SelectQuote, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2022. The requested “2021 Q4” is not a separate reporting period in the provided text; this filing reports the full fiscal year and comparative fiscal years 2021 and 2020. Filed August 29, 2022.
Business Context
SelectQuote operates a technology-enabled, direct-to-consumer insurance distribution platform. It earns commissions and production bonuses from insurance carriers for distributing Senior health, Life, and Auto & Home policies, and also provides healthcare and pharmacy services through Population Health and SelectRx. The company does not underwrite insurance risk.
- Senior represented 78% of total revenue in fiscal 2022 and includes Medicare products, Healthcare Services, and InsideResponse.
- Healthcare Services revenue increased as SelectRx and Population Health expanded.
- The company employed 1,857 agents and 2,510 non-agent full-time equivalent employees as of June 30, 2022.
Financial Results and Key Metrics
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Total revenue | $764.0 million | $930.0 million | Down 18% |
| Commission revenue | $587.5 million | $818.8 million | Down 28% |
| Production bonus revenue | $89.1 million | $70.7 million | Up 26% |
| Other revenue | $87.5 million | $40.6 million | Up 116% |
| Operating loss | $(346.0) million | $192.2 million income | Material deterioration |
| Net income (loss) | $(297.5) million | $124.9 million | Turned to loss |
| Adjusted EBITDA | $(260.5) million | $220.2 million | Turned negative |
| Cash used in operating activities | $(338.3) million | $(115.4) million | Greater cash use |
- Operating margin was negative 45% and net loss margin was negative 39% of revenue.
- Cost of revenue rose 72% to $466.8 million; marketing and advertising rose 26% to $484.1 million.
- Interest expense increased 49% to $43.6 million.
- Cash and cash equivalents declined to $141.0 million from $286.5 million.
- Total debt, net of issuance costs and discounts, was $705.6 million, including $469.6 million of term loans and $243.8 million under the delayed draw term loan facility.
- Total assets were $1.29 billion and shareholders’ equity was $391.1 million at June 30, 2022.
Operating Metrics and Segment Trends
- Senior submitted policies increased 33% to 982,658 and approved policies increased 30% to 810,719.
- Medicare Advantage approved policies increased 42%, but Medicare Advantage lifetime value per approved policy fell 27% to $925.
- Senior revenue declined 18% to $595.4 million and Senior Adjusted EBITDA fell to $(193.8) million from $243.8 million.
- Life revenue declined 13% to $154.0 million. Term premiums fell 19%, while final expense premiums increased 20%.
- Auto & Home revenue declined 10% to $27.9 million, consistent with the company’s strategy to reduce growth in that division.
- Healthcare Services generated $65.8 million of new revenue in fiscal 2022, primarily from SelectRx and Population Health.
Material Changes Versus the Prior Comparable Period
- Management reduced Medicare Advantage growth after weaker persistency, lower agent productivity, higher marketing costs, and adverse changes in estimated lifetime commission value.
- A $193.3 million downward adjustment to Senior Medicare Advantage cohort transaction prices materially reduced revenue. Total net commission revenue adjustments from changes in estimates were $212.2 million.
- Revenue recognition estimates were revised for lower lapse and persistency performance. The filing also corrected prior-period final expense commission errors, reducing fiscal 2021 revenue by approximately $7.8 million and fiscal 2020 revenue by approximately $2.2 million.
- Goodwill impairment charges totaled $44.6 million, including $39.2 million for Senior and $5.4 million for Auto & Home. Long-lived asset impairment charges were $3.1 million.
- Healthcare Services was separated from Senior into a new reporting unit beginning July 1, 2022.
Cash Flow, Liquidity, Debt, and Outlook
Operating cash flow was significantly negative because marketing and personnel costs are incurred upfront while commission collections occur over time. Investing cash outflows were $42.6 million, including capital expenditures, software development, the Simple Meds acquisition, and an equity investment. Financing activities provided $235.4 million, primarily from the delayed draw term loan facility.
The company stated that available liquidity under its Senior Secured Credit Facility should meet projected operating and debt service requirements for at least the next 12 months. However, the filing disclosed that there had previously been substantial doubt about going-concern status because of projected covenant noncompliance. The company subsequently amended its credit facility and stated that it expected to comply with the revised covenants, subject to successful execution of its new strategy.
- The August 26, 2022 Fourth Amendment reduced revolving commitments from $135 million to $100 million, terminated certain delayed draw commitments, and added or revised liquidity and asset coverage requirements.
- The credit facility matures November 5, 2024 and is secured by substantially all company assets.
- Following the amendment, term loan interest includes cash and paid-in-kind components, with potential rate increases beginning October 1, 2023.
- Management’s outlook emphasizes cash efficiency, lower operating leverage, stabilization of Medicare Advantage production, and growth in Healthcare Services. The filing does not provide clear numeric revenue or earnings guidance.
Risks, Contingencies, and Unusual Items
- Revenue estimation risk: Commission revenue depends heavily on estimates of policy persistency, lapses, renewal commissions, and lifetime value. Actual results may require further downward adjustments.
- Liquidity and leverage: The company has substantial secured debt, negative operating cash flow, variable-rate exposure, and covenant requirements. Failure to comply could trigger default and acceleration.
- Control weakness: Management and Deloitte issued adverse conclusions on internal control over financial reporting because of a material weakness involving the completeness and accuracy of third-party carrier lapse data used for final expense commission provisions.
- Regulatory exposure: The business is subject to complex Medicare, insurance, pharmacy, privacy, cybersecurity, telemarketing, and healthcare regulations.
- Customer and carrier concentration: Three Senior carrier groups accounted for 18%, 17%, and 12% of fiscal 2022 revenue; carrier contracts are generally terminable on short notice.
- Legal matters: The company is defending securities class actions and a derivative action. It stated that no loss was considered probable and no liability was accrued. In August 2022, it also received a subpoena from the U.S. Attorney’s Office for the District of Massachusetts regarding arrangements with insurance carrier partners.
- Seasonality: Senior revenue and expenses are heavily influenced by the Medicare Annual Enrollment Period and Open Enrollment Period.
Most Important Facts for Investors to Verify
- Whether the revised Medicare Advantage strategy improves persistency, lifetime value per policy, customer acquisition economics, and cash generation.
- Whether the company remains compliant with the amended debt covenants and maintains adequate liquidity through the November 2024 maturity.
- Whether management remediates the material weakness and avoids additional commission revenue restatements.
- Whether SelectRx and Population Health can scale profitably without further significant investment or impairment charges.
- The status and potential financial exposure of the securities litigation, derivative action, and Massachusetts subpoena.
- Whether the $838.6 million commission receivable balance is ultimately collectible under the company’s persistency and lapse assumptions.