SelectQuote, Inc. (SLQT) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Frank Morgan with RBC Capital Markets. Welcome, everyone, to the RBC fireside chat with SelectQuote. Today's call is part of an ongoing series of events to provide more insights into the direct-to-consumer Medicare Advantage broker industry. This industry has emerged as a high-growth opportunity, which plays on the theme that MCOs are enjoying in the Medicare Advantage market: attractive demographics with additional upside from relatively low penetration rate in the Medicare-eligible population. Wall Street has certainly taken note. Including the most recent IPO, we now have 3 publicly traded companies in this sector. But with this growth, there have also been issues and concerns that hopefully we can address today. I would like to introduce SelectQuote's CEO, Tim Danker; and CFO, Raff Sadun. Welcome, gentlemen, and thanks for also providing a deck as part of this fireside chat today, certainly noticed several interesting slides, particularly Slide 20 and 22. We all know -- Tim, we all know that you operate in a high-growth industry, but we while we appreciate the fact that it's -- there's a lot of growth here. I think a lot of focus is now turning to the quality of that growth. And when we're doing today, hopefully, everyone has a better sense of the unique models and differentiation, certainly SelectQuote, from a business model and strategies perspective and on an operating perspective are all things we're very interested in learning about today. So Tim, we're going to cover a lot of other topics today. But let's start with your business model and your strategy and really how do you think you are different in the marketplace today.

Well, thank you, Frank. And for both Raff and myself, we really appreciate the opportunity. To your question, I mean, clearly, there is a large market opportunity. I think it's well known, you mentioned the secular growth in Medicare, the shifts in distribution from traditional street brokers to highly efficient direct-to-consumer brokers like SelectQuote, we're all experiencing rapid growth. With that said, though, the way that you approach the business, the actual operating model, if you will, and the consistency of the execution can certainly have a big impact on your results. So I think we should start and get grounded in our investment philosophy. So one of the hallmarks of our 35-year-old direct-to-consumer business, we got nearly a decade of experience in senior health care, has really been a focus on consistent, disciplined growth. So first and foremost, we've always had an intense focus on the quality of our growth with an ROI mindset. And the investment philosophy really is to try to balance our profitability with highly attractive returns on invested capital. So when we approach the business, everything that we're trying to build at an operational level, whether it's marketing, technology, workflow or highly skilled agents, our back-end client service is thoughtfully engineered really with ROI in mind. I think we'd looked to our track record of disciplined growth. It has certainly not been a growth at all cost type of mentality. And we think you can see that as evidenced in our industry-leading per unit economics and really an attractive high-margin business. And because of the durability of our economics, we feel like we're very well positioned to grow and scale into the large addressable market opportunity in a very disciplined manner. We're going to maintain this ROI mindset that we have in the past as we move forward. So bottom line, I would say not all the direct-to-consumer players approach the market in the same way or have the same underlying operational processes or may have the same extensive direct-to-consumer experience. All of these can play into the effect on results. And we certainly realized, right, we're a new public company. But I would say we shouldn't necessarily be lumped in with others as we have a different approach and, quite frankly, a different margin profile. I think Raff is going to speak to this more, but we have industry-leading LTVs and profitability per policy that's anywhere from $150 to $250 higher than our peer group. So Frank, I should probably pause there. I've covered quite a bit of ground. There's a few directions that we could go on how SelectQuote is differentiated at a process level, whether that be our lead-generation technology and the way we train our agents. So why don't I turn it back to you and see you where you might want to head from here?

Yes. I think that's actually a great segue in. So yes, I would be very interested in that process and, specifically, how that leads to better retention and reduces the potential for churn. So yes, let's start on the operating process side and then really from an acquisition perspective, from a sales perspective, and then we'll see how that converts in the numbers. We'll let Raff discuss the -- from the metric side. Go ahead.

That sounds great, Frank. So I'll start at the top of the funnel with marketing. We have always employed what we call a wide-funnel, omnichannel approach to lead gen. That allows us to source and consume leads from a wide variety of market mediums, which is important, right? It gives us maximum utility to tap into all the different ways that a senior might potentially express interest in Medicare products. So we're not pigeonholed, and we're not dependent on a handful of marketing channels. So then we're accompanying that with sophisticated marketing technology, which is really important. You can look at our P&L, you can see the dollars we're spending from a direct marketing perspective. And so we've built marketing tech that allows us to be smart about lead generation and buying as well as proprietary workflow that helps us really deliver the right lead to the right agent at the right time, which maximizes agent productivity, which ultimately, you can see in ROI and marketing investments. So that's kind of the front end from a marketing perspective, not to say that maybe some of our peers have some of those capabilities, but the level of sophistication, the level of data that we have and this ability to really consume a wide funnel puts us in a really good spot. We then couple that with a very important second part of the equation, which is our highly skilled agents: 100% internal, carrier commission-agnostic agent force. I know there's been talk about use of external agents in the industry. 0% use of external agents for SelectQuote, that's not been part of our model as really we've always philosophically believed in building a permanent career-focused agent force. Another thing that's different and unique to SelectQuote amongst the direct-to-consumer players is what we call our flex agent model. And our flex agent that provides us some benefits. One, from a recruiting perspective, and unlike some of our competitors, we're not hiring for a part-time role, we're hiring for a career opportunity in which the initial entrée for the agent is into our senior division focused on AEP, right, at managing that peak productivity opportunity. Because of the diversification of our business model, we're able to retain a lot of these agents in senior, but we also do what we call flex a portion of those agents into our term life platform. We're the #1 term life direct-to-consumer provider in the country, our growing final expense opportunity or our auto and home division during nonpeak AEP or OEP periods. So we think this is a great kind of holistic way to manage what we believe is one of the most talented agent forces in the country. We flex agents back into subsequent AEP and OEP periods where, historically, they have been 40% to 50% more productive from an agent productivity perspective. We think this is another good example of an ROI mentality and the inherent benefit in our model. I'd also say, as all the competitors are chasing the opportunity, we want to be consistent in our business results, and we think this is a great way to do it. Again, we're not hiring temps for temporary results. We're bringing in folks in which we can layer into the growth opportunity in a more predictable manner. Another quick thing, it's really important to your question about how does it drive higher retention. Again, these are complex products. Our talented agents are doing great work, trying to match doctors and drugs with the prototypical 70-year-old consumer who is on 5 different prescription drugs, and there's 20 different plan choices to choose from. So it's very important to get the consumer on the right plan on our choice platform the first time. That's the biggest thing that we have found that we can do to influence persistency is getting the consumer on the right plan upfront. That's one of the primary drivers, which is why we've spent a lot of money in our technology while we've continued to invest in our agent plant to make sure that we can accomplish that. We can talk a little bit later about things we do on the back end as well, but I'd say the final point I'd make is we're really looking at this from an end-to-end. This isn't about just driving market share. We've always tried to look at this from an integrated systems approach. So when we talk about our agents, they have skin in the game. We have compensation plans on a balanced scorecard that measure not only productivity and ROI but how the business is being retained with a very robust quality assurance platform. And then we have back end tools around consumer life cycle management and dedicated humans, our customer care organization, that try to help ensure that the consumer is happy with the plan that they're on.

Tim, how much of that -- when I think of a part of it, about right policy for the right customer, is there anything that you can identify as unique from the algorithms you use to help pick those plans? And then how much would you attribute just to, obviously, having a full-time employed agent on staff, you can have more influence over them, and yes, I think you mentioned compensation and this quality scorecard of how they retain business. Could you talk a little bit more about what you're doing both on that side and then on the -- just on the ability to effect a better outcome with -- in tying it to compensation?

Sure. Great question, Frank. I mean, on the front end, there is a lot of work that we are doing from a technology perspective to really assist in that matching process. So we think we do a pretty good job today, but we continue to make incremental investments in our technology for things like the prescription drug matching. That's a big driver of what we have seen in our historical experience around churn: unexpected cost in prescription drugs. So we're trying to continue to augment both from what we've built in our technology as well as third-party data to really help us get the formularies right, get the costing right and ensure that we get them on the right plan. So that's what we're doing today as well as some incremental investment on the front end. In addition, we have made a significant investment in what we call our consumer life cycle management. And that's a big part of really what's helping from a back-end perspective. And it's really the combination of, I'd say, probably 3 things that are really important. The first is really trying to understand one of the biggest elements that drive churn. So we are leveraging our historical data that we're capturing in our CRM and in our consumer life cycle management tool, so we're using our own historical data. We're getting data feeds from our carrier partners. We're also augmenting the third-party data. That helps us get our arms around understanding the drivers that cost churn and allow us to be in a proactive versus reactive mode. We're then feeding that information into our third-party tools, our artificial intelligence, data science, if you will, to constantly analyze who might churn, so propensity to churn type of viewpoint. We're then taking that information -- that starts our engagement strategy, which is twofold. It's people. It's the customer care group as well as our digital workflow. That may be things like e-mail, SMS, sometimes even direct mail. So we've already seen a positive impact in our ability to get in front of early churn events: the things that we may recognize, the withdraw or a potential lapse, we've got some campaigns where we're driving a 2x better save rate. I think we'll talk -- if we get an opportunity later to talk about our recapture rate, but those are all things that we're trying to do, both front end, back end, both people and technology, of leveraging our 10 years of experience and a robust data.

That's very good. Maybe we should talk a little bit, bring Raff into the discussion here to talk about how some of these efforts, both from a business model and strategic standpoint, how does that really get manifested in your operating metrics. Obviously, you and the peer group all report slightly different metrics here. And I'm hoping you could help us maybe understand these metrics that -- in terms of how you analyze and operate and gauge success of your business.

Great. Yes. Well, obviously, we receive a lot of questions about the various metrics that are out there. And there are some metrics that are consistent, but there's actually quite a few that are maybe unique to individual businesses that are not like-for-like across the board. And so I think, first, it's important to understand what those differences are, right? So yes, metrics like revenue to CAC, which is one of our metrics; or LTV to CAC, which is one of our competitors' metrics, are actually not calculated on a like-for-like basis and, therefore, not comparable. I think, in some cases, some of the metrics only relate to a subset of a company's Medicare business versus sort of a holistic view of their Medicare segments, whether it's internal or external. And that's important because some of these internal segments won't exist as they do in terms of their performance, their margins without those external pieces as well. So looking at it on a consolidated basis is really important. I think margins, again, really important to look at that on a like-for-like basis within the Medicare business, and so we've attempted to sort of create apples-to-apples comparisons, and we've had trouble doing that, be it either going our way or going their way based on the publicly available information so like, it's confusing for investors. And given some of the research analysts and reports out there, I think you guys have also attempted to do something similar. I think it's helpful to take a step back, though, and really ask the question of what is it that you're trying to measure and compare. So if it's marketing efficiency, I think our original metric, which is revenue to CAC, is the best way to look at that. It's -- for every dollar you're spending in pure media, how much revenue are you driving from that? All revenue: commissions, other revenue, market development funds, et cetera. And so that's one of our metrics. I think e-health doesn't necessarily disclose that metric, but you can back into it based on the information that they do disclose. I think for GoHealth, you can't really calculate it because they don't disclose their pure lead-gen expense at the segment level. And then even if they did, I think it includes some contra marketing expenses that they're getting from carriers, and so it's not really like-for-like. So until all 3 companies report similar metrics on that, it will be difficult to sort of just look at pure media efficiency. I think if you want to look at the overall efficiency of these business models, there are a couple of different ways to look at that, which are apples-to-apples based on what has been disclosed. And so I'd refer you to -- I think you mentioned a couple of these slides -- Slide 20 of the presentation that we posted today. This graph shows the per unit revenue, cost and profit per approved MA/MS policy across all 3 companies. So the graphs are based on what is publicly reported the last 12 months through March 31 for the revenue, cost and profit for each company's consolidated Medicare segment business, divided by approved MA and MS policies. And so as you can see, we have the highest revenue and EBITDA per policy amongst our public company peers. Our higher EBITDA per policy, which is about $150 to $250 higher, is driven by our higher revenue per policy. And we generate between $225 to $350 more revenue per policy. And that's really a result of our higher retention rates and, specifically, we believe, higher retention rates in the first couple of years of a policy. And that's a function of our agent-focused model, 100% internal career-based agents, which leads to customers buying the right plan upfront, which is a big driver of higher persistency rates. It's also very consistent and predictable, which helps us set expectations with our carrier partners and also allows us to invest in the business with predictable and stable returns. One thing to note is that the persistency rates for our core agents versus our flex agents, is actually very similar. So we do not see wide differences in the persistency rate of core and flex. Obviously, productivity, core agents are more productive. But in terms of the training that our flex agents are receiving, it's resulting in very consistent policies in the back end, similar to our core agents. So in addition to what we do upfront, we also have very targeted efforts on the back end in terms of our customer care team to help retain customers and get in front of churn events or identify gaps in coverage, which really helps the customer life cycle management of our customer base and leads to stickier customers. And so these are programs and initiatives that have been in place for many years that are sort of fundamental to how we run the business, focusing on the needs of the customer, which tends to work out well for them and, certainly, for us and our carrier partners. In addition to the revenue and cost per policy and EBITDA per policy on this page, we also, on the top end -- top right-hand side of the page, put an overall efficiency metric, which is really sort of total revenue divided by total segment costs, and that really measures overall efficiencies. And not just marketing efficiency but, really, for all of the costs involved in the business, how much revenue are you generating? And you don't really need to know how much is in sales or how much is in fulfillment and marketing because that's not necessarily disclosed consistently across the 3 businesses, but the overall cost is. And so as you can see, for every $1 of cost, we're generating about $1.7 of revenue. And while one of our peers has a similar ratio, you can also see that we have the highest EBITDA per policy, which we believe should be one of the ultimate measures of efficiency in ROI. Two other points just before we get off this slide. I think as evidenced by the slide, we generate very healthy sort of industry-leading margins. But our ultimate goal is obviously aggregate EBITDA dollars. We are focused on maintaining solid margins but also want to capitalize on the incredible growth opportunity presented in our senior health market. And so from time to time, that might require trade-offs to drive higher aggregate EBITDA. And so the focus on aggregate EBITDA and the ROI ultimately guides our decision-making. It's important to keep in mind, as an example, there can be situations where a lower LTV of a policy is tied to also a lower cost of acquisition. So I wouldn't get too hung up on that LTV metric in isolation. It really needs to be done on a holistic basis, looking at profit per policy, margin, absolute EBITDA to really understand the performance of the business.

It's very interesting and very helpful. Back to the point on the higher level of revenue per approved core policy, attributing that to higher retention, specifically in the first few years, can you maybe share with us some of the numbers around kind of where your numbers run from a trend perspective in those early years? Like what are your retention levels in those early years?

Yes, so I don't think we've given specific numbers per se, and I don't know that that's necessarily disclosed across the board either. I think one thing that I think we are comfortable of saying is the first year persistency, generally speaking, we believe that our persistency rate is 500 basis points. It's not greater, higher than some of our peers. And so that's a pretty wide margin, and that does obviously compound on itself. As you do the lifetime value math over that 10-year renewal period, you're starting with a much higher base basically every year, and so those first couple of years where, a, the retention rates are lower in those first couple of years in general; b, being applied to the most amount of policies, those years really matter. And I think that's really where we differentiate ourselves. And really, to Tim's point, getting the customer on the right plan upfront as much as possible, that is the biggest driver of persistency. By the time you get out to year 4, 5, the lower rates, I would imagine those are more similar across the 3 companies. And it's also -- and it trends higher, and it's more stable and it's also being applied to lower policy counts. It's just not as impacted.

Got you, very important point. And so let's take this as I think this is a good segue, we've actually had some questions coming in over the chat board. I think this is a good point to segue over to looking at and talking about translating our GAAP numbers into actual cash numbers. And so, yes, maybe from that perspective, when you think about your management of cash flows, obviously, 606 accounting creates some differences in revenues versus cash, for sure, certainly, but can you help us really -- let's talk a little bit more about managing the cash flow, balancing that against growth and in terms of what's been your historical success with cash flow generation and when do you likely see operating cash flow breakeven.

Yes. That's great, great questions. And actually, I think I'll refer you to Slide 22 of the deck that we posted. I think it's really helpful in understanding sort of the cash flow dynamics of the business and the ROI associated with specific cohorts. So it can be confusing just looking at the cash flow statement and looking at cash flow from operations and seeing losses to understand sort of the underlying trends and attractiveness of the investments that we're making. At a high level, it takes about 2 or 3 years to break even on a new policy sold in our senior division, which is the largest piece of our business. And as we grow, and certainly, at the rates that we have been growing, i.e., over 100% last quarter in our senior business, the cost of writing new policies does exceed the first year of cash we're receiving on those policies and the renewal cash from past cohorts, which leads to sort of use of cash on the cash flow statement. However, with that growth, we are building a bigger and bigger book of business, a commission receivable balance on the balance sheet that will bring in cash flow over time. And so the best way to understand do these investments make sense and what is the return on these investments is really looking at returns on a specific cohort basis. So what the slide demonstrates is the cash flow profiles of customer cohorts for the last 5 years. So for example, if you look at 2015, the orange bar represents all the cost of writing policies in 2015. The bar next to it represents the lifetime cash we expect to receive from those cohorts in 2015 broken out into 4 different components. So the first one, the gray bar is the first year of cash that we received from those policies in 2016. The blue bar is the cash we've already received from renewals of those policies sold in 2015. So it would represent 5 years' worth of renewals that we've already received. The yellow bar represents cash that we expect to receive from policies that have already gone through a renewal event. So the renewal piece has already happened, but because we get paid monthly, we haven't received all the cash from it, but we will receive it within the next 12 months or actually really in the next 6 months. And then the green bar represents the future cash we still expect to receive through the tenth renewal year on those original policies. So anytime the gray and the blue bars are above the orange bar, it means we've already broken even on that investment, that upfront investment, that we made upfront to write those policies, and it's all profit from thereon out. And as you can see, we're already well into cash flow-positive territories for the cohorts sold in '15, '16 and '17. For the 2018 cohort, we've just broken even, so basically all future cash that we receive from that cohort will be profit from here on out. And that sort of fits within the 2 to 3 years to break even on a new policy. And then for 2019, we have almost broken even already on this cohort, which is a little bit faster than maybe normal, and it really has to do with 2 things: one, we operated the business at 47% margins that year, so that's a big driver; the second is our marketing development funds or production bonus dollars that we received that year as a percent of our total revenue was a little bit higher than it had been historically, and those dollars tend to be paid upfront, so it helps in terms of breaking even faster. So you can see, we've more than recouped the cost of writing policies the last 5 years. And going forward, they will all be profitable. When we add 2020 to this graph, when we do disclose our results for fiscal '20, 2020 would still not be breakeven, but we would expect it to follow the same trajectory and break even within sort of that 2- to 3-year period. And so this is why we're so confident about the investments that we're making. We have clear visibility into how and when they start producing positive cash flows and what the returns are, which we think are highly attractive. The last point I would just make on this slide is that there's been a lot of questions about churn and persistency and the impact that that has, as you can see here, if -- and I want to stress the word if -- if there are reductions in persistency, they will take a small portion off of the top green bar, but the overall profitability from these cohorts will still be very, very positive and the return very attractive. And this only represents the cash flow expected through sort of that tenth renewal period, but there are going to be policies for each of these cohorts that renew beyond that 10-year renewal period, and that's not captured on this graph at all yet.

Interesting. So when you think about your growth, obviously, we talked earlier about the growth in this industry, sort of balancing that against cash flow. We get a lot of questions. In fact, there are questions coming in right now about just the notion of breaking even on cash flow. So what are your thoughts about when you'll actually achieve operating cash flow breakeven as an enterprise? And then maybe talk a little bit about the levers there that you can pull to change that, to accelerate it or take advantage of opportunities.

Yes. So I guess, first of all, being cash flow positive, we can be cash flow positive next year by pulling back on the growth, right? So that's a blunt instrument. And quite frankly, we don't think that's in the best long-term interest of investors, but that's important. That's something that we can do. What we said as part of the IPO process, and the reason for raising the proceeds as part of that, was we wanted to raise enough money to be able to grow for the next several years at the growth rate sort of implied by some of your forecast there without having to raise additional capital. And at that point in time -- we'll look at what the opportunities exist at that point in time. And to the extent that they continue to be attractive, that might require raising additional capital in a few years' time. I think in terms of sources to be able to do that, there are multiple levers in the business, both in terms of pulling back growth or, to the extent we want to fund future growth, whether it's additional, follow-on offerings or additional term debt or revolver balance or securitization -- we used to have securitization in our auto and home business, we paid that off as part of the IPO proceeds -- but there is a lot of demand for a product on the senior side. And so I think, in addition to that, we're also looking at opportunities within the business to generate more cash upfront with some of the products that we sell. So whether that's final expense, which has a faster cash-generation profile, we're in constant dialogue with our carrier partners to sort of optimize our commission streams and get paid for additional services that we can provide on the behalf. So those are the types of things that can impact the overall cash flow profitability and the timing of that. But honestly, we're a little bit less concerned about the time frame for sort of positive cash flow from operations as we are more focused on the returns that we can generate for the opportunities that we're seeing in the marketplace. And hopefully, investors will continue to be excited about the prospect of investing alongside us and earning those types of returns.

That's very helpful. And I guess we'll go more -- a little bit into more general across-the-board questions here over the next few minutes, and then we'll try to get some questions off the chat board as well. But I guess, you mentioned this earlier about the recapture rate. And certainly, one of your peers discloses that recapture rate. So how do you track -- I mean do you think this is an important metric to track? Obviously, I think it is, you brought it up. So tell us -- give us your thoughts about the notion of recapture as part of that churn process?

Yes. So we -- obviously, we track that metric as well. And we do think that is an important metric. I think if you look at year-to-date customers who have lapsed, we recaptured over 25% of those customers, which I think compares to around 10% or 11% for one of our peers. This figure has increased each of the last few years and is driven by sort of all of the work and programs that we run on the back end with our customer care team that impact our retention of customers. When you look at that recapture -- those recaptured policies, roughly 40% of those are recaptured with the same carrier. So technically, that would not be a churn event for 606 purposes because we measure cohorts at a carrier level. 60% of those recaptured policies are with a different carrier. And so that would be a churn event for 606 and, effectively, a new customer with a new LTC for that new carrier. But the persistency rates that we use assume this type of activity already, so it's all embedded in the calculation we use upfront. When we do recapture a customer, whether it's the same carrier or a new carrier, we do tend to benefit from the updated renewal rate that's in place at that point in time versus the original renewal rate. And so that's an additional benefit sort of as we recapture customers. One other thing I might just add before moving on here is some of those recaptured customers have come back to us based on either new leads that they filled out or marketing dollars that we spent. It's not 100% pure margin, but it's still obviously very good that we're retaining those customers within our overall complex.

Got you. And staying on that, the topic of growth. A lot of it is just purely predicated on head count adds, right, just adding agents. So really, from your perspective, how important and to what extent is this true for you in that aspect?

Yes. I mean I think we do not assume sort of increasing levels necessarily of agent productivity in our models. We've experienced that -- we don't assume that necessarily in our forecast. So it's really the number of agents that we have in our business and the mix of flex and core. So on one level, our professional sort of career-based agents and purpose-built technology produces agent productivity that are multiples higher than the typical field agent, right? I don't feel that that's a surprise to anyone. When we think about sort of productivity of an agent in our senior business, we really think about it in terms of MA and MS submissions. And so that calculation includes average productive agents, which is a combination of core agents that are here with us for 12 months of the year, and then flex agents that are here within our senior business for 6 months, October through March, then may go off to do other things. But -- so that blended average productive agent is based off of those 2 pieces. And on a blended average basis, each productive agent is submitting around 400 policies a year, which is a mix of our core agents that are producing well over 600 policies through the year; and our flex agents, which are producing around 250-or-so for the 6 months to a year. And so obviously, that total average -- blended average is going to move around based on the percent of our agents that are core versus flex. That's generally speaking how we think about it.

But I would say, Frank, I don't know if this is roundabout germane to the question but, obviously, the actual agent head count is a big deal. And as you know, we're all preparing for this upcoming AEP, so the Super Bowl of Medicare. So this will be our ninth AEP. We're continuing to build upon and improve the quality and scale of our all-internal agent force. We certainly feel good about where we're at. The COVID environment has put us in an even better position. It's allowed us really to build upon our remote agent capabilities that we had pre-COVID, but it's now kind of opened up the ability for us to hire beyond our traditional physical geographies where our sales centers are located to build a robust nationwide network of agents, if you will. So I think the recruiting pipeline has been very robust. We have made a decision, from an AEP execution perspective, to do this as a virtual AEP, if you will. And that's been going on for some time now with respect to new agent recruiting. From a training perspective, when we go into actual sales execution during AEP, our current position is that we will do that virtually. We think that's in the best interest in the health and safety of our associates. We think it's the right cost-benefit trade-off and preserves goodness that we have seen thus far because, again, for 35 years, we've distributed product telephonically. So it was probably a little bit easier for us than others, and we've got the tech stack that promotes it. So we continue to work very vigorously on the virtual aspects of this. I feel like we're really in good position and on track to achieve the hiring plan. We feel good about where we're at.

Got you. And I guess on the subject of COVID, there have been a lot of discussions on some of the managed care calls about the impact that that's having on the field marketing organizations in the marketplace. So have you had any discussions with your carrier partners about assistance to you or any kind of reconnaissance you've had in your discussions with those carriers about the opportunity that may be available for you now given the fact that this field marketing organization channel is going to be impaired because of COVID?

Yes. Great point, Frank. And yes, I mean, clearly, there were shifts going on from the legacy field models pre-COVID, and that's only accelerated. And our carriers are still highly dependent upon the production from those channels, albeit they're at much slower growth rates than the high-growth direct-to-consumer. And so we have had lots of discussions with our carriers because some of our brethren, if you will, in the field model are challenged in a socially distant environment. I think we have through our roughly 10 years of history and a proven and predictable track record with our carriers of actually executing upon what we say we will do. They continue to lean in. They continue to look for us to be able to grow even more rapid rates than we have typically. We can also benefit from these deep strategic relationships. Sometimes that can manifest itself in the pods as a way for us really to kind of supercharge growth. So I think the biggest thing is that -- they don't tell us exactly what's happening on the other side of the fence, but the tone is we would love for SelectQuote, as a proven partner, to continue to do more. And I think that speaks volumes to the quality of the business that we write with them, right? We're high-growth quality at scale. And so they continue to come to us to look for more.

And I guess on the subject of those field-based marketing organizations usually selling one product, what type of advantage do you really see? Obviously, you're much more diverse in terms of your relationship with carriers and much more diverse versus some of your peers, but how much of a competitive advantage do you see that when you were in the marketplace?

Well, I mean I think, fundamentally, Frank, I mean, having the choice platform is absolutely paramount. That has been -- from 1985, part of our business model is lining up the best blue-chip carriers and providing transparency and choice to the consumer. And when we say that our agents are commission-agnostic, we want that so there's never a blur between making sure we're doing the right thing for the consumer. So on the senior side, we have got relationships with the best of the best with the managed care organizations. They're in very integrated relationships. We think it's validated by some of the pod relationships that we have. And that's different than sometimes a field-based model where they may be a captive and they only have one or they have an unlimited selection of carriers which, ultimately, to take this back to the topic at hand around retention and churn, we think having a wide array of high-quality choices, putting the consumer in the right plan upfront and then allowing to keep dialogue with the consumer through consumer life cycle management of combining people and digital workflow to ensure that the underlying needs of the consumer are being met, are all of the things that kind of go into the soup of driving highly retentive business.

Staying on that thought about the life cycle management of the consumer, obviously, a lot more plans, we hear about these huge number of MA plans that are available today. And how much of the issue of churn would you really attribute to the fact that there are just so many plans out there. And obviously, you're being very helpful in, hopefully, getting the best plan. But how much of a problem would you -- or how much would you attribute just the sheer number of plan options out there today to this whole issue of about churn that some of your competitors have discussed?

Yes. I think there's a couple of things that you need to manage. One is just from a marketing perspective, and that's where our wide funnel and our analytics and our ability to really kind of predict what we call the gap between lifetime revenue and acquisition cost comes into play. But specifically, to your question, around plan choices, there's a lot, I think, on average, it's something around 20 to 25 in a particular consumer's geography. There's obviously a proliferation of additional plans that are coming out. And that's really where, I think, as a company, we have hitched our wagons to national carriers that really provide great benefits and some continuity in their design. It's not to say -- because we're always looking at ways to fill in kind of gaps in the network, if you will, but for those, it's just really where the agent comes in. It's where we spend a lot of time making sure that we educate our frontline advisers and provide technology and tools that help them make the right plan selection. So I do think it can be a driver. I do think it's really managed by the combination predominantly around a highly skilled agent force but also technology and tools that can augment that.

And I would also just add to that, our recapture rate, obviously, to the extent that people are turning out, is a function also of sort of that persistency rate. And so I think that's another thing that, to the extent that people do decide to switch plans, they're doing it within our complex. Obviously, it's not necessarily a bad thing for us.

Got you. And I guess let's just stay on that for just a second. Getting back to the very, very basic here, how does the customer process of changing plans typically start? I mean we know it always -- if it's going to happen, it usually happens very early. But kind of walk us through like how -- what would be -- if there's such a thing as a typical example of how this begins, could you walk us through that?

Yes, sure. Again, as I mentioned before, one of the biggest drivers for why churn happens is that the consumer has an unexpected cost in their drug benefits that accompanies their MA plan. They can also find that their doctor's out of network. And that's really where, right, again, the investments that we're making upfront of subscription drug matching, consumer education, trying to save them money on their pharma and, I'd also say, just work that we're doing to try to improve the consumer health care experience. But the point is, and to the point of your question is, it's not a static world that we live in. The consumers' needs aren't static. The carrier plans are always changing. And that's really where we have to leverage our data, understand what's driving the churn and provide the solution through humans and our consumer life cycle management. You're right, it does happen a lot kind of early on. I might let Raff talk about what we see in terms of how quickly that can start. But ultimately, the consumer that may not have been eligible for a plan that we sign them up for, there's certain dissatisfaction that they have with their plan or, quite frankly, unfortunately, sometimes consumers inadvertently cancel their MA plans, they may switch PDP, and they don't really realize that they're also canceling their MA plan, this is where our back-end customer care organization -- now, I believe, is 130-associate strong, we're going to grow it by the start of AEP to over 250, and this is where the data and humans come in to kind of proactively get in front of it. Raff, do you want to speak a little bit to the timing and numbers?

Yes. I mean if you think about a new policy sold in AEP, there's obviously some follow-up that happens between a policy being approved and it ultimately going effective. And that can range anywhere between sort of 8% to 10%. And then from there, the first couple of months of the new year, so January through March, you can see sort of 2%, 3% churn in each of those months as people have an opportunity to switch plans during OEP. But from there, without additional sort of switching periods, we normally see the churn drop until you get to the renewal at the end of the year, so it sort of stabilizes. Basically, people use their plan. They don't really have an opportunity to switch out of it. And so that's, generally speaking, sort of our experience. I will say one of the things that we look at, obviously, is sort of the lapse rate year-over-year. And generally speaking, there's nothing fundamentally that has sort of changed in terms of the business over the last 12, 16 weeks. You've got this incremental SEP period that did happen in the fourth quarter here, but our lapse rate year-to-date are roughly in line with last year on a year-over-year basis. There's a slight uptick in sort of second-term lapses. But actual -- our first-term lapses actually ticked better year-over-year. And so that's a function of some of the initiatives we rolled out over the last 12 months on the front end in terms of getting people on the right plan but then also on the back end in terms of the [ field-based team ] and our retention initiatives. And obviously, there's a lot of focus on churn and persistency, and that is obviously an important metric in terms of the LTV, but it's not the only metric. And so again, I wouldn't get too hung up on that metric in isolation. There are things that we do from either a capture standpoint or different carrier mix or increasing rates or additional services that we can provide carriers that go into sort of the LTV calculation and the revenue that we receive. And so just focusing on churn, I think, is a mistake. It's really the holistic combination of all those things which, ultimately, all of that gets represented in sort of the EBITDA that you're producing and sort of the EBITDA per policy. And I think that's looking at it on a holistic basis is really important.

Got you. And I guess are consumers -- how aware are MA consumers today about the open enrollment period? Do you get a sense that more of your customers or aware of, "Oh, well, if I get in the wrong plan, I can always bail out and do it, change it next quarter during OEP."? But I mean is it -- is this a concept that your average MA -- potential MA customer is aware of?

I don't know that they're particularly well versed. I mean OEP is a relatively new concept, and you can't actually advertise during OEP to switch plans. I mean there's just general advertising that takes place. So I don't know that that's very well understood by consumers.

Got you. Well, we're getting a little bit closer to the end of our hour, but I wanted to switch over to -- obviously, the web-based model is something that your 2 competitors do to varying degrees. But what are your thoughts about or interest level in expanding into the web-based model?

I'll take that one. So fundamentally, we believe that there's a lot of power and leverage in our career agent force combined with technology. That's what we think is the thicker sauce of our leading profitability per unit economics. I do think we see, at least in 2 of the 3 public companies, that this hybrid model has yielded higher sales conversion, better return on marketing investment, higher margins than just kind of a technology-only approach. That said, we've been very clear, we have the technical ability to provide online fulfillment. We are going to begin what I'll call a test-and-learn approach. It's an online fulfillment on a small scale early this fall. This is very much going to be an additional complement, right, to our agent-driven model. It's certainly not in lieu of that model but -- and it's an approach, I think, that's a little bit different than what we've seen from some of our competitors. And it's going to allow us to continue to augment learnings about the places where we think this can make sense. Market dynamics can change. And if, in the future, we see that from our data first that allowing consumers to do more online will maximize return on investment and drive higher shareholder value, then we're prepared to do it, but that's kind of the current state of where we're at on that, Frank.

Got you. I'll grab one off the chat board here. We've obviously talked a lot about ASC 606 and a lot of the assumptions that go into that. But just curious, investors are asking, are there any other non-GAAP metrics that you could point us to that would help to see the strength in your future revenue streams? Any other measures?

I mean I think that the slide that we presented on Page 22, I think, is the best representation of what to expect from a cash flow progression standpoint. Obviously, ASC 606, the revenue is going to be derived basically by the policies that are written in that specific year. So things like the LTV of a policy, that's a big driver, obviously, of some revenue for that year. And then to the extent that there are cohort or tail adjustments, that would reflect there's some changes from historical assumptions. But yes, from a purely cash-generation perspective and are those investments paying off, I think looking at Slide 20 and 22 that we posted probably makes the most sense to look at that.

Got you. Okay. Here's one. Any thoughts about the effect of the outcome of the presidential election in terms of your long-term prospects? Is there -- do you have a view on what would be the best outcome for your business and for this industry?

Yes. I think we are -- I mean we're very well positioned either way. I mean I think we could go down the path of talking about a Biden-Harris ticket win. If they win, Democrats still need to take control of the Senate. If they do, Biden has been pretty clear that he doesn't believe in the elimination of private insurance. Obviously, with Obama, very much a proponent of the Affordable Care Act. I think the general tone has been one of expansion of Medicare, not contraction via a combination potentially of a public and private option. There's even talk about lowering the Medicare eligible age to 60, which would certainly be a boon for the business. I think Kamala has clarified her position on health care and says that it involves private insurance. Any changes, we think, will probably take a fair amount of time. But at the end of the day, Frank, I would say consumers, they want choices, they want advice. We've got a really great customer acquisition mousetrap. And ultimately, I'd say we are well positioned in multiple political environmental outcomes.

Got you. Here's one on agent retention. How critical -- why is agent retention such a key in terms of your success?

It's really important. We've been beating the drum pretty hard about our hybrid model of technology and agents, but a lot really centers around our highly skilled agents. The fact that we're building this internally, from the ground up. Our -- we do an excellent job, in my opinion, of retaining our agents. Our top agents, our level 1 agents, are retained at 93%, which is really phenomenal. And the top half of our bell curve, we just -- we really do a great job because we've -- right, we built the flywheel that allows them on a merit-based system to consume more leads, to drive higher agent productivity, ultimately, to make more income. And we think that that's really important. So we spend a lot of time over the -- really, it's been, I'd say a 30-plus year journey, accelerated in the last 5-plus years to really do a great job of retaining our agents and building the type of culture where our agents are sticky and want to deliver like they have, even as we moved to everybody home, so we feel really good about it.

Got you. And I guess, with those highly productive agents that you're retaining, any metrics you can share about that in terms of their ability to -- even in the face of if you have higher acquisition costs, kind of what is the offset that a highly productive sales agent can have on your overall growth?

Yes. I mean I think I'd sort of go back to maybe the comments I made before in terms of how we think about agent productivity of an average productive agent. And during AEP, right, our core agent are well over 50% more productive than our flex agents, right? And so to the extent that we can keep a high portion of our flex agents as full-time agents after AEP and OEP, put them into one of the 3 divisions, right, has since come back and they're selling again but just haven't stayed within our senior business, that obviously has a big impact in terms of the overall efficiency of the model. And I think that's one of the true benefits that our business model provides is that we don't have agents that are falling off. Like, we're hiring these agents, we're training them. We get the long-term benefits, right, of having them stay within the business and being productive outside of AEP and OEP and then also the productivity benefits of having sold more -- the more of that we have, the better we're going to be, right? So if they've been here 2 years, 3 years, it's just going to be better than someone who's only seen the ball for the first time. So I think that goes to sort of that strategy in terms of keeping agents and having a career opportunity for those agents over time.

Yes. I think that's well said. Just to bring it together on kind of some of the quantifiable, again, we're trying to paint a picture here of the consistency of growth that we can drive and our approach to agents and the diversification of the model and the ability to flex in and out. So I think 93% top agent retention, because we have the ability to flex people into other divisions during nonpeak periods, when we bring them back, they are 40% to 50% more productive. Also, given a lot of the discussion around retention, we've actually analyzed the persistency results of our core and flex agents. And to Raff's point, while the core agent does more policies, from a retention standpoint, we have found both our core and flex agents, from a persistency perspective, to be very similar. So I think these are all kind of good markers of, again, the quality of growth that we're really driving.

Thank you. That's quite aggressive. I guess we're at the end of our time. Just any concluding remarks you would like to make, and then we'll end the call.

Well, we'd just thank you, Frank, so much for the opportunity to share the story. We are -- like many folks on the call, I'm sure, we realize that there's this massive opportunity that's out there. I would say not all direct-to-consumer companies are created equal. And that's certainly not meant to sound arrogant, just it's been our approach to building it from the ground up, to nail it before we scale it, to really focus on the combination of ROI, durable economics while also driving the growth opportunity. So we appreciate to hopefully shed a little bit more education and light on subjects that were of interest to the investor community, and we thank you very much, Frank.

Well, thank you very much for your time, and I hope everyone on the call has a good day. And if there's anything we can follow up with you directly, just call us (615) 372-1331. Everyone, have a good evening.

Thank you.