Selectquote, Inc. annual report, FY2021

SelectQuote, Inc. — Form 10-K Summary

Reporting period: Year ended June 30, 2021. The request metadata references “2020 Q4,” but the supplied filing is SelectQuote’s fiscal 2021 Form 10-K, filed August 26, 2021, with comparative fiscal 2020 and 2019 results.

Business Context

SelectQuote operates a technology-enabled, direct-to-consumer insurance distribution platform. It earns commissions, production bonuses, marketing development funds and other revenue from insurance carriers; it does not underwrite policies or bear insurance underwriting risk.

• Senior: Medicare Advantage, Medicare Supplement, prescription drug, dental, vision and hearing products; also includes InsideResponse, Population Health and SelectRx.
• Life: Core life, final expense and ancillary insurance products.
• Auto & Home: Auto, homeowners and related property and casualty products.

The business is highly seasonal because Medicare Annual Enrollment and Open Enrollment periods drive elevated Senior activity. Approximately 38% of fiscal 2021 revenue was generated in the second quarter.

Financial Performance and Key Metrics

Fiscal year ended June 30	2021	2020	Change
Total revenue	$937.8 million	$531.5 million	Up 76%
Commission revenue	$826.6 million	$476.6 million	Up 73%
Production bonus and other revenue	$111.2 million	$54.9 million	Up 103%
Income from operations	$200.1 million	$132.3 million	21.3% margin vs. 24.9%
Net income	$131.0 million	$81.1 million	Up 61%
Net margin	14.0%	15.3%	Down 1.3 percentage points
Adjusted EBITDA	$228.0 million	$154.0 million	Up 48%
Adjusted EBITDA margin	24.3%	29.0%	Down 4.6 percentage points
Operating cash flow	$(115.4) million	$(61.8) million	Greater use of cash

Fiscal 2021 operating expenses increased 85% to $737.7 million. Marketing and advertising rose 109% to $385.3 million, while cost of revenue increased 62% to $270.7 million. The higher spending supported agent expansion, lead generation and policy growth but reduced operating and Adjusted EBITDA margins.

• Senior revenue: $728.7 million, up 101%; Senior Adjusted EBITDA was $243.8 million, up 67%.
• Life revenue: $185.5 million, up 43%; final expense revenue increased 157% to $78.8 million. Life Adjusted EBITDA was $30.4 million, up 9%.
• Auto & Home revenue: $30.9 million, down 25%, primarily because agents were shifted to Senior and Life. Adjusted EBITDA declined 6% to $8.2 million.
• Senior approved policies: 625,347, up 97%; Medicare Advantage approved policies increased 107% to 467,585.
• Life premium: $167.7 million, up 49%; final expense premium increased 153% to $88.3 million.
• Auto & Home premium: $55.6 million, down 21%.

Cash Flow, Liquidity and Debt

• Cash, cash equivalents and restricted cash declined to $286.5 million at June 30, 2021, from $368.9 million at June 30, 2020. Restricted cash was eliminated following the debt amendment.
• Operating cash flow was negative because revenue recognition occurs before much of the related commission cash is collected. Commissions receivable increased by $332.9 million during fiscal 2021.
• Investing cash use was $64.0 million, including $41.0 million for acquisitions, $14.9 million for property and equipment, and $8.1 million for software and capitalized development.
• Financing cash inflow was $97.0 million, primarily reflecting $228.8 million of net term-loan proceeds, partially offset by $84.1 million of debt repayments, the $32.3 million InsideResponse earnout and $10.4 million of equity-award tax withholdings.
• Term-loan principal outstanding was $471.9 million, with $461.4 million of debt net of issuance costs and discounts. The company also had $145.0 million of delayed-draw capacity and $75.0 million of revolver capacity, with no amounts drawn under either facility at year-end.
• The facilities mature on November 5, 2024. Mandatory term-loan amortization begins March 31, 2022. The company was in compliance with its debt covenants at June 30, 2021.
• Management stated that existing liquidity, cash and available credit were sufficient for projected operating and debt-service needs for at least the next 12 months.

Material Changes Versus Fiscal 2020

• Revenue growth was concentrated in Senior, particularly Medicare Advantage, and in Life final expense products.
• Management expanded agent capacity and productivity; average productive Senior agents increased approximately 75%, while productivity per productive agent rose 16%.
• Revenue per Senior MA/MS approved policy remained approximately flat at $1,489, but operating expense per policy increased 12%, reducing Adjusted EBITDA per policy from $598 to $498 and the related margin from 40% to 33%.
• Lower Senior persistency, higher intra-year lapses and carrier mix reduced estimated Medicare Advantage lifetime value per approved policy by 2% to $1,260. Medicare Supplement lifetime value declined 8% to $1,269.
• Cash flow weakened materially as commissions receivable grew with policy volume and upfront marketing costs increased.
• The company amended its senior secured credit facility, issued additional term debt and reduced certain interest-rate and covenant constraints.
• Acquisitions included a lead distribution company and Express Med Pharmaceuticals, now SelectRx. Population Health launched in April 2021.
• The company adopted lease accounting under ASC 842 on July 1, 2020, recording $41.3 million of lease liabilities and $29.7 million of right-of-use assets.

Outlook, Commentary, Risks and Unusual Items

The filing does not provide specific fiscal 2022 revenue, earnings or Adjusted EBITDA guidance. Management expects to pursue growth by increasing policyholder lifetime value, expanding and improving its agent force, increasing cross-selling, deepening carrier relationships, adding products and developing Population Health and SelectRx.

• Revenue includes estimated future renewal commissions. Fiscal 2021 renewal commission revenue was $451.1 million, and the company recorded a net $7.0 million downward adjustment related to changes in renewal estimates and cohort experience.
• Renewal revenue depends heavily on persistency, lapse rates, commission rates, carrier mix and the company’s estimates of future collections.
• Three carriers represented 24%, 19% and 15% of fiscal 2021 revenue. Carrier contracts are generally non-exclusive and may be terminable on short notice.
• Senior represented 78% of total revenue, increasing concentration in Medicare-related products, CMS requirements and enrollment-period execution.
• Key risks include higher lead-acquisition costs, competition from carriers and online brokers, regulatory changes, Medicare marketing compliance, cybersecurity and privacy events, technology outages, personnel retention, acquisition integration and variable-rate debt.
• The company reported no material legal proceeding expected to adversely affect its business, liquidity or results. However, a putative securities class action was filed on August 17, 2021, alleging securities-law violations related to statements during February 8 through May 11, 2021. The company denies the allegations, has not accrued a liability and believes the matter is not currently material.
• Other unusual items included a $3.3 million loss on debt extinguishment, $6.1 million of non-recurring expenses, $1.5 million of fair-value adjustments to contingent earnout obligations and acquisition-related costs.
• Deloitte & Touche issued an unqualified audit opinion and an unqualified opinion on internal control over financial reporting. The critical audit matter was renewal commission revenue recognition.

Investor Verification Checklist

• Reconcile the growth in Senior policies with persistency, lapse rates, approval rates and the sustainability of estimated renewal commissions.
• Review commissions receivable of $845.9 million and assess the timing and collectability of related carrier payments.
• Evaluate whether marketing and advertising spending can generate acceptable lifetime value and restore declining per-policy margins.
• Monitor carrier concentration, commission-rate changes, contract termination provisions and CMS or other regulatory developments.
• Assess liquidity under negative operating cash flow, upcoming debt amortization, variable interest rates and the November 2024 debt maturity.
• Review the integration, performance and contingent consideration associated with InsideResponse, the lead distribution acquisition and SelectRx.
• Follow developments in the securities class action and other regulatory, privacy, cybersecurity and litigation matters.
• Confirm that the fiscal-period comparison is fiscal year 2021 rather than 2020 fourth quarter, because the supplied filing is an annual report for the year ended June 30, 2021.