Monday, April 22, 2013

Health Insurance Innovations ( Nasdaq - HIIQ ) -- The Affordable Alternative

Health Insurance Innovations (HIIQ $14.00) is a leading provider of short term medical insurance plans for individuals.  The policies are underwritten by several major insurance companies that Health Insurance Innovations has longstanding relationships with.  The company doesn't possess any underwriting risk.  Those plans are offered through the company's website to individuals who don't have serious pre-existing conditions, and who need coverage for 6-12 months.  Unlike traditional plans, those offered by Health Insurance Innovations are not automatically renewable.  If a customer comes down with a serious disease or condition the policies will cover it through the end of the policy's term.  But the policy won't be renewed.  The fact that most of Health Insurance Innovations' customers are healthy keeps prices low, however.  Individuals typically pay 50% or less of what a traditional major medical policy costs.  To date most customers are healthy individuals who need short term coverage against catastrophe.  Most are small business owners and their employees, recent graduates, divorcees, early retirees, military discharges, unemployed, seasonal workers, and temporary employees.  Health Insurance Innovations relies on a network of brokers and sales agents to distribute its products.  Most policies are issued the same day the application is made.  Payments are made by credit card or similar method, eliminating bad debt risk.  The company offers a variety of related products, moreover, such as pharmacy cards, dental, vision, hospitalization, and cancer/critical disease plans.  Those cost less but enhance profitability by sharing overhead costs.

The new U.S. national health insurance law promises to accelerate growth.  The legislation takes effect in 2014.  It requires individuals to carry health insurance or face tax penalties.  It also forces employers with 50 or more workers to provide insurance or face tax penalties.  It prohibits traditional major medical insurance companies from denying coverage for pre-existing conditions.  And it requires them to spend at least 80% of premiums on clinical services.  Industry analysts predict the individual health insurance market will expand from 14 million Americans currently to 100 million or more as a result.  The short term policies offered by Health Insurance Innovations are exempt from the new regulations.  The company already is boosting distribution by offering higher commissions, better web services, and increasingly customized plan designs.  Many prospective customers will be able to purchase one of the company's plans for little more than the fine they'll pay under the new scheme for not having any coverage.  Additionally, if customers are afflicted with serious medical issues they will be able to switch to a major medical plan later, because those offerings will be required to accept all pre-existing conditions.

Growth already was robust under the existing rules.  Sales advanced 40% in 2012 to $41.9 million.  Earnings improved 39% to $.25 a share.  Health Insurance Innovations sold 5.3 million shares at $14.00 apiece in February, raising an additional $69 million in fresh capital to finance growth.  A recent acquisition is likely to enhance margins.  (That transaction will result in a non-recurring write-off, reducing GAAP earnings in Q1.  Our estimates exclude that impact.)  Additional funds are being advanced to some distribution partners the company has proven relationships with, to help them prepare for the enlarged opportunity created by ObamaCare.  Health Insurance Innovations' web based technology promises to yield rising margins as volume expands, as well.

We estimate sales will rise 43% in 2013 to $60 million to provide earnings of $.40 a share (+60%).  Next year $100 million (+67%) represents a realistic target.  Earnings could climb 87% to $.75 a share.  A stronger performance is possible if awareness of the short term plans proliferates.  In 2-3 years sales could attain $150-$200 million to support income of $1.50-$2.50 a share.  Applying a P/E multiple of 20x to the midpoint of the range suggests a target price of $40 a share, potential appreciation of +185% from the current quote.  Limits are advised.

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