SelectQuote quietly went public last week and soared 40% in its opening day. The company now sports a $4 billion valuation. What’s all the fuss about? Strong growth, great margins, and great, SaaS-like metrics in its core senior insurance segment.
If you are my age (nearly 60), you remember SelectQuote from 30 years ago. SelectQuote is the company you called (yes, called) for multiple quotes on term life insurance policies. These folks have been around that long. The SelectQuote value proposition is similar today, except the process is tech-enabled from marketing to quoting. Also, the main business is not life insurance, it’s Medicare Advantage and Medicare supplement policies for seniors.
SelectQuote describes itself as follows:
We are a leading technology-enabled, direct-to-consumer (“DTC”) distribution platform that provides consumers with a transparent and convenient venue to shop for complex senior health, life and auto & home insurance policies from a curated panel of the nation’s leading insurance carriers. As an insurance distributor, we do not insure the consumer, but rather identify consumers looking to acquire insurance products and place these consumers with insurance carrier partners that provide these products and, in return, earn commissions from our insurance carrier partners for the policies we sell on their behalf.
For SelectQuote, consumers are on one side of the platform, insurance carriers are on the other. A tech-enabled software platform and insurance agents are in between. As every S-1 does these days, SelectQuote has a flywheel. SelectQuote’s flywheel is driven by consumer awareness, carrier integration, data, and machine learning.
Tech-Enabled, Not Pure Tech
SelectQuote is committed to human mediation on the platform using real-life agents. The company states:
Although we have the ability to conduct end-to-end enrollments online (my italics), our expertise and value add stems from the coupling of our technology with our skilled agents, which provides greater transparency in pricing terms and choice, and an overall better consumer experience. When customers are satisfied, their propensity to switch policies decreases, thereby improving retention rates, increasing policyholder lifetime values and ultimately, optimizing and increasing the visibility of our financial performance.
The most interesting part of the prospectus is the section on how SelectQuote routes leads to their various levels of agents, how they train agents, and the value the company feels agents provide.
At first, I thought “the lady doth protest too much” about the need for agents. But, recall that the company’s primary product is for consumers 65 and older. In this market, a human agent is a feature, not a flaw.
SelectQuote’s Gaudy Numbers
SelectQuote’s Senior products accounted for 57% of SelectQuote’s fiscal 2019 revenue and 73% of EBITDA. Let’s take a look at the economics of those health insurance policies and then the total company.
SelectQuote earns a commission (and some volume incentives) for the sale of each health insurance policy. The company earns an adjusted EBITDA of 47% on each policy. As you can see, the company’s revenue (lifetime value of commissions) to CAC ratio is 4.0x. Not shabby.
For the fiscal 2019 year, the company grew revenue to $337.5 million representing 44% growth. On this revenue, the company earned $72.6 million in net income and $105 million in adjusted EBITDA. That’s a 31% EBITDA margin. SelectQuote is a “Rule of 75” company. These financials explain SelectQuote’s market cap and 10x multiple! Apparently, those agents are not costing the company that much!
It will be fun to see how SelectQuote evolves over time in the glare of the public spotlight. The S-1 raises a few questions that all platforms of its type share:
- How do prices of policies sold on the platform compare with prices obtained by going direct to carriers or through other independent agents? (This is the same question, for instance, that online travel agencies face.)
- How does the algorithm determine which agent and policy to recommend? Is the recommendation based on which insurance carrier pays the highest commission? Or has the best volume incentive in place? Or is the recommendation based on the needs of the customer? Selectquote is an insurance agency, not a fiduciary.
- Will SelectQuote remain agent-mediated? Or will it conduct an increasing number of end-to-end enrollments without human intervention? Will data science and machine learning obviate the need for agents?