SelectQuote, Inc. (NYSE:SLQT) Q4 2020 Earnings Conference Call September 9, 2020 5:00 PM ET

Company Participants

Matt Gunter – Investor Relations

Tim Danker – Chief Executive Officer

Raffaele Sadun – Chief Financial Officer

Bob Grant – Chief Revenue Officer

Bill Grant – Chief Operating Officer

Conference Call Participants

Jailendra Singh – Credit Suisse

Frank Morgan – RBC Capital Markets

Sarah James – Piper Sandler

David Styblo – Jefferies

Lauren Cassel – Morgan Stanley

Jonathan Young – Barclays Capital

Elizabeth Anderson – Evercore ISI

Daniel Grosslight – Citi

Operator

Ladies and gentlemen, thank you for standing by, and welcome to SelectQuote’s Fiscal Fourth Quarter and Full-Year 2020 Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Matt Gunter, Investor Relations. Thank you. Please go ahead.

Matt Gunter

Welcome to SelectQuote’s fourth quarter and fiscal year 2020 earnings call. Before we begin our call, I would like to mention that on our Web site we have provided a slide presentation to help guide our discussion this morning. After today’s call, a replay will also be available on our Web site.

Joining me from the company I have our Chief Executive Officer, Tim Danker; and our Chief Financial Officer, Raff Sadun. Following Tim and Raff’s comments today, we will have a question-and-answer session. In order to allow everyone the opportunity to participate, we do ask that you limit yourself to one question and one follow-up at a time, and then fall back into the queue for any additional questions.

As referenced on slide two, during this call we will be discussing some non-GAAP financial measures, the most directly comparable GAAP financial measures, and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and investor presentation on our Web site.

And finally, a reminder that certain statements made today may be forward-looking statements. These statements are made based upon management’s current expectations and beliefs concerning future events impacting the company, and therefore, involve a number of uncertainties and risks, including but not limited to those described in our earnings release, Annual Report on Form 10-K and other filings with the SEC. Therefore, the actual results of operations or financial conditions of the company could differ materially from those expressed or implied in our forward-looking statements.

And with that, I’d like to turn the call over to our Chief Executive Officer, Tim Danker. Tim?

Tim Danker

Thank you, Matt, and thank you to all of our investors and analysts for joining us today. As you likely saw in our press release, we are very pleased with the results for our fourth quarter and full fiscal year. We’re excited to share those results with you, but before we do, I’d like to begin with a heartfelt thank you to all of our customers and fellow SelectQuote associates. We have built SelectQuote to deliver the best customer experience, and that focus is core to our success. We are all very proud of the growth we’ve achieved so far, but are even more excited about the huge opportunity we see ahead.

So, with that, let’s get down to business on slide three, where you can see the highlights from our very strong fourth quarter. Let me start by summarizing the high points. SelectQuote ended the fourth quarter with consolidated revenues of $121 million, up 90% year-over-year, and adjusted EBITDA of $40 million, up 106% year-over-year. Both were ahead of our internal expectations, and represent the continued strength in both our Senior and Life Divisions, which we will detail in a minute. On a consolidated basis, we reported net income of $20 million, or diluted earnings per share of $0.13. This dramatic growth reflects not only the very large growth opportunity in the Senior market, but also the differentiated operational processes we had built into our model over the last 35 years that have enabled us to take advantage of this opportunity. We’re going to spend some time talking to those differentiators today as well.

As you all know SelectQuote completed a very successful IPO in May of this year, and we’re excited to be speaking to you today on our first earnings call as a public company. Over the quarter, we also closed the acquisition of Inside Response, which further bolsters our leading customer acquisition capabilities. SelectQuote also announced the expansion of our diverse network of carrier relationships by adding Kaiser Permanente to our platform, further extending our geographic reach with leading blue chip insurance carriers. Additionally, we’ve recently announced a strategic partnership with a leading primary care provider network, Iora Health to integrate value-based care initiatives into our offering. This furthers our role as a consumer advocate that puts healthier patient outcomes at the forefront of its mission.

Lastly, in addition to our headline financials, we are most proud of how the company performed over the quarter and through the onset and evolution of COVID-19. The migration of over 1,800 associates to nearly 100% work-from-home environment was swift and effective. We’re extremely proud of how our team has capitalized on increased consumer demand for health and protection products, driving 27% premium growth in Auto & Home, 52% premium growth in Life, and 155% policy growth for our Senior Division in the quarter, maximizing both efficiency and client service.

On slide four, let me begin with some key stats about SelectQuote to help describe who we are and what we do. First, SelectQuote is a leading technology-enabled direct-to-consumer insurance distribution platform that provides consumers choice and assistance and choosing the right policy for them across Senior Health, Life, and Auto & Home Insurance. SelectQuote has over 35 years of operating history, and over that time, we’ve optimized our business to drive attractive returns on invested capital. Moving from top to bottom on the left, we believe a key to success in our business is our highly trained and 100% in-house agent force, which now stands at over 1,000, and has nearly doubled over the past few years. That growth story continues, and we’re pleased with the progress we’re making to hire, onboard, and train the agents we need to achieve our objectives during this upcoming AEP. Our growing customer care organization that will number over 250 by the beginning of AEP also plays a vital role in delivering our leading lifetime values. These customer care associates are focused on making sure customers are in the right policy, following the initial approval. This approach both from the front-end and back-end are core to customer persistency and our market-leading LTVs.

On the right, we have a healthy addiction to data, and have invested heavily proprietary technology to utilize our over 1 billion unique data points. SelectQuote leverages this data to optimize across every facet of our business, from marketing and lead generation to agent training and customer behavior and service. This allows us to further accelerate our business operation in flywheel. To date, we have served over 2 million policyholders, and believe in aggregate that our potential addressable market stands at over $180 billion across our Senior, Life, and Auto & Home divisions. That is certainly a big number, but in our opinion, the opportunity is only tangible and attainable if the underlying operation is built correctly across each piece of the business. Our built-to-last ROI mindset drives every decision we make.

To briefly touch upon the industry opportunity on slide five, we play in a huge market currently representing about 60 million Medicare customers. Each year an additional 4 million customer’s agent’s eligibility and we expect the market to grow to about 77 million consumers by 2028. Additionally, consumers are rapidly migrating from basic Medicare to Medicare Advantage and Medicare supplement plans, with each 1% increase in MA or MS adoption, representing an incremental 750,000 policies. As we will discuss in subsequent slides, SelectQuote is incredibly well-positioned to profitably grow into this huge and expanding market.

If we turn to slide six, I’d like to speak to the rapidly-changing landscape of insurance distribution. On the left hand side, depicts the traditional field agent model that represented how most of our parents purchase their policies. This across-the-table model was and still is cumbersome for a number of reasons highlighted mainly by agent inefficiency, and limited policy options or alternatives to shop. On the right, today’s consumers demand choice and convenience, and want to shop and compare those choices without a pitch or an angle. As you know, SelectQuote was designed specifically to address these evolving consumer preferences, but you may not know is that it’s estimated that well over 50% of the policies sold across our markets are still sold primarily through the legacy model, and a way we believe the shift from old legacy models to newer highly efficient, transparent, and pro-consumer distribution models is even more exciting than the demographic tailwinds as we think about SelectQuote’s growth potential.

On slide seven, we present the two foundational pillars enabling SelectQuote to scale into this opportunity without sacrificing customer experience and ultimately, our returns. I’ll start on the left with our purpose built technology, which is too expensive to detail on this call and has been built and invested in over the 35 year history of the company, but I’ll summarize by saying that we’ve deployed significant capital, time and effort each and every piece of our value chain. These investments power all aspects of our business, including how and where we generate our leads to maximize the probable return relative to the cost of acquiring the customer, how we tier in route leads to agents to optimize close rates and throughput, and perhaps most importantly, these systems help our agents match customers with the best plan for their needs at point-of-sale and deliver industry leading retention to the customers lives.

Turning to the right side of the page, we also firmly believe that our highly trained and 100% in-house agent workforce is a key differentiating asset for SelectQuote. The complexity and deciding upon an insurance policy is daunting for most people, and the stakes pertaining to details like physician networks and prescription drugs can prove costly. We believe our internal mission agnostic agent lead model is the best way to achieve the best outcome for our customers and simultaneously maximize the return SelectQuote earns on acquiring that same policyholder.

If we turn to slide eight, let me briefly touch on another differentiator SelectQuote’s model and that is the diversity of our policy offerings and our ability to flex our agent force based on the peak selling season for Medicare. As you likely know, we traditionally deliver approximately 70% of our annual MA and MS policies during the two enrollment periods of AEP and OEP that spanned from October through March. To put it briefly, we believe there is a lot of value in a tenured agent workforce that can work year round by shifting from our Life or Auto & Home divisions into Senior. These flex agents who return with us for their second year of the peak AEP Medicare season are on average 40% more productive than agents that have only been on the job for a year. We believe this flex model plays a key role both in our agent productivity, but also in our strong agent retention, which currently stands at 93% for our top agents. We will continue to invest in this model particularly our life and health advisors, who sell both final expense and Medicare products depending upon the season. We grew final expense premium 288% year-over-year, and about half of all final expense customers are over 65. So we are now gaining significant traction in transferring final expense customers to our senior agents to cross sell Medicare products.

Turning to slide nine, I’d like to stress a few points about how and why we run SelectQuote the way that we do. First and foremost, in our business, we believe that customer satisfaction is crucial. Simply put, a policyholder that gets help in selecting the right policy on day one is much more likely to renew and extend the lifetime value or cash flow string about the carrier and SelectQuote. Second, everything we do at the company is designed with the express purpose of driving the best return on our invested capital that we can, and we believe that our focus on the consumer translates into a model that generates the best return, as you can see in our market leading lifetime value and EBITDA per policy. Lastly, we’re very confident in our ability to replicate the history of strong returns as we continue to scale into the business with a very large opportunity set that lies ahead of us over the next decade plus.

On slide 10, you can see the recent output of the model, which has generated high growth and very attractive profitability. Over the past two years, SelectQuote has grown total revenue by 127% or at a CAGR of 51%. Over the same period, our EBITDA is up over $104 million for a CAGR at 76%. We will detail each of our segments in a minute, but as you can see on these charts that our Senior Division is fueling our growth and now represents 68% of our revenue, and 80% of our EBITDA before corporate expense. We expect that trend to continue given a large and growing opportunity in the Senior Health market. Over the past two years, our Senior Division revenues and EBITDA have grown by 253% and 297% respectively. Raff will provide further details and our operating results for the division, but I’ll comment that these growth figures validate in our view that we’ve built the right model to scale and leverage the very large opportunity in Medicare for years to come.

With that, let me turn the call over to our Chief Financial Officer Raff Sadun, to expand on our metrics and also detail our financial results. Raff?

Raffaele Sadun

Thanks, Tim. I’ll start on slide 11 with our consolidated results. For the fourth quarter, we generated $141 million of revenue, and $40 million of adjusted EBITDA representing growth of 90% and 106% respectively. We also increased our adjusted EBITDA margin to 28% in the fourth quarter. On a full fiscal year basis, we generated $532 million of revenue and $154 million of adjusted EBITDA, representing growth of 58% and 46% respectively, with an adjusted EBITDA margin of 29%.

With that, let me now turn to our fourth quarter and full-year results by segment. I’ll begin on slide 12 with our Senior Division, which is our largest division, as you can see, we had a very strong quarter generating revenue of $88 million and adjusted EBITDA of $33 million with a robust adjusted EBITDA margin of 38%, this represents year-over-year growth of 160% and 157% respectively, and actually represent accelerating growth compared to our full-year growth, as we leveraged the proceeds from the private placement, and IPO to continue to invest in the growth of our business.

On a full-year basis, we generated revenue of $352 million and adjusted EBITDA of $146 million, representing year-over-year growth of 88% and 62% respectively, with an adjusted EBITDA margin of 40%. Quickly on our 40% adjusted EBITDA margin for the full-year, as I said before, while margins will always be important, we believe that historically we have operated the Senior business with margins that were probably a little too high at the expense of absolute EBITDA. As we continue to capitalize on the large market opportunity in front of us. There are going to be opportunities to maximize absolute EBITDA with slightly lower, but still very attractive and strong margins. Before speaking to our volumes, I’d also note that we closed the InsideResponse acquisition on May 1, and this business was included in our results for the last two months in the quarter.

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Moving on to slide 13, in terms of our production for the fourth quarter, we had almost twice as many productive agents as a year ago, and that combined with an increase in agent productivity allowed us to grow our total submitted policies 136%, and total approved policies 155%. The largest driver of this growth was MA policies, where we grew our MA submitted policies 186%, and our MA approved policies 184%. We’ve benefited from our strategy of hiring the larger flex class for AEP and OEP, and keeping a larger percent of those flex agents as full time core agents after OEP. This strategy allows us to grow and non-peak selling periods are first quarter and fourth quarter, but more importantly, allows us to increase the number of core agents selling during AEP and OEP when core agents tend to be over 50% more productive and flex agents. We also benefited from the special election period in May in June that allowed seniors to make a change to their plan if they had been impacted by COVID, while this special election period was one time in nature and beneficial to the quarter. It just added to the already strong growth we were seeing in April before the special election period.

Moving on to LTVs, for the quarter, LTV of an MA policy was flat year-over-year, which was the net result of two main cross currents. First, with the introduction of OEP and the ability for seniors to switch plans more easily, we have experienced slightly lower overall persistency especially in the first couple of renewal years of a plan. This lower persistency is included in our LTV calculations. I will point out though that the impact of this slightly lower persistency is more than offset by the volume we are able to generate because of this special election period. As evidenced by our 184% growth in MA policies during the quarter. Second, as an additional offset, we had a positive mix shift in our volume towards carriers that have higher persistency, and lastly, we have benefited from increasing commission rates and additional fees from carriers for services that were able to provide for them. I would note that while churn is important, it is not the only factor that drives the business, and we would suggest that investors not get too hung up on churn as a single KPI. There are things that we can do to impact LTV. Specifically, we work hard to influence LTV with our focus on recapture rates, our management of carrier mix, additional services that we can provide carriers and the amount of the LTV, which comes from first year versus renewal revenue.

On the topic of recapture rates, our recapture rate now stands at over 25% and has improved each of the last few years due to some initiatives that we have launched to increase the size of our customer care team and targeted programs to retain laps in customers. Let me say clearly, nothing has fundamentally changed on the persistency front in the last five months, and MA LTVs for the fourth quarter and full-year were actually slightly ahead of our expectations, as one would reasonably expect these OEP and SEP periods are driving slightly lower persistency. However, in the last few quarters, they have been a huge net win for SelectQuote, and we expect that to be the case going forward. Not every distributor will benefit from these periods, but we clearly are.

Lastly, from a cost perspective, our sales and fulfillment costs were up in line with the increase in the number of agents and fulfillment staff. However, our marketing costs grew slightly faster than our revenue, as we deliberately use the proceeds from the IPO to generate higher absolute revenue and EBITDA at the expense of slightly lower margins, consistent with my margin comments earlier. Important to note though, that while our marketing costs were up year-over-year, they were favorable relative to our expectations for the fourth quarter, as we implemented some new initiatives that increased our close rates and allowed us to buy media more efficiently.

On slide 14 before I move on to our Life Division, I’d like to touch on a topic where I’ve received many questions from investors. There has been some confusion in the industry about KPIs for our Senior Division compared to other competitors. As we have stated, key metrics like revenue to CAC or LTV to CAC are not apples-to-apples in most cases and cannot be compared amongst the three public companies. On this slide, we have attempted to create an apples-to-apples comparison, based on the publicly available information across each company’s total consolidated Senior segments revenue cost and profit. As you can see, we estimate that we have the highest revenue and EBITDA per policy, which we believe is driven by our higher policyholder persistency, which is a result of how we operate the business.

Based on the results, SelectQuote currently drives EBITDA per approved MA/MS policy that is approximately $150 to $250 higher than our peers. On the top right of this slide, in an attempt to address the different methodologies and definitions for revenue to CAC or LTV to CAC, we have calculated the total Senior revenue generated for every dollar of costs incurred. This is as apples-to-apples as possible based on what is currently publicly disclosed. To be clear, the cost measure we use here is inclusive of all costs for each company Senior segment, not just marketing. For every dollar of cost we incur in our senior segment, we generated 1.7 times that amount of revenue, while this is similar to one of our peers. We’d also note that our EBITDA for policy is the highest, and something we are very focused on to Tim’s earlier point about returns on invested capital.

If we turn to slide 15, our Life Division grew revenue 37% to $42 million, and adjusted EBITDA 35% to $12 million. This is driven by 62% increase in total premium, which was a combination of our term life premium declining 6%, and our ancillary premium, which is mostly our final expense product grown 288%. As mentioned before, our term life product has been impacted by some COVID-19 headwinds as consumers initially delayed getting blood work done and completing the process to get their policies in force. This improved towards the end of the quarter that remains to be seen, if this is sustainable. These continued shutdowns occur later in the year. For our final expense product, over the last several quarters we have significantly ramped up our investment in agents and marketing to sell this product. It’s a great example of leveraging the platform that we’ve built to be able to launch new products. We actually generated more premium from our ancillary products in the fourth quarter than we did our term life products. While this may have been a bit of an anomaly, given the COVID impacts this quarter, it is reflective of what we think could happen over the next several quarters in years, namely the premium from sales of final expense products may end up eclipsing premium of term life products. As a reminder, our full-year fiscal results were impacted by our decision to civilize agents to our Senior Division during AEP and OEP, and based on the success of that program we expect that to continue going forward.

Turning to Auto & Home on slide 16, we grew revenue 24% to $12 million in adjusted EBITDA 36% to $3 million. This was driven by a 27% increase in new premium. While the quarter demonstrated good year-over-year growth. The results of our Auto & Home business for the year were impacted by our decision to switch Auto & Home agents to our Senior Division during AEP and OEP. Similar to our Life Division, based on the success of that program, we expect to continue that strategy going forward. In addition, during the fourth quarter we also made the decision for the next several quarters to reallocate agents from our Auto & Home business to our Senior Division and final expense efforts. This will impact the financial results of our Auto & Home business over the next several years. This decision is also a good example of how we allocate our capital to balance, optimizing the trade-off between absolute revenue. EBITDA cash flow and return on investment. As an example, a new policy in our Auto & Home business has the longest breakeven period of all of our products over 4 years, and EBITDA for policy is similar to selling a final expense policy. However, final expense policies have an approximately one-year breakeven period, and agents can sell more final expense policies during the course of the day than automatic and home policies. Therefore, for now is a more efficient product for us to sell. That’s not to say we plan to get out of the Auto & Home business by any means, but if we think about capital allocation. This is the right capital allocation decision for now.

Turning to slide 17, let me briefly detail our capital position post IPO, and then I’ll discuss how we see cash flows for our business in the chart displayed here. During the quarter, we used $20 million in cash from operations as we significantly grew our policies in our Senior Division. In addition, we used about $5 million in cash for general CAPEX and $36 million to fund the purchase price of the inside response acquisition. Lastly, from a capitalization perspective, we had net proceeds from our private placement and IPO of approximately $475 million. We use $100 million to pay down a portion of our term debt, and another $28 million to unwind the securitization of our Auto & Home policies. We ended the quarter with $369 million in cash and cash equivalents. $325 million of term loan debt and zero drawn on our $75 million revolver. We also ended the fiscal year with $597 million of accounts receivable and short and long-term commission’s receivable balances.

With that said, let me review this cash flow chart. It can be confusing just looking at cash flow from operations and seeing losses to understand the underlying trends and attractiveness of the investments we are making. At a high level, it takes about two to three years to breakeven on a new policy sold in our Senior Division, which is the largest piece of the business, as we grow, and certainly at the rate that we have been growing, i.e. over 100% the last two quarters in our Senior business. The cost of writing new policies exceeds the first-year cash we are receiving and the renewal cash from past cohorts, which leads to the use of cash and the cash flow statement. However, with that growth, we are building a bigger and bigger book of business that will bring in cash flow over time, and the best way to understand, do these investments make sense is looking at the return of specific cohorts. This slide demonstrates the cash flow profiles of customer cohorts from each of the past six years. For example, if you look at the 2015 bars, the orange bar represents all the costs of writing policies in 2015. The bar next to it represents the lifetime cash expected from those cohorts broken out into four components. The first grey bar is the first-year cash we received from these cohorts in 2015. The blue bar is the cash we’ve received already from these renewals of policy sold in 2015. So it represents five years with renewals that have already renewed. The yellow bar represents cash we expect to receive from policies that has already renewed the renewal event has happened, but because we get paid monthly. We haven’t received all the cash yet, and lastly the green bar represents the future cash we still expect to receive through the 10th renewal year on those original policies. Anytime the grey and blue bars are above the orange bar. It means we’ve already broken even on the investment we made upfront to write those policies, and it’s all profit from here on out.

As you can see, we’re already well into cash flow positive territory for cohorts sold in 2015 ’16, and ’17. For the 2018 cohort, we have just broken even, so basically all future renewal cash we received from this cohort will be profit from here on out, and that fits with the two to three years to breakeven on a policy for 2019, we have almost already broken even on this cohort. That’s a little faster than normal, and has to do with the marketing development funds we received that year, which is a percent of our total revenue was higher than it had historically been, and the fact that we had 47% margin is that year in our Senior business. You can see we’ve more than recoup the cost of writing policies with the five years before 2020, and going forward, they will all be profitable. We added 2020 to this graph, and while we still have not yet broken even, we would expect that cohort to follow the same trajectory and breakeven within two to three years. This is why we’re so confident about the investments we’re making. We have clear visibility into how and when they start producing positive cash flow, and what the returns are, which we think are highly attractive. The last point I would make is there have been a lot of questions around churn and persistency, and the impact of that has. We already addressed some of this earlier. As you can see here, if and I want to stress the word, if there are additional reductions in persistency, they will take a small portion off the top of the green bar, but the overall profitability from these cohorts will still be very positive, and the return is very attractive.

In addition, this only represents the expected cash, through the 10th renewal period, but there will be policies that renew beyond that, and that’s not captured on this graph at all. The key takeaways here are one, SelectQuote earn substantial returns on invested capital. Two, our payback period tends to be in the two to three year range, and is very consistent and predictable, and three, while we get the question often about when SelectQuote will become cash flow positive on a consolidated basis, we would simply say that we built a company to take advantage of a very large and long tailed opportunity. At the types of returns that we generate, it is in our best interest and the interest of our shareholders to continue to pursue those returns instead of focusing on immediate positive cash flow generation. Put it another way, while we do not expect to be cash flow positives in the near-term on a consolidated basis, given our growth trajectory, we’re significantly cash flow positive when viewed on a cohort level, which in our opinion is what really matters.

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Turning to our guidance for fiscal year 2021 on slide 18, as discussed earlier this year, we will be providing annual consolidated guidance or revenue adjusted EBITDA and net income. We expect consolidated revenues to be in the range of $775 million to $815 million. This would imply consolidated revenue growth of between 46% and 53% year-over-year, we expect adjusted EBITDA to be in the range of $200 million to $215 million, which would imply consolidated adjusted EBITDA growth of between 30% and 40% year-over-year. Lastly, we expect net income to be in the range of $115 million to $127 million. This revenue and EBITDA growth is primarily driven by growth in our Senior business and growth in our sales of final expense policies somewhat offset by higher corporate costs associated with operating as a public company. It also assumes that the LTV of MA policies will be relatively flat year-over-year for the full-year based on the factors we discussed earlier.

And with that, let me now turn the call back to the Operator for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jailendra Singh with Credit Suisse. Your line is open.

Jailendra Singh

Congratulations on a good first quarter as a public company. First question, I was wondering, let me just — can you elaborate a little bit more about your fiscal ’21 guidance, some puts and takes we should keep in mind for each segment next year, and maybe any color on your margin expectations if you can elaborate more there?

Tim Danker

Yes. So, I think you know, consistent with what we’ve said before, we definitely plan to push the growth profile of the Senior business and to maximize absolute revenue and absolute EBITDA, and so, when we think about margins in our Senior business, I think sort of mid-30s is sort of the right length for that, and obviously, that comes with higher revenue and EBITDA, which is embedded in our forecast, and then on a consolidated basis I think our guidance basically has margins in the mid-20s or so, and the biggest driver of that again is going to be the Senior business and then a slight uptick in corporate costs as a result of operating as a public company. I think in our Life and in our Auto & Home businesses the margins will be slightly higher than they were last year, but the biggest drivers are those two things that I mentioned before.

Jailendra Singh

Okay, and then my follow-up on, maybe if you can provide some color around your expectations for the number of agents and agent productivity in fiscal ’21. What are the key drivers there, and any thoughts on the expected mix between core and flexi you’re expecting in fiscal ’21? That will be helpful.

Tim Danker

Yes. So, I guess, as we said before, the agent growth is going to be very consistent with the revenue growth, and so, I’d expect the agent growth to be in line with revenue growth, but certainly on the Senior side. In terms of agent productivity, it’s basically flat with last year, down a little bit, but the mix of flex versus core agents is actually going to be slightly higher this year. Originally, we had anticipated it to be a little bit lower, but we’ve actually hired little more agents as part of OEP this year, so — or AEP this year. So, probably 55% flex with the remaining core, and that’s on a full-year basis, and so that will naturally drive agent productivity on a weighted average basis down a little bit, but in terms of the assumptions for both flex and core, those are held relatively constant, and I will say that while we’re holding them confident with respect to our forecasts, historically we have seen improvements there as evidenced obviously also in the fourth quarter here.

Jailendra Singh

Okay, thanks a lot.

Operator

Our next question comes from Frank Morgan with RBC Capital Markets. Your line is open.

Frank Morgan

Good afternoon. I guess, you made a comment about the effect of — a positive effect of carrier mix on that having higher persistency. I’m curious if you can maybe shed a little light on what are the attributes of those carriers, why they have the higher persistency? And then my second question would be when you think about your customer retention team and your model, any particular tweaks or changes you’ve made with the proliferation of zero premium plans? Thanks.

Tim Danker

Yes, Frank, this is Tim, great to hear from you. On your first question about carrier mix, I mean we are always analyzing our footprint, our data that we get from analyzing our customer conversion. I think Bill and Bob had done excellent job building out a great national footprint with blue chip carriers, but we’re also filling in gaps when we find that, and we’ve announced the relationship with Kaiser is a great example to do that. So, we have the capability to add additional carriers when we see that there’s a market need there.

Bob, do you want to talk about other things that we’re doing to kind of drive that?

Bob Grant

Yes, specific to your question, Frank, on why we see carriers increasing maximum, why their persistency may be better, you know, that comes down to competitiveness of plans, obviously, every year we go into it, there’s a little bit of a mix shift there, and then the reason those carriers in a lot of cases have stronger persistency is some of the back-end action that they take on initiatives like we announced with more value-based and cost saving initiatives for the consumers. So, we believe that all carriers are really trying to follow those models, and we’re working very closely with them, as you probably saw with our announcement of Iora and others to try to drive that value-based behavior, so that we can increase persistency of all carriers, kind of match those carriers that we see the best persistency with.

Tim Danker

Bill, do you want to take the CCA?

Bill Grant

Sure, absolutely. To add, Frank, a little bit about what we’re doing in terms of the action that we’re taking internally to address persistency, [technical difficulty] now we continue to learn about our customers and get smarter and smarter to develop more and more technology in terms of how we reach out to them, what affects [technical difficulty] point about zero premium plans, whether it be something in the West, special election periods, whatever it may be. We use those that data to drive us to reach out to those calls. So, then the next step from that data and those tools is the people. We’re rooting with our technology around 70,000 customers per month in terms of contacts, and from there, it’s a lot about what we’re talking to them about, and Tim mentioned, Bob mentioned it these extra offerings that we can offer, the outcomes in terms of outcomes on overall healthcare and other products when we talk about cross-sells and things that we can offer them that continue to tie them closer to SelectQuote and build persistency.

Frank Morgan

Okay, thank you.

Operator

Our next question comes from Sarah James with Piper Sandler. Your line is open.

Sarah James

Thank you, and congrats on a great quarter. I was hoping that you can help us with contexts, what portion of churn factors are outside of your control, like carrier offerings and back-end initiatives versus under your control, and for the levers of churn under your control, are there certain levers that have a higher ROI for you to pull than others?

Tim Danker

Yes. Sarah, great to hear from you, this is Tim. I mean there’s multiple things that the team is really working on, but to your point are within our control. So, maybe I’ll start with kind of the front-end and then maybe ask Bill to also comment on things that are working on the back-end, but really with respect to the front-end, there’s a lot of things we’re doing on the marketing front that allow us really to concentrate on the highest profitability opportunities. I think we’ve talked about our marketing tech or wide funnel, it allows us really to concentrate on the highest lifetime revenue CAC relationship. I’d also point out we’re doing a lot with technology. Bob has really spearheaded that to make sure that while we do a great job, matching consumers with prescription drugs, as well as primary care physicians, we’ve made enhancements into that technology to even better improve that matching, I think we touched upon kind of the mid part of the process and funnel from a product perspective things, we’re doing to build out additional carrier relationships, as well as significant investments in our agent plan.

Bill, is there anything you’d like to add kind of on the back-end to elaborate things that we’re doing proactively on our part really to manage churn?

Bill Grant

Yes, absolutely. So I’ll talk about some of the specific things and what drives that more than others, there absolutely are critical elements of someone’s plan that may drive persistency, and then the action we take, we will correlate basically with what may have happened. So, we have scores for every consumer in terms of their persistency score and how we look at okay, well what may have changed with their plan, or what may have changed within the environment that would allow us to how aggressive we’re going to be in reaching out to that consumer. So things like that could include changes in pharmacy networks, they could include changes in specialists, different things that might affect someone’s coverage. So that rating right in terms of how we rank those folks and that’s a combination of our data feedback that we get from the carriers, all those different things feed into our score, our score drives been our efforts, and we’re constantly updating that to try to get in front of that as best we can, and make sure that, we continue to improve that recapture rates should something have changed with their plan where another plan is a better fit for them.

Sarah James

Great, and maybe just one follow-up, on the recapture rate increasing. That’s great, but can you help us understand what that means financially? So, as your capture rate goes up, do you guys get a performance bonus or is well attach on the captured Life, or how should we think about that metric changing?

Tim Danker

I guess the way to think about recapture rate is it’s kind of broken out into customers that are buying another plan, but with the same carrier, and so in that scenario, it’s not a churn event. This is part of the persistency rates that we’ve used upfront to calculate persistency for that carrier and that represent about 40% of the recaptured policies, and then 60% are actually recaptured with a different carrier, and so, in that scenario, it would be viewed as a churn event, and it would be a new policy with that new carrier with a new tale associated with it, and again, that is captured in the persistency rates that we use. The one thing I would add to that is that to the extent that that customer is recaptured with the same carrier, so it’s not a churn event, it is effectively sold then at the commission rates in place at that point in time, which given the commission rates have been increasing over time. We benefit from a higher commission rate at that point. Bob, would you add anything to that?

Bob Grant

Yes, I think that the one thing I would add is that recapture rate going up this year also underscores how strong our scoring is of our book that Bill talked about, especially with some of the SCPs that were introduced this year with COVID and the other second OEP being out there. Our scoring and risk profile and then driving marketing towards that group on the backend, so we get those folks back in the funnel really spills how much of an impact are scoring tad on that recapture rate.

Operator

Our next question comes from David Styblo with Jefferies. Your line is open.

David Styblo

Hi, there. Good afternoon. Thanks to the question. I just wanted to start off to get a better sense of understanding the factors that might gate your growth, obviously the senior business has been doing really well on the top line, 85% or 90% growth the last couple of years consistently, what in your mind sort of cache that in terms of how faster you want to grow, what can the infrastructure hold in terms of being able to adequately train your sales agency and make sure that it’s quality growth versus things that would just sort of start to really impair the model. So maybe those areas would just be of interest.

Tim Danker

Great. I’ll start that one Dave. I mean, clearly a big market as we all know and have covered, we don’t necessarily view that there is any operational constraints to growth. With that said, I think, we had been very disciplined about our approach very much as we’ve grown these businesses, we’ve tried to really nail it and optimize the unit economics and in a very disciplined manner grow into those. So with that said, I mean, we continue to focus I think on two levers for growth are very important, and maybe I’ve asked our Chief Operating Officer Bill to speak to them out a little bit more color, but it’s really around people are highly skilled agents, everything we’re doing to build that as well as obviously our people in the lead side the capabilities that we’re really building there to make sure that we can grow into the opportunity, and then I’ll let him speak to those two and maybe come back and talk about the other divisions. Bill?

Bill Grant

Yes. Great, Tim. Thanks. I think two factors that are near and dear to me. Certainly we concentrate on day in and day out in terms of growth would certainly be the recruiting of our agents and in marketing. So I think on both those fronts, we feel really good about the teams and the approach and the technology we’ve put together, you know as it relates to marketing. Certainly, I think that our approach has always been a white funnel approach, and what I mean by that is, we’re able to consume all different types of media and really react to the market in a fluid way. So whether it be TV paid search clicks affiliates, we built technology to consume all different types of media, which really allows us to be wide funnel and pivot very quickly if we see trends on one that’s very profitable for us and we can move very fluidly.

So, on that front, we feel really good about what we’ve done. As it relates to recruiting also feel really good about we’ve done, we’ve had a great team, we treat recruiting just like we do sales floor in terms of a resume, as a lead, through our resume, we have a great understanding for someone that we think is going to be successful within our organization. Also think we’ve been benefited certainly with this environment with COVID by the fact if you look at the field model certainly right now is struggling and we see a lot of those people turning towards us for employment, and just in general with some of our expansion of our remote, certainly expanding to a lot more states than we’ve been in the past. We’re seeing some more and more resumes, which allows us to be more and more selective about the talent that we bring to the organization.

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David Styblo

That’s great.

Tim Danker

Yes, Dave, just coming back to your other points about the other divisions in a really quickly. We have had really great strength in the final expense offering I’d asked Bobby Grant to really speak to that, because it’s a great growth opportunity within our Life Segment. We’re growing in our core term business. There is a few headwinds there with respect to the paramedical exams in COVID, but overall, we’re seeing a lot of great top line growth as well as very attractive kind of payback periods on final expense. Bob, can you speak to that real quick? I think it’s important.

Bob Grant

Yes, I mean, I think that we are very, very bullish on our final expense offering and we’re relatively new in that market as you’ve seen by our growth, but we see similar trends within the marketing space, and then ultimately the carrier portfolio that we’ve put together as we saw in our Medicare business. So we are extremely excited about the future, and we see also — it’s a little bit more of a transactional sales. So we see agents get to quote tenure a little bit quicker, which is allowed us to scale very quickly there, and we feel like we can continue to do that given what we’ve built and what we are going to continue to build the future.

Operator

Our next question comes from Lauren Cassel with Morgan Stanley. Your line is open.

Lauren Cassel

Great, thanks so much. I’m just wondering if there is a way to quantify how much the special enrollment period during COVID benefited the quarter certainly came in better than we were expecting, or gets another way. Was there any sort of underlying organic increase in productivity that was better versus your expectations?

Raffaele Sadun

I was going to say maybe I’ll hit on the financials and then head it over to Bobby for the quarter, but we were seeing very strong results in April. Before the special election period even hit, I think we were up 143% in terms of MA/MS submissions, and so, obviously, that increased in May and June, but we are seeing very strong results already beginning in April. Bob, do you want to comment on that?

Bill Grant

Yes. It’s a good point on the agent productivity front, even without that SEP, we are seeing 20 plus percent year-over-year agent productivity increases, and I think it really spells the quality of growth that Raff discussed earlier, and Tim, on the responsible way that we try to grow, while really building our technology to enable our agent productivity to rise. So even with the dramatic scale, we’ve seen recently, we have seen close rates actually rise and we’ve really seen the number of leads that our agents can take also rise through the technology that we’ve built and we continue to focus all of our technology efforts on those things to drive more leads and higher close rates for agents driving obviously better agent productivity with that.

Lauren Cassel

Thank you.

Operator

Our next question comes from Steve Valiquette with Barclays. Your line is open.

Jonathan Young

Thanks. It’s Jonathan Young on for Steve, I just had a question on the LTV assumptions for FY ’21, kind of given the positive mix shift that you’re talking about and the higher persistency with those specific carriers. I guess, what else, is coming into that plan LTV assumptions is just that, because of the slightly lower persistency for the other carriers that that’s just dragging down the whole thing, just care to get the color there?

Tim Danker

Yes, no, I think, great, great question. So when we think about LTVs. We use our own historical experience for that, which is sort of a 36-month weighted average, and I think as we’ve talked about before anytime you have these sort of additional election periods that allow consumers to change the plans that’s naturally going to drive slightly lower persistency and we have seen that this year, and so, when we think about fiscal 21 and sort of the expectations throughout this being flat, we basically are holding persistency flat to our experience, but because we use a 36-month weighted average, there’s more periods now that are being brought in at slightly lower persistency. So on average, the persistency is a little bit lower in fiscal 21, and that is being offset with rate increases and then changes in mix to just naturally have a higher persistency and we’re adding carriers to the platform that actually have higher persistency as well, and then obviously, all of that is just being offset by the incremental volume that we can sell during these special election periods as evidenced by the 184% growth and then the policies this quarter.

Jonathan Young

Okay, and then, turning to your relationship with your health, can you just kind of go over that relationship or the economics, what exactly are you doing for them? Thanks.

Tim Danker

Yes, absolutely. So the economics directly to that deal are not really anything material, but what we’re trying to do there is partner with groups like Iora health. In order to add more value to our consumers and more education around what value-based care is and ultimately that their outcomes could be better and the customer satisfaction could be better at those facilities, and what we’ve seen in the data with the carriers we partnered with on this, that the retention rates can be materially better, if we educate and kind of get folks to switch over to that model, we would not be doing that though our relationship with him is pure education, and then, sending consumers over to them to see if they would be eligible or see if it would be a good fit for that consumer, but again, those are just pure effort to try to drive consumer satisfaction and better health outcomes for our base than we’ve seen.

Jonathan Young

Okay, thanks.

Operator

Our next question comes from Elizabeth Anderson with Evercore. The line is open.

Elizabeth Anderson

Hi, good afternoon guys. Thanks for the question, and I was wondering, if you could talk a little bit about inside response sort of like what you’ve seen as your early successes and learnings from that business and much of its surprised you there?

Tim Danker

Hi, Elizabeth, this is Tim. Yes, great, great, great question. I mean, again we’re always working as we mentioned before around people and leads. This is a great acquisition for us in terms of enhancing our marketing capabilities, but I’ll ask Bill to talk about some of the early wins, we’ve really seen on relationship.

Bill Grant

Yes, absolutely. So we were, I think our thesis around that investments was that they had a channel that we felt really good about in terms of being able to scale that channel, and a method that they were using to basically help drive lead volume. Obviously, they’ve been a partner of ours for a long time. So our main thesis was around that, and we felt by working closer with them that we could continue to even optimize that channel even further. So I’ll let Raff here talk a little bit here about the financial results, but from just a kind of a strategic aspect, we’re incredibly pleased with how it’s played out. That channel has continued to scale very well, and we continue to see better and better results with that channel. So, our primary thesis is very good. We’ve also seen from a kind of integration standpoint, other synergies between the two organizations that continue to play out very positively, but Raffele, I will turn it over to you on kind of that?

Raffaele Sadun

Yes, so I mean obviously, we closed the acquisition May 1, and so it was included in our results the last two months of the year. It was a couple million dollars in terms of profitability that added to the quarter. So that’s, I think that’s what we can say in terms of the fourth quarter.

Elizabeth Anderson

Okay, perfect. That’s helpful. Thank you, and then in terms of as you I know, you touched on this a little bit before, but in terms of how you’re thinking about marketing for AEP, what would you say was sort of like the biggest differences you’re looking at as you approach this season? And then also sort of how you think about the ROI on your investments there?

Raffaele Sadun

Yes, so I think we have a very specific plan in terms of this, that we put or putting together right now are for the most part kind of finalized in terms of where we expect our leads to come from. With that said, right, we’ll build that, and then every AEP, there’s a channel or something that for whatever reason, it takes off more than another channel. So one of the things about our model is we’re extremely nimble, and we see something like that going on, we’re able to really attack that channel quickly, and I mean quickly like within a day or an hour, it’s really, really just turning dials and we can start taking more volume from those sources, and really optimize our ROI and our marketing spend, as we see that revenue to CAC relationship being more and more beneficial on certain channels than others. So I think that we’re prepared, we have our plan, but what we know and what we like about our model is that, our plan will open-up, we’ll see opportunities that are outside of our plans, and we’ll be able to optimize to those.

Tim Danker

Yes, I think what Bill’s really and the team has built on this point is it really been attracted to the company, and it’s a differentiator really this wide funnel approach that allows us to work with all different types of ways that consumers and seniors may want to interact, combining that with marketing tech with our rich data that we have, we’ve been in the space nearly a decade, and some really sophisticated workflow allows us to really make raw material work that many other shops can and we think that puts us in a really good space, we continue to scale into the opportunity.

Operator

Our final question comes from Daniel Grosslight with Citi. Your line is open.

Daniel Grosslight

Hi guys, congrats on the quarter, and thanks for taking my questions here. So I want to go back to a comment you made on agent recruitment. Two of your competitors have noted that they are trying to pretty aggressively hire internal agents, and as you ramp-up for AEP in the coming weeks, as it become more difficult to hire agents, and do you anticipate having to increase retention at all?

Tim Danker

Hi, Daniel, this is Tim. I would say that this is one of the benefits that we’ve really had, and the business is the fact that since the beginning of the company, we’ve really focused on 100% internal agent force, and we think we get a lot of benefits from our agents in that approach and not really trying to outsource and hire temporary folks. I think we’ve talked in previous calls about our ability to leverage the diversity of our platform for flex agents as well. So that folks from our final expense router at home can pivot into Medicare during the peak selling season, which you know, and they’re returning kind of sophomore year, if you will, or 40% more productive, we do a great job of keeping our top agents, 93% top agent retention. So, we feel like we’ve built really good mousetraps, it allowed us to be more consistent with our deliveries we continue to scale. I think our folks really compliment them. They’re bought into our mission of helping consumers. So, we’ve got a really good thing going there, and I just may add, in the COVID environment, it’s really enabled us to recruit on a nationwide basis. So, I feel very good going into this year’s AEP, and feel really good about the platform that’s been built.

Daniel Grosslight

Got it, thanks, and just to follow-up, can you spike out some of the revenue contribution this quarter for IR production bonuses and any adjustment revenues included in the Senior segment?

Raffaele Sadun

So, in terms of IR, I think we talked about it before, the couple million dollars in terms of profitability, probably around four or so in terms of revenue contribution for the quarter, and that is both production bonus and other line items.

Daniel Grosslight

Okay, and is there any other bonus or adjustment revenue included in the Senior Segment other than $4 million?

Raffaele Sadun

Yes, I mean our traditional marketing development funds are also booked to that line item, and so, the combination of those two things that go to a production bonus line item for Senior.

Daniel Grosslight

Okay, and in aggregate, is that what is that number?

Raffaele Sadun

In aggregate for the quarter?

Daniel Grosslight

Yes.

Raffaele Sadun

So, for the quarter, it was about $19 million on a consolidated basis.

Daniel Grosslight

Got it, okay. Great, thank you very much.

Raffaele Sadun

Yes.

Operator

This concludes the question-and-answer session. I will now turn the call back over to Tim Baker, Chief Executive Officer, for closing remarks.

Tim Danker

So, I just want to thank everyone again for the time today. I would just want to wrap today’s call with a quick review of our value proposition on slide 19 of the investor deck. Again, first we compete in a large and growing market. It’s not really just driven by demographics, but also by a significant shift in the way that insurance bought and sold. Second, with over 35 years of experience, we’ve really thoughtfully build our two foundational pillars, proprietary technology, highly skilled agents to really optimize each stage of the business, so that we can profitably scale into this immense opportunity. Third, our businesses really aligned both with our customers and our carriers that write their policies, and we think that positive feedback loop deepens our relationship with both of them, which is critical to growing market share. Fourth, we continue to be laser focused on return on invested capital. Our model is built to optimize those returns across every function of the value chain. Finally, we just don’t talk about it enough, but SelectQuote’s 2,000 plus fellow associates are really where the magic happens and how this all works. We’re very passionate about serving our customers that’s what drives our success.

So, on that note, I’ll end this with a thank you to all of our SelectQuote associates, as well as our investors and analyst community. We are excited about the opportunity ahead. We look forward to talking to you again very soon. Thank you very much.

Operator

This concludes today’s conference call. You may now disconnect.



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