SelectQuote, Inc. — Fiscal 2023 Form 10-K Summary
Reporting period: The supplied filing is the Form 10-K for the year ended June 30, 2023, filed September 13, 2023. It is not a standalone 2022 fourth-quarter filing; fiscal 2023 fourth-quarter results are included within the annual results. SelectQuote operates insurance distribution businesses serving Senior, Life, and Auto & Home markets, plus Healthcare Services, including SelectRx pharmacy and Population Health.
Financial performance and key metrics
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Total revenue | $1,002.8 million | $764.0 million | 31% increase |
| Commission revenue | $653.5 million | $587.5 million | 11% increase |
| Pharmacy revenue | $239.5 million | $59.5 million | 303% increase |
| Income from operations | $11.6 million | $(346.0) million | Returned to operating profit |
| Net income (loss) | $(58.5) million | $(297.5) million | Loss narrowed |
| Adjusted EBITDA | $74.3 million | $(260.5) million | Improved materially |
| Net cash used in operating activities | $(19.4) million | $(338.3) million | Lower cash use |
| Cash and cash equivalents | $83.2 million | $141.0 million | Decreased $57.8 million |
| Total debt, net | $698.5 million | $705.6 million | Decreased $7.1 million |
Net loss was $0.35 per basic and diluted share, compared with a $1.81 loss per share in fiscal 2022. The income tax benefit was $10.6 million, producing a 15.3% effective tax rate.
Reported revenue margins were approximately 65% commission, 24% pharmacy, and 11% other revenue. Total operating costs and expenses were $991.3 million, or approximately 99% of revenue. Interest expense increased 85% to $80.6 million, reflecting higher debt balances, higher rates, financing-cost amortization, and the impact of credit-facility amendments.
Segment results
| Segment | FY2023 revenue | FY2023 Adjusted EBITDA | Key change |
|---|---|---|---|
| Senior | $590.1 million | $155.1 million | Revenue increased 12%; profitability improved from $(161.7) million |
| Healthcare Services | $252.1 million | $(22.8) million | Revenue increased 260%; remained loss-making while scaling |
| Life | $145.8 million | $23.1 million | Revenue decreased 5%; profitability improved from $(0.1) million |
| Auto & Home | $21.9 million | $0.1 million | Revenue decreased 22%; included a $10.4 million carrier-contract estimate adjustment |
- SelectRx active members increased 92% to 49,044 at June 30, 2023, from 25,503.
- Total Senior submitted policies declined 25% to 740,189, and approved policies declined 20% to 648,442, reflecting the strategy to reduce Senior distribution activity and redirect resources toward Healthcare Services.
- Average productive Senior agents declined 55%, while productivity per agent increased 25% and overall close rates increased 24%.
- Medicare Advantage and Medicare Supplement approved policies totaled 580,186, compared with 667,199 in fiscal 2022.
- Medicare Advantage lifetime value per approved policy declined 5% to $877, primarily due to carrier mix and lower persistency, partly offset by higher commission rates.
- Life premiums declined 15% to $146.7 million, while Auto & Home premiums increased 2% to $50.9 million.
Cash flow, liquidity, and debt
Cash used in operations was $19.4 million, reflecting the net loss, non-cash charges, and working-capital investment. Cash used in investing was $9.1 million, primarily for software development and property and equipment. Cash used in financing was $29.3 million, including $17.8 million of term-loan principal payments and $10.1 million of debt issuance costs.
At June 30, 2023, the Company had $83.2 million of cash, $707.5 million of term-loan principal outstanding, and no amounts drawn under the revolving facility. The revolving facility provided up to $100.0 million, all available at year-end. The credit facility matures November 5, 2024, with the remaining balance payable at maturity. Mandatory term-loan amortization increased to 4.75% of the applicable outstanding principal beginning July 1, 2023.
Management stated that available cash and credit-facility resources should meet projected operating and debt-service needs for at least 12 months, but future covenant compliance depends on restructuring existing debt or securing additional financing. The Company was in compliance with required covenants at June 30, 2023 and was exploring financing alternatives, including securitization.
Material changes, outlook, and unusual items
- The principal strategic change was a reduction in the Senior distribution business and a greater focus on SelectRx and Population Health. This reduced policy and marketing volumes but substantially improved Senior profitability.
- Pharmacy revenue grew rapidly, but Healthcare Services remained unprofitable because medication, fulfillment, compensation, and other scaling costs increased with membership.
- Fiscal 2023 included $17.3 million of long-lived-asset impairment charges, including $15.1 million related to a terminated vendor relationship and $0.5 million related to a non-compete agreement. No goodwill impairment was recorded in fiscal 2023; fiscal 2022 included $44.6 million of goodwill impairment.
- Commission revenue depends on estimates of policy lifetime value, persistency, lapse rates, renewal commissions, and carrier mix. The Company recorded a $7.4 million net negative commission estimate adjustment in fiscal 2023, including a $9.4 million negative Senior adjustment. Fiscal 2022 included a much larger $193.3 million downward adjustment to Medicare Advantage cohort transaction prices.
- The Company entered into a Sixth Amendment to its credit facility on September 11, 2023, reducing the minimum asset coverage ratio required as of June 30, 2024.
- No formal revenue, earnings, or margin guidance is provided in the supplied filing. Management’s stated priorities are to maximize policyholder lifetime value, improve agent productivity, deepen carrier relationships, expand cross-selling, and grow Healthcare Services.
Principal risks and contingencies
- High dependence on a small number of carriers: UnitedHealthcare and Humana represented 33% and 20% of fiscal 2023 revenue, respectively. Carrier agreements are generally non-exclusive and may be terminated on short notice.
- Senior health insurance remains the largest business, representing 59% of total revenue, creating exposure to Medicare enrollment volumes, carrier commission changes, persistency, CMS requirements, and regulatory changes.
- The Company faces substantial refinancing and liquidity risk because term loans mature in November 2024, interest rates are variable, and future covenant compliance depends on financing or debt restructuring.
- Revenue recognition is sensitive to estimated lifetime commissions. Higher-than-expected policy lapses or weaker persistency could require future revenue reversals and write-offs of commissions receivable.
- Healthcare Services and pharmacy operations carry regulatory, drug-supply, reimbursement, licensing, patient onboarding, and execution risks.
- Insurance, Medicare, pharmacy, privacy, telemarketing, cybersecurity, and consumer-protection rules are complex and changing. Noncompliance could lead to fines, litigation, loss of licenses, carrier termination, or restrictions on marketing activities.
- The Company disclosed consolidated securities class actions and a related derivative action. Management has not accrued a liability because it has not concluded that a loss is probable, but the matters could be costly and divert management resources. The filing also notes an August 2022 subpoena from the U.S. Attorney’s Office for the District of Massachusetts concerning arrangements with insurance carrier partners.
- The filing states that no currently known legal proceeding is expected to have a material adverse effect, but unfavorable developments could materially affect liquidity, operations, or financial condition.
Investor verification checklist
- Verify the latest refinancing, amendment, or securitization status before the November 2024 debt maturity and assess compliance with all liquidity and asset-coverage covenants.
- Reconcile cash on hand, available revolver capacity, required term-loan amortization, and expected operating cash needs through the next Medicare enrollment cycle.
- Review Medicare Advantage persistency, lapse rates, commission lifetime-value assumptions, cohort adjustments, and the sensitivity of commissions receivable to adverse experience.
- Assess whether SelectRx can reach profitability as membership grows, including medication gross margins, reimbursement timing, fulfillment costs, and production capacity.
- Monitor concentration in UnitedHealthcare, Humana, and other carrier relationships, including commission rates, contract renewals, marketing funds, and termination provisions.
- Track the securities litigation, government subpoena, and any related regulatory or carrier actions, including potential financial or operational consequences.
- Distinguish GAAP net loss and operating cash flow from Adjusted EBITDA, which excludes interest, depreciation, amortization, share-based compensation, impairments, and other adjustments.