SelectQuote Inc (SLQT) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to SelectQuote's Fiscal Fourth Quarter and Full Year 2020 Conference Call. (Operator Instructions)

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

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 website, 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 website. 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. (Operator Instructions)

As referenced on Slide 2, during this call, we will be using 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 website.

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?

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 3, 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 $141 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 these differentiators today as well.

As you all know, SelectQuote completed a very successful IPO in May of this year, and we are 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 our team who's 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 4, 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 in choosing the right policy for them across senior health, life, and auto and home insurance. SelectQuote has over 35 years of operating history, and over that time, we have 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 2 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 on the front end and back end are core to customer persistency and our market-leading LTVs.

On the right, we have a healthy addition to data and have invested heavily in 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 and 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 5. We play in a huge market currently representing about 60 million Medicare customers. Each year, an additional 4 million customers age into 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 6, 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 purchased 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. What 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. In 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 7, we presented 2 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 extensive 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 and 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 through 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 in deciding upon an insurance policy is daunting for most people, and mistakes pertaining to details like physician networks and prescription drugs can prove costly. We believe our internal, commission-agnostic, agent-led 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 8, let me briefly touch on another differentiator to 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 2 enrollment periods of AEP and OEP that span from October through March. To put it briefly, we believe there's 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 returned 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 advisers 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 9. 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 1 is much more likely to renew and extend the lifetime value or cash flow stream for both 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 2 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 of 76%. We will detail each of our segments in a minute, but as you can see in these charts that our Senior division is fueling our growth and now represents 68% of revenue and 80% of our EBITDA before corporate expense. We expect that trend to continue given the large and growing opportunity in the senior health market. Over the past 2 years, our Senior division revenues and EBITDA have grown by 253% and 297%, respectively. Raff will provide further details on 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?

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 represents accelerating growth compared to our full year growth as we leverage 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 $362 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've 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 Inside Response acquisition on May 1, and this business was included in our results for the last 2 months of the quarter.

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 benefited from our strategy of hiring a 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 in nonpeak selling periods, our 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 than flex agents. We also benefited from the special election period in May and June that allowed seniors to make a change to their plan if they had been impacted by COVID. While this special election period was onetime 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 2 main crosscurrents. 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 the 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 volumes towards carriers that have higher persistency. And lastly, we have benefited from increasing commission rates and additional fees from carriers for services that we are 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 lapsing customers. Let me state clearly nothing has fundamentally changed on the persistency front in the last 5 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 used 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 we've received many questions from investors. There's 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 3 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 segment 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 cost incurred. This is as apples-to-apples as is 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's Senior segment, not just marketing. For every dollar of cost we incur in our Senior segment, we generate 1.7x that amount of revenue. While this is similar to one of our peers, we'd also note that our EBITDA per 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 was driven by a 52% 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, growing 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, but it remains to be seen if this is sustainable as continued shutdowns occur later in the year. For our final expense product, over the latter 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 have 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 and years, namely that 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 swing Life 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 and 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 swing 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 the EBITDA per policy is similar to selling a final expense policy. However, final expense policies have an approximately 1-year breakeven period, and agents can sell more final expense policies during the course of the day than Auto & Home policies. Therefore, for now, it 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 as 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 upfront 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 used $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 0 drawn on our $75 million revolver. We also ended the fiscal year with $597 million of accounts receivable and short- and long-term commissions 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 2 to 3 years to break even 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 2 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 on 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 6 years. For example, if you look at the 2015 bars, the orange bar represents all the cost of writing policies in 2015. The bar next to it represents the lifetime cash expected from those cohorts broken out into 4 components. The first gray 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 policies sold in 2015. So it would represent 5 years' worth of renewals that have already renewed. The yellow bar represents cash we expect to receive from policies that have already renewed. So 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 tenth renewal year on those original policies. Any time the gray 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 profits 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 receive from this cohort will be profit from here on out, and that fits with the 2 to 3 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, as a percent of our total revenue, was higher than it had historically been and the fact that we had 47% margin of that year in our Senior business. You can see we've more than recouped the cost of writing policies for the 5 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 break even within 2 to 3 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 that, 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 very attractive. In addition, this only represents the expected cash through the tenth 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 earns substantial returns on our invested capital. Two, our payback period tends to be in the 2- to 3-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 the 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 another way, while we do not expect to be cash flow positive in the near term on a consolidated basis given our growth trajectory, we are significantly cash flow positive when viewed on a cohort level, which, in our opinion, is what really matters.

Turning to our guidance for fiscal year 2021 on Slide 18. As discussed earlier this year, we will be providing annual consolidated guidance for revenue, adjusted EBITDA and net income. We expect consolidated revenue 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.

(Operator Instructions) Our first question comes from Jailendra Singh with Crédit Suisse.

Congratulations on a good first quarter as a public company. First question, I was wondering -- maybe 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.

Yes. So I think 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 thing 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 2 things that I mentioned before.

Okay. And then on 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 flex you are expecting in fiscal '21? That would be helpful.

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, 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 a little more agents as part of OEP this year. So -- or AEP this year, so probably 65% 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 are holding them constant with respect to our forecast, historically, we have seen improvements there, as evidenced obviously, also in the fourth quarter here.

Our next question comes from Frank Morgan with RBC Capital Markets.

I guess you made a comment about the effect of a positive effect of carrier mix on having -- 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 that higher persistency.

And then my second question would be, when you think about your customer retention team in your model, any particular tweaks or changes you've made with the proliferation of zero-premium plans?

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 have done an 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 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 -- to drive that?

Yes. And specific to your question, Frank, on the -- why we see carriers increase mix and why their persistency may be better, 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 are 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 to kind of match those carriers that we see the best persistency with. Bill, do you want to take the CCA?

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. First, we've spent kind of the last 5, 6 years developing our customer care team and the technology that we use to determine who's the most likely person to churn out. We continue to learn about our customers and get smarter and smarter and to develop more and more technology in terms of how we reach out to them, what affects churn. So whether that'd be your point about zero-premium plans, whether it be something with 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 reaching with our technology around 70,000 of our own 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 it, Bob mentioned it. It's these extra offerings that we can offer the outcomes in terms of outcomes on overall health care and the other products when we talk about cross-sells and things that we can offer them to continue to tie them closer to SelectQuote and build persistency.

Our next question comes from Sarah James with Piper Sandler.

Congrats on a great quarter. I was hoping that you can help us with context. 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?

Yes. Sarah, great to hear from you. This is Tim. I mean there's multiple things that the team is really working on that, 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 we're 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 talked about our marketing CAC, our wide funnel that allows us really to concentrate on the highest lifetime revenue to 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 plant. 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?

Yes. Absolutely. So I'll talk about -- when you talked about some of the specific things and what drives it more than others, there absolutely are critical elements of someone's plan that may drive persistency, and then the action we take 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, what may have changed within the environment that would allow us and how aggressive we're going to be in reaching out to that consumer. So things like that could include changes in pharmacy networks. They can include changes in specialists, different things that might affect someone's coverage. So that rating, right, in terms of how we rank those folks, 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 then 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 rate should something have changed with their plan where another plan is a better fit for them.

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 recapture rate goes up, do you guys get a performance bonus? Or is there a lower CAC on recaptured life? Or how should we think about that metric changing?

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. It's just part of the persistency rates that we've used upfront to calculate persistency for that carrier. And that represents 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 tail associated with it. And again, that's 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 that commission rates are increasing over time, we benefit from a higher commission rate at that point. Bob, would you add anything to that?

Yes. I think that the one thing I would add is the 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 SEPs that were introduced this year with COVID and the second OEP being out there. Our scoring and risk profile and then driving marketing towards that group on the back end so we get those folks back in the funnel really spells how much of an impact our scorings had on that recapture rate.

Our next question comes from Dave Styblo with Jefferies.

I just want to start out 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. I think it's 85% or 90% growth in the last couple of years consistently there. What in your mind sort of caps that in terms of how fast you want to grow? What can the infrastructure hold in terms of being able to adequately train your sales agents to ensure that it's quality growth versus think that would just sort of start to really impair the model? So maybe those areas would just be of interest.

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's any operational constraints to growth. With that said, I think we have 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 2 levers for growth. They're very important. And maybe I'd ask our Chief Operating Officer, Bill, to speak to them a little bit more color. But it's really around people or 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 2 and then maybe come back and talk about the other divisions. Bill?

Yes. Great, Tim. Thanks. I think 2 factors that near and dear to me certainly that we concentrate on day in and day out in terms of growth would certainly be the recruiting of our agents and marketing. So I think on both those fronts, we feel really good about the teams and the approach and the technology we put together. As it relates to marketing, certainly, I think that our approach has always been a wide-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've 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 what we've done. We've had a great team. We treat recruiting just like we do our sales force in terms of a résumé as a lead. We score our résumés. We have a great understanding for someone that we think is going to be successful within our organization. I 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, it's struggling. 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 more and more résumés, which allows us to be more and more selective about the talent that we bring to the organization.

Dave, just coming back to your other points about the other divisions really quickly. I -- we have had really great strength in the final expense offering. I'd ask Bobby Grant to really speak to that because it's a great growth opportunity within our Life segment. We're growing our core term business. There's a few headwinds there with respect to the paramedical exams and 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.

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 sale. So we see agents get to "tenure" a little bit quicker, which has 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 in the future.

Our next question comes from Lauren Cassel with Morgan Stanley.

Great. Just wondering if there's a way to quantify how much the special enrollment period during COVID benefited the quarter, certainly came in better than we were expecting. Or I guess another way, was there any sort of underlying organic increase in productivity that was better versus your expectations?

Sure. Yes. I mean I think -- sorry. I was going to say maybe I'll hit on the financials and then hand 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?

Yes. And 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 our agents, driving obviously better agent productivity with that.

Our next question comes from Steve Valiquette with Barclays.

It's Jonathan Yong on for Steve. I just had a question on the LTV assumption 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 slight LTV assumption? Is it just that because of the slightly lower persistency for the other carriers that's just dragging down the whole thing? Just curious to get the color there.

Yes. No. I think -- 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 talked about before, any time you have these sort of additional election periods that allow consumers to change their 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 for LTVs 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 carriers that 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 in MA policies this quarter.

Okay. And just turning to your relationship with Iora Health. Can you just kind of go over that relationship? What are the economics? What exactly are you doing for them?

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 their customer satisfaction could be better at those facilities. And what we've seen in the data with the carriers that 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 them 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.

Our next question comes from Elizabeth Anderson with Evercore.

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 what sort of surprised you there.

Elizabeth, this is Tim. Yes. 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'm going to ask Bill to talk about some of the early wins we've really seen on relationship.

Yes. Absolutely. So one of the -- we were -- I think our thesis around that investment 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 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 2 organizations that continue to play out very positively. But Raff, I'll turn that over to you on kind of the...

Yes. I mean obviously, we closed the acquisition May 1, and so it was included in our results for the last 2 months of the year. It was a couple of million dollars in terms of profitability that it added to the quarter. So that's -- I think that's what we can say in terms of the fourth quarter.

Okay. Perfect. That's helpful. 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?

Yes. So I think we have a very specific plan in terms of the -- that we put -- are 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 on other channel. So one of the things about our model is we're extremely nimble. And if 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 literally 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 be 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.

Yes. I think what Bill has really and the team have built on this point has really been attractive 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't. And we think that puts us in a really good space as we continue to scale into the opportunity.

Our final question comes from Daniel Grosslight with Citi.

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, has it become more difficult to hire agents? And do you anticipate having to increase retention pay at all?

Daniel, this is Tim. I would say that this is one of the benefits that we've really had in the businesses, 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 or Auto & Home can pivot into Medicare during the peak selling season which -- and they're returning kind of sophomore year, if you will, of 40% more productive. We do a great job of keeping our top agents, 93% top agent retention. So we feel like we've built a really good mousetrap. It's allowed us to be more consistent with our delivery as 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 on 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.

Got it. And just a 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?

So in terms of IR, I think we talked about it before. It's a couple of million dollars in terms of profitability, probably around $4 million or so in terms of revenue contribution for the quarter. And that is booked to production bonus and other line items.

Okay. And there -- is there any other bonus or adjustment revenue included in the Senior segment other than that $4 million?

Yes. I mean our traditional marketing development funds are also booked to that line item. And so it's a combination of those 2 things that go to the production bonus line item for Senior.

Okay. And in aggregate, is that -- what is that number?

In aggregate for the quarter?

Yes.

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

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

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 is bought and sold. Second, with over 35 years of experience, we've really thoughtfully built our 2 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 business is really aligned both with our customers and our carriers that write their policies. And we think that, 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. And 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're excited about the opportunity ahead. We look forward to talking to you again very soon. Thank you very much.

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