SelectQuote(SLQT) - 2021 Q4 - Annual Report

PART I Business SelectQuote operates as a technology-enabled, direct-to-consumer insurance distribution platform, earning commissions from insurance carriers across senior health, life, and auto & home segments without underwriting risk - The company is a direct-to-consumer (DTC) insurance distribution platform that earns commissions from carrier partners and does not bear underwriting risk[13][25] - The business operates through three segments: SelectQuote Senior (Medicare products), SelectQuote Life (term and final expense), and SelectQuote Auto & Home[40][41][43] - Recent strategic initiatives include the launch of the Population Health platform in April 2021, designed to improve health outcomes and consumer persistency, and the acquisition of Express Med Pharmaceutical Inc (now SelectRx) to provide prescription drug management[16][22][250] - The company's technology stack includes proprietary systems like SelectBid for lead purchasing, Get A Lead (GAL) for lead routing, and Automated Rate Calculators (ARC/AQE) for real-time quoting[59][60][61] - The business is highly seasonal, with 38% of FY2021 revenue generated in the second quarter, driven by the Senior segment's activity during the Medicare Annual Enrollment Period (AEP)[98] Risk Factors The company faces significant risks including high dependence on key insurance carriers, regulatory changes in Medicare, intense competition, lead generation costs, and cybersecurity threats - The company has a significant concentration of revenue from a few insurance carriers, with UnitedHealthcare, Humana, and Wellcare accounting for 24%, 19%, and 15% of total revenue respectively in fiscal year 2021[121] - The business is substantially dependent on the Senior segment, which generated 78% of total revenue in fiscal year 2021[127] - Approximately 50% of Medicare Advantage and Medicare Supplement policies are submitted during the Annual Enrollment Period (AEP), making any disruption during this time particularly harmful[136] - The Senior segment is subject to a complex and frequently changing legal and regulatory framework by CMS, and non-compliance could materially harm the business[197][198] - The company's business model relies on its ability to obtain a large quantity of quality insurance sales leads in a cost-effective manner and convert them into sales[139][141] - Cybersecurity breaches involving the company's systems or those of its partners pose a material risk, potentially leading to data loss, litigation, and reputational damage[184][186] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[223] Properties As of August 15, 2021, the company leases all of its principal properties, with its corporate headquarters in Overland Park, Kansas, and other operational sites across several states Principal Leased Properties as of August 15, 2021 | Location | Approximate Leased Square Footage | Primary Use | | :--- | :--- | :--- | | Overland Park, Kansas | 295,658 | Corporate headquarters, operations for all segments | | Centennial, Colorado | 45,373 | Senior operations | | Des Moines, Iowa | 24,464 | Senior operations | | San Diego, California | 21,396 | Life and Auto & Home operations | | Jacksonville, Florida | 15,231 | Life operations | | Monaca, Pennsylvania | 15,000 | SelectRx operations | Legal Proceedings The company is involved in routine litigation and a securities class action lawsuit filed in August 2021, which it intends to vigorously defend - A putative securities class action lawsuit, Hartel v SelectQuote, Inc, et al, was filed on August 17, 2021, alleging securities fraud claims on behalf of purchasers of the company's stock between February 8, 2021, and May 11, 2021[529] - The company believes the allegations in the lawsuit are without merit and has not concluded that a loss is probable or accrued any liability for the matter[529] Mine Safety Disclosures This item is not applicable to the company - Not applicable[227] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE since its May 2020 IPO, with no anticipated cash dividends or share repurchases in the foreseeable future - Common stock trades on the NYSE under the symbol "SLQT" since the IPO on May 21, 2020[229] - The company does not anticipate declaring or paying cash dividends in the foreseeable future[232] - No repurchases of the company's common stock were made during the fiscal year ended June 30, 2021[233] Management's Discussion and Analysis of Financial Condition and Results of Operations SelectQuote's FY2021 revenue grew 76% to $937.8 million, driven by a 101% increase in the Senior segment, while operating expenses rose significantly due to lead generation and agent force expansion, resulting in negative operating cash flow due to increased commissions receivable Consolidated Financial Highlights (in thousands) | Metric | FY 2021 | FY 2020 | FY 2019 | | :--- | :--- | :--- | :--- | | Total Revenue | $937,815 | $531,515 | $337,469 | | Income from Operations | $200,072 | $132,329 | $96,288 | | Net Income | $131,046 | $81,147 | $72,579 | | Adjusted EBITDA | $228,030 | $154,024 | $105,278 | - Total revenue increased by 76% in FY2021 compared to FY2020, primarily driven by a 101% increase in the Senior segment's revenue[297][328] Senior Segment - Key Operating Metrics | Metric | FY 2021 | FY 2020 | Change YoY | | :--- | :--- | :--- | :--- | | Approved Medicare Advantage Policies | 467,585 | 225,404 | +107% | | LTV per MA Approved Policy | $1,260 | $1,287 | -2% | | LTV per MS Approved Policy | $1,269 | $1,376 | -8% | - The LTV per MA policy decreased slightly due to lower persistency rates, higher intra-year lapse rates, and carrier mix, while the LTV per MS policy decreased due to a shift to a carrier pod with lower commissions but also lower marketing costs[268] - Operating expenses increased significantly, with Marketing and Advertising up 109% and Cost of Revenue up 62%, reflecting investments in lead generation and a larger agent force to drive revenue growth[301][304] - Net cash used in operating activities was $115.4 million in FY2021, primarily due to a $332.9 million increase in commissions receivable, which reflects the working capital requirements of the business model where acquisition costs are paid upfront[341][345] - A critical accounting policy is revenue recognition, which requires significant management judgment to estimate the lifetime value of commissions from policy renewals, with the company revising its estimation approach for the Senior segment in Q4 2021[372][448] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include credit risk concentration with major insurance carriers and interest rate risk from variable-rate debt, mitigated by interest rate swap agreements - As of June 30, 2021, three insurance carrier partners accounted for 29%, 21%, and 10% of the company's total accounts and commissions receivable, representing a concentration of credit risk[383] - The company is exposed to interest rate risk due to its variable-rate Term Loans and uses interest rate swap agreements to hedge against unfavorable interest rate changes[384][385] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for FY2019-2021, with an unqualified auditor opinion from Deloitte & Touche LLP, highlighting renewal commission revenue estimation as a Critical Audit Matter - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting[390][391] - The auditor identified the estimation of renewal commission revenue as a Critical Audit Matter, citing the significant management judgment required for key assumptions like historical lapse data and persistency rates[397][398] Consolidated Balance Sheet Summary (in thousands) | | June 30, 2021 | June 30, 2020 | | :--- | :--- | :--- | | Total Current Assets | $493,435 | $513,834 | | Total Assets | $1,433,872 | $1,073,793 | | Total Current Liabilities | $108,817 | $95,811 | | Total Liabilities | $758,983 | $528,104 | | Total Shareholders' Equity | $674,889 | $545,689 | Consolidated Statement of Comprehensive Income Summary (in thousands) | | Year Ended June 30, 2021 | Year Ended June 30, 2020 | | :--- | :--- | :--- | | Total Revenue | $937,815 | $531,515 | | Income from Operations | $200,072 | $132,329 | | Net Income | $131,046 | $81,147 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[583] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of June 30, 2021, with an unqualified audit opinion from Deloitte & Touche LLP - Management concluded that disclosure controls and procedures were effective as of June 30, 2021[584] - Management's report concluded that internal control over financial reporting was effective as of June 30, 2021[587] - The independent registered public accounting firm, Deloitte & Touche LLP, issued an unqualified audit report on the company's internal control over financial reporting[590] - There were no changes in internal control over financial reporting during the fourth quarter of fiscal 2021 that materially affected, or are reasonably likely to materially affect, internal controls[588] Other Information The company reports no other information for this item - None[597] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement, including the adopted Code of Business Conduct and Ethics - Required information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement[600][601][604] - The company has adopted a written Code of Business Conduct and Ethics, which is available on its corporate website[605] Executive Compensation All information regarding executive and director compensation is incorporated by reference from the company's 2021 Proxy Statement - Information regarding executive compensation, director compensation, and related matters is incorporated by reference from the 2021 Proxy Statement[606][607][608] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the company's 2021 Proxy Statement - Information regarding security ownership and equity compensation plans is incorporated by reference from the 2021 Proxy Statement[610][611] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's 2021 Proxy Statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2021 Proxy Statement[612][613] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2021 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the 2021 Proxy Statement[614] PART IV Exhibit and Financial Statement Schedules This section lists consolidated financial statements, confirms omission of schedules, and provides an index of all exhibits filed with the Form 10-K - This item lists the consolidated financial statements, confirms the omission of financial statement schedules, and provides an index of all exhibits filed with the Form 10-K[617][618][619] Form 10-K Summary The company reports no Form 10-K summary - None[627]