revenue consists of Contingent Commissions and other income.

We started franchising in 2012 and have since expanded rapidly.

Premiums in the Franchise Channel grew 52% during 2020.

As of December 31, 2020, we have 1,468 total franchises, including 891 franchises operating and 577 in implementation, a 55% increase in total franchises and a 45% increase in operating agencies in 2020 compared to 2019.

We have franchise locations either operating or signed in the following states, which cover over 97% of the US population:

Geographic footprint Operating or signed agencies

State December 31, 2020

(1) Number of franchise locations include 577 franchises which are under contract but yet to be opened as of December 31, 2020.

Our competitive strengths

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The agents in the Corporate Channel are fundamentally different than the typical agents in the personal lines industry.

Substantially all of our agents are recent college graduates, whereas 64% of personal lines agents in the industry are over 50 years old, according to the 2018

Future One Agency Universe Case Study.

Substantially all of our agents are recent college graduates, whereas 64% of personal lines agents in the industry are over 50 years old, according to the 2018 Future One Agency Universe Case Study.

This gives us a significant advantage both in the short- and long-term.

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Additionally, our Corporate Channel agents view the success of the Franchise Channel as a potential catalyst to their career trajectories.

The support structure provided by the Corporate Channel to the Franchise Channel creates unique career paths in sales management, territory management, and even franchise ownership.

The support structure provided by the Corporate Channel to the Franchise Channel creates unique career paths in sales management, territory management, and franchise ownership.

• Franchise Channel solves the inherent flaws in the traditional agency model .

We believe that the traditional agency model is flawed for several reasons, including:

(1) Captive Agents can only offer clients products from one Carrier, limiting the agents’ ability to best serve their clients, (2) agents are typically responsible for handling their own client service and renewals, diminishing the time they can devote to marketing, winning new business and growing their overall Book of Business, (3) agents are often using antiquated and decentralized tech platforms to sell and service their Book of Business, and (4) some Captive Agents do not own their Book of Business, giving them less incentive to win new business.

(1) Captive Agents can only offer clients products from one Carrier, limiting the agents’ ability to best serve their clients, (2) agents are typically responsible for handling their own client service and renewals, diminishing the time they can devote to marketing, winning new business and growing their overall Book of Business, (3) agents are often using antiquated and decentralized technology platforms to sell and service their Book of Business, and (4) some Captive Agents do not own their Book of Business, giving them less incentive to win new business.

Given the size of the traditional agency market and its inability to adapt to these challenges without introducing significant channel conflict, we believe there is a meaningful opportunity to disrupt the traditional agency marketplace.

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• Service centers drive both new and renewal business .

Our service centers handle all of our client service and renewals and have achieved a highly differentiated level of service as indicated by our NPS scores of 89 in 2019 and 2018—higher than many global service leaders such as Ritz Carlton and Nordstrom and 2.4x the P&C industry average, according to Satmetrix.

Our service centers handle all of our client service and renewals and have achieved a highly differentiated level of service as indicated by our NPS scores of 92 in 2020 and 89 in 2019—higher than many global service leaders such as Ritz Carlton and Nordstrom and 2.3x the P&C industry average, according to Satmetrix.

Having such a skilled and fully licensed service team provides three tangible benefits to our business:

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We continue to make the necessary technology, staffing and real estate investments in our service centers to support our planned agent hiring which we believe will allow us to readily scale and increase market share.

Each of our service agents can service, on average, a Book of Business that it would take a good sales agent years to generate.

• Unique value proposition to Referral Partners .

We have highly standardized processes across our entire organization due to the strong quality controls instituted in our service centers.

Both new business and renewal business move through our systems in a tightly choreographed manner which enables both strong quality

controls and quick delivery of services.

We have found that the ability to quickly and accurately bind an insurance policy is attractive to both individuals buying insurance and third parties, such as Referral Partners, who can drive new business to us.

Referral Partners include financial services providers who depend on us to timely place insurance policies and to provide the flexibility to facilitate necessary changes rapidly, including at the time of home closings.

We typically deliver policy binders in under an hour, which allows our Referral Partners to close transactions on time and ultimately become more productive in their business.

We do not compensate our Referral Partners for sending us new business.

Each of our service agents can service, on average, a Book of Business that it would take a productive sales agent years to generate.

• Proven and experienced senior management team .

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We plan to continue to expand our recruiting to additional college campuses and engage in highly targeted internet recruiting campaigns as we grow.

As demonstrated in the chart below, our compensation package for sales agents is very competitive in comparison to other professional services and offers attractive long-term compensation opportunities.

Average corporate agent compensation by vintage ($000)

Our compensation package for sales agents is very competitive in comparison to other professional services and offers attractive long-term compensation opportunities.

• National penetration of the Franchise Channel .

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The number of potential franchise candidates is updated daily to reflect new franchise candidates on our customized recruiting platform.

We identify our franchise candidates according to the following criteria:

(1) work experience, including sales, entrepreneurial or insurance experience;

(2) license status;

and (3) geographic location.

Of our total current pipeline, we estimate approximately 10% of the candidates would qualify over time as Franchisees under our exacting standards.

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• Continue to invest in technology to drive efficiencies in all areas of our business.

We discuss in more detail below the investments we've made historically to outrun our competitors.

We will continue to find opportunities to utilize technology to widen the gap between us and any nascent competition.

We have invested heavily in our technology platform to not only support our business, but to drive growth and productivity.

Our operations utilize an innovative proprietary cloud-based technology solution customized to suit our needs:

• In 2009, we rolled out our proprietary agency management system which provided us with transparency into client lifecycle, a sophisticated commission accounting application and enhanced analytic capabilities.

• In 2010, we integrated electronic signature capabilities into our platform, improving client experience and Carrier compliance.

• In 2013, we created our Carrier knowledge database (a reference library of Carrier underwriting guidelines) and our Referral Partner platform (creates precision and coordination in Referral Partner marketing).

• In 2015, we established our learning management system which enables efficient compliance training, initial training, and continuing education.

• In 2018, we implemented several key new enhancements to our technology platform and further strengthened our competitive barriers to entry.

The year was highlighted by the following developments:

◦ Our integrated comparative rater was rolled out that eliminated 75% of the required input fields, saving the majority of our agents approximately 15 minutes per quote.

◦ A proprietary mortgage database was made available to our agents providing them with a sophisticated and precise marketing tool that identifies transactions down to the micro level to improve Referral Partner prospecting.

◦ A unified, cloud-based voice solution was implemented system-wide, using AI driven speech analytics to evaluate agent performance and client sentiment.

◦ We further enhanced our cyber-security protection by utilizing enhanced encryption of our platform, creating cybersecurity education modules using our proprietary learning management system, and implementing additional email filtering tools.

• 2019 was another watershed year for our technology efforts, as we implemented several new tools into our technology suite:

◦ A new client portal was rolled out to allow our clients to view and manage their various insurance products in one centralized location and to interact with our sales and service agents whichever way the client prefers – a true omnichannel experience that spans our entire Carrier portfolio.

◦ An artificial intelligence tool was created for our service team that measures a client’s likelihood of defection in real time and provides our service agents live feedback on specific action items to decrease the likelihood of defection, which is the first of many use cases for artificial intelligence.

◦ Enhancements were made to our referral partner marketing tool and our comparative rating engine using additional data integrations, which improved efficiency and accuracy in our lead generation and quoting processes.

We've made investments in technology to outrun our competitors, and we will continue to find opportunities to utilize technology to widen the gap between us and any nascent competition.

Markets & marketing

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Agents in both the Corporate Channel and the Franchise Channel are primarily responsible for acquiring new clients.

Agents are encouraged to procure new clients through both relationships with Referral Partners and traditional channels (friends, family, client referrals, inbound inquiries and outbound inquiries).

Referral Partners are typically professionals in the home buying process who rely on us to quickly bind accurate home insurance policies.

While traditional channels are an important source of new business, Referral Partners typically provide us with a high-quality source of ongoing business leads.

Clients sourced through Referral Partners are generally in the process of either buying or refinancing a house.

These clients frequently purchase additional policies such as auto insurance.

By leveraging our Referral Partner network, we have been able to quickly gain scale in the personal lines property and casualty industry without incurring other significant direct client acquisition costs, such as advertising or purchasing internet leads.

Agents are encouraged to procure new clients through both relationships with Referral Partners and traditional channels (friends, family, client referrals, inbound inquiries and outbound inquiries), and we give them proprietary tools and technology to leverage our years of experience in successfully executing this go-to-market strategy.

The Company represents over 140 Carriers, of which 45 provide national coverage.

In 2019, two carriers represented more than 10% of total revenue at 16% and 10%.

In 2018, two carriers represented more than 10% of total revenue at 17% and 11%.

During 2020, three carriers represented more than 10% of total revenue at 20%, 13% and 12%

Franchise agreements

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Our brokerage operations compete with firms, which operate globally or nationally or are strong in a particular region or locality and may have, in that region or locality, an office with revenues as large as or larger than those of our corresponding local office.

We believe that the primary factors determining our competitive position with other organizations in our industry are the quality of the services we render, the technology we use, the diversity of products we offer, and the overall costs to our clients.

A number of Carriers directly sell insurance, primarily to individuals, and do not pay commissions to third-party agents and brokers.

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The FTC (through its “Franchise Rule”) requires franchisors to provide certain disclosures, in the form of a franchise disclosure document (an “FDD”) to prospective Franchisees.

One of the disclosure requirements is to include in the FDD audited financial statements of the franchisor (Goosehead Insurance Agency, LLC) or, if not the franchisor, an affiliate or parent of the franchisor who guarantees

the franchisor’s obligations to its Franchisees.

In order to include our consolidated financial statements in the FDD, we are required to guarantee Goosehead Insurance Agency, LLC’s current and future obligations to its Franchisees.

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Congress, state legislatures, and regulatory authorities are expected to consider additional regulation relating to privacy and other aspects of customer information.

Human Capital

Our workforce is our most important asset and a key competitive advantage in our industry.

Imperative to our continued success, and the primary reason for our decision to go public in 2018, is our ability to attract and retain the most talented individuals available.

We will continue to strive for a one-of-a-kind company culture and offer a competitive compensation and benefits package, which includes health insurance, a 401(k) plan, an Employee Stock Purchase Program, and the potential for option awards.

As of December 31, 2020, we had approximately 943 full-time and 6 part-time employees.

Our Franchisees are independent businesses and their employees are independent contractor sales associates are therefore not included in our employee count.

Our Franchisees are independent businesses, and we do not control the essential terms and conditions of employment for their employees;

therefore, neither our Franchisees nor their employees are included in our employee count.

We believe that we have a positive relationship with our employees and we conduct regular engagement and outreach with our workforce.

None of our employees are represented by a union.

Operating principles

Our company is grounded in a set of operating principles, which each member of the Company is expected to uphold.

These values are at the very center of what makes our company unique, defines our dynamic culture, and enables us to build a truly world class business.

It has resulted in a work force that is highly energized and motivated and a work environment that is meritorious, respectful, diverse and inclusive.

Our operating principals and values are articulated below.

• Uncompromising integrity in all we do

• Deliver the WOW!

• Support the team

• Respect Company confidentiality – clients, third parties, staff

• Be at cause

• Pull more than your own weight

• Honest, open and direct communications

• Presume trust

• Work hard – we are building a great company;

it will take great effort

• Meritocracy and pay for performance

• Our clients and our people are our assets – treat them as such

• Exceptional service always

• Respect and fairness

• Look for opportunities to create value for our company – your ideas are important

• Highest quality and service in the industry

COVID-19 response

In March 2020, we transitioned our entire workforce to work remotely.

Due to our prior investments in talented employees and proprietary technology, this transition was virtually seamless.

We remained focused on growth despite the change, and we saw no negative impact on our financial results or our key performance indicators.

To help limit any long-term negative culture impacts due to a remote-work environment, we began to bring back employees on a reduced and rotational basis during the third quarter of 2020.

By the end of the third quarter, almost all employees were back in the office for at least 50% of the work week.

We took these steps carefully and deliberately and have implemented a number of COVID-19 mitigation practices at our facilities including a screening process upon entering the office, requiring face coverings and social distancing.

We will continue to strive to follow all local government and CDC guidelines in our approach to reopening fully while continuing to prioritize the health and safety of our team .

Initial Public Offering and Organizational Transactions

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business