SelectQuote Overstates Revenue, Discloses Federal Subpoena
Insurance platform misstated financials in each of its first two years as a publicly traded company, is understanding its future lease liabilities, and is the target of a federal probe.
August 31, 2022
SelectQuote Inc., (SLQT), a platform that allows consumers to compare and purchase policies from multiple carriers, recorded more commission revenue than it should have for certain policies over the past two years. Customer lapse rates exceeded SelectQuote’s expectations, meaning the company did not receive the revenue it originally projected.
Initially, SelectQuote says it believed the misstatement was an isolated error related to a single carrier. But in its latest annual report, SelectQuote says it determined the lapse rates used for other insurance carrier partners were also incorrect, resulting in additional misstatements.
The misstatements resulted in SelectQuote:
—Overstating revenue by $7.8 million and $2.2 million in 2021 and 2020 respectively
—Overstating net income by $6.2 million and $1.7 million in 2021 and 2020 respectively
Separately, it appears SelectQuote is using an inflated discount rate which understates the company’s future operating lease liabilities. SelectQuote currently borrows money for approximately 6.5%- 7.5%; the revolver is LIBOR + 4% and its senior secured credit facility is SOFR + 5%.
Yet SelectQuote uses a 9.5% discount rate.
SelectQuote has $52.5 million in future operating lease obligations. The present value of those obligations, according to SelectQuote, is $39.2 million. If we discount SlectQuote’s operating leaves by the 7.5% borrowing rate, we calculate a lease liability of $48.7 million. It means SelectQuote is understating the present value of its lease liabilities by approximately $9.5 million, or 24.2% of its discounted future operating lease obligations and 1% of total liabilities.
Understating liabilities may help SelectQuote more easily remain compliant with certain debt covenants.
Separately, SelectQuote announced it is realigning its business segments due to a change in strategic direction. Notably, four days before filing its annual report, SelectQuote granted its General Counsel a new, more generous employment agreement. Daniel Boulware will now receive a $395,000 base salary, a 27.4% increase from FY21.
In 2021— the last year SelectQuote overstated sales and net income— executives received raises ranging between 13-91%. The latest Proxy contains no language related to an executive compensation clawback policy. It appears management will hang onto their bonuses and pay raises despite misstating the company’s financials in the first two years as a public company.
Lastly, SelectQuote received a subpoena from the United States Attorney’s Office for the District of Massachusetts in August 2022. The subpoena requests, among other things, information regarding SelectQuote's arrangements with insurance carrier partners.
Related: EHTH, GOCO
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