Goosehead Insurance Finalizes Plans For IPO

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About: Goosehead Insurance (GSHD), Includes: AJG, AON, MMC, WLTW
by: Donovan Jones
Summary

Goosehead Insurance has filed updated terms for its U.S. IPO.

The firm provides individual and commercial lines insurance brokerage services in the U.S.

Top line revenue growth is strong but IPO valuation is high.

Quick Take

Goosehead Insurance (GSHD) intends to raise $128 million from the sale of 8.53 million of its Class A common stock at a midpoint price of $15.00 per share, according to an S-1/A registration statement.

The firm acts as an insurance broker to consumers and businesses for over 80 insurance carriers.

GSHD is growing smartly as it increases its focus on the competitive corporate space, but the IPO valuation is quite high.

Company & Business

Westlake, Texas-based Goosehead was founded in 2003 as an LLC to broker insurance coverage to consumers. In 2012, the firm expanded to a franchise model.

Management is headed by co-founder and CEO Mark Jones, who was previously a Senior Partner and Director and Global Head of Recruiting at Bain & Company.

Goosehead counts as ‘partners’ the many insurance carriers it brokers policy coverage, for both consumers and businesses throughout the U.S.

Shareholders are led by husband and wife Mark and Robyn Jones, who together own 91% of Class B stock (pre-IPO) and after the IPO will have between 66% and 68% of combined voting power between Class A and B holdings.

Goosehead has created a franchise insurance agent business model that relies on recruiting non-owner agents who are interested in running their own independent agency.

The typical agency model requires agents to not only source new business but to also service existing business. In Goosehead’s franchise model, the firm handles the ongoing servicing piece through a corporate back office support team, enabling franchisees to focus more on generating new business.

Below is a brief overview video of Goosehead Insurance:

(Source: Goosehead Insurance)

Customer Acquisition

GSHD has two operating segments: Franchise and Corporate.

The Franchise segment offers homeowner’s and commercial lines insurance through its 411 franchise locations (119 of which are under contract but as-yet unopened).

The Corporate segment is run out of the firm’s corporate headquarters and has seen dramatic headcount growth in the past few years as management has increased its focus on its corporate brokerage activity.

Below is a map of its current and planned geographical coverage:

(Source: Goosehead S-1/A)

In 2017, the Corporate segment accounted for 64% of total revenue and Franchise fees accounted for 36%.

Corporate sales activity is currently confined to Texas and Illinois.

Goosehead’s employee compensation as a percentage of total revenue for both segments was as follows:

  • 2017: 57%
  • 2016: 62%

Management says that during calendar year 2017, its sales agent headcount for the Corporate channel increased by 61% and premiums increased by 26%.

Market & Competition

According to a market research report by IbisWorld, the insurance brokers and agent market size in the U.S. was $162 billion in 2013 and was expected to grow at a CAGR of 2.9% from 2013 through 2018.

However, according to a 2018 outlook report by Deloitte, ‘a soft market beyond auto and property-catastrophe lines continues to prevail, with global insurance renewal rates falling for the seventeenth consecutive period in the second quarter of 2017. This appears mainly due to an overabundance of capital, particularly in the US market.’

Major publicly held competitive vendors that provide insurance brokerage services include:

  • Aon (AON)
  • Arthur J. Gallagher (AJG)
  • Marsh & McLennan (MMC)
  • Willis Towers Watson (WLTW)

The industry is quite fragmented with numerous medium and small insurance brokerages.

Management says that it also faces competition from direct sales from insurance carriers as well as banks, financial planners, investment management firms and broker-dealers.

Financials

GSHD’s recent financial results can be summarized as follows:

  • Increased top line revenue
  • Growing operating profit
  • Slightly increased operating margin
  • Sharply increased cash flow from operations

Below are the company’s operational results for the past two years (Audited GAAP):

(Source: Goosehead S-1/A)

Revenue ($)

  • 2017: $42.7 million, 36% increase vs. prior
  • 2016: $31.5 million

Operating Profit ($)

  • 2017: $7.6 million
  • 2016: $5.1 million

Operating Margin (%)

  • 2017: 17.8%
  • 2016: 16.2%

Cash Flow from Operations ($)

  • 2017: $13.5 million cash flow from operations
  • 2016: $4.4 million cash flow from operations

As of December 31, 2017, the company had $4.9 million in cash and $57.8 million in total liabilities.

IPO Details

GSHD intends to raise $125 million in gross proceeds from an IPO of its Class A stock.

The IPO will offer 8.53 million Class A shares at a midpoint price of $15.00. The Class A shares will be entitled to one vote per share vs. one vote per share for Class B shares.

Multiple share classes are a way for existing shareholders and management to retain voting control even if they lose economic control of the company in the future.

The S&P 500 Index no longer admits firms that have multiple share classes in its index.

Assuming a successful IPO, the company’s post-IPO market capitalization would be approximately $525 million, excluding the effects of underwriter over-allotment options.

Management says it will use the net proceeds from the IPO as follows:

We intend to use the net proceeds from this offering to repay the Goosehead Management Note and the Texas Wasatch Note in consideration for the acquisition of the indirect ownership interests held by the Goosehead Management Holders and Texas Wasatch Holders in Goosehead Management, LLC and Texas Wasatch Insurance Holdings Group, LLC, respectively. The aggregate principal amount of the Goosehead Management Note and the Texas Wasatch Note will be collectively equal to the product of 12,253,767 times the public offering price per share of the Class A common stock in this offering (approximately $184 million based on the midpoint of the estimated public offering price range set forth on the cover page of this prospectus). To the extent that the net proceeds of this offering (excluding any exercise of the underwriters’ option to purchase additional shares of Class A common stock) are insufficient to repay the Goosehead Management Note and the Texas Wasatch Note in full, then we will issue shares of Class A common stock to the Goosehead Management Holders and the Texas Wasatch Holders for the difference valued at the public offering price per share of the Class A common stock in this offering (3,723,767 shares of Class A common stock assuming 8,530,000 shares of Class A common stock are sold in this offering, excluding any exercise of the underwriters’ option to purchase additional shares of Class A common stock). In exchange for the acquired ownership interest in Goosehead Management, LLC and Texas Wasatch Insurance Holdings Group, LLC, wholly owned subsidiaries of Goosehead Insurance, Inc. will acquire a number of LLC Units equal to the number of shares of Class A common stock issued in this offering from Goosehead Financial, LLC. Goosehead Insurance, Inc. intends to use the net proceeds (if any) from the exercise of the underwriters’ option to purchase additional shares of Class A common stock to purchase from Goosehead Financial, LLC a number of LLC Units equal to the number of shares of Class A common stock issued pursuant to the exercise of the underwriters’ option to purchase additional shares. In turn, we intend to cause Goosehead Financial, LLC to use the proceeds it receives for general corporate purposes, which may include the repayment of debt.

Management’s presentation of the company roadshow is available here.

Listed bookrunners of the IPO are J.P. Morgan, BofA Merrill Lynch, Keefe, Bruyette & Woods and William Blair.

Expected IPO Pricing Date: Thursday, April 26, 2018.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.