Saturday, May 18, 2013

Health Insurance Innovations ( Nasdaq - HIIQ ) -- Battle for Healthy Insurance Customers Intensifies

Health Insurance Innovations (HIIQ $11.25) reported excellent on target Q1 results.  Earnings were flat with the year ago quarter at $.06 a share.  Average shares outstanding -- Class A and B combined -- were up 55% as a result of the company's initial public offering in early February.  Revenues improved 47% to $12.5 million.  Margins widened as overhead costs stayed relatively steady.  Health Insurance Innovations is a leading provider of "short term" medical insurance for healthy Americans.  The policies are exempt from the new national insurance law scheduled to take effect in 2014.  The policies are designed for individuals and families that are outside of group plans.  Typical buyers are self employed individuals, divorcees, students leaving school, part time workers, and other non-welfare type of individuals.  A quick series of questions is all that is required to sign up.  Anyone with an expensive medical condition normally is rejected.  The policies are not automatically renewed, either.  If a customer acquires a serious condition the policies cover it for the duration of the plan.  But they typically are not renewed.  The key advantage is sharply lower prices.  On average Health Insurance Innovations' plans cost 50%-60% less than conventional major medical plans, with identical deductibles, co-pays, and coverages.  The primary difference is the lack of "guaranteed issue."

That lack of renewabity has limited demand to date.  The advent of the Affordable Care Act requires all 50 states to establish insurance exchanges were anyone can buy a policy no matter how sick they are.  The company expects to see demand for its products surge in that environment because healthy customers can qualify for the company's lower cost plans; and if they do get sick, they can move to the exchanges and buy a guaranteed issue policy from a different insurance company.  Approximately 95% of the company's customers (or their family members, if on a family plan) don't get that sick and renew at the cheaper price.  But the fail safe option has held back lots of potential customers in the past.  The potential market itself is expected to expand in size as small and large businesses alike abandon their own group plans and send their employees into the individual health insurance market.  Some estimates put the new potential market at around 100 million individuals, up more than 600% from today's 14 million.  The company's pricing advantage may widen, too, if sick indivudals flock to the new exchanges.

Established insurance companies that will be subject to the "guaranteed issue" rules have begun to recruit healthy customers more aggressively.  The Affordable Care Act is designed to cap overhead, marketing, and profit at 20% of total premiums collected.  But a loophole has allowed the companies to over spend on marketing until the end of 2013.  Several of those companies have lifted commission payments to independent agents, causing them to steer business away from Health Insurance Innovations.  The Obama Administration is planning a series of high profile marketing events of its own to persuade young Americans to buy insurance through the exchanges, even if they are healthy and qualified to buy less expensive "short term" policies.  The Administration's goal is to over charge younger Americans to subsidize the older segment of the population.  Health Insurance Innovations is a small company that operates in a niche market that few Americans are familiar with.  The relentless publicity and marketing by the giant insurers and the Obama Administration is likely to make it more difficult for the company to attract business.

On the plus side, Health Insurance Innovations actually does have a better mousetrap.  It operates an automated platform that keeps costs low.  Distribution is handled through a network of independent agents who are paid commissions that are not limited by the 20% limit.  So the company will be able to pay higher rates over the long haul while keeping its consumer prices at least 50% below the exchange norm.  (Welfare buyers on the exchange will quality for government subsidies.  Health Insurance Innovations concentrates on middle income Americans.)  The policies themselves are underwritten by AAA insurance companies.  It has no underwriting risk.  Those insurers, like ING, service the policies.  Health Insurance Innovations watches its order flow carefully and communicates with its agent network on a regular basis, helping it develop new products quickly.  A new offering recently was launched to combat the more aggressive pricing by the major medical providers.  (To date only a small percentage of the conventional insurers have lifted commissions above the expected norm.)

Our 2013 revenue estimate is unchanged at $60 million.  We have reduced our earnings estimate by a nickel to $.35 a share to reflect the higher marketing costs the company likely will endure.  Our 2014 estimates are unchanged.  That environment promises to be phenomenally beneficial to the company.  No regulatory threats are on the horizon, either.  Over the long haul the regulatory framework may change.  With 100 million Americans in the individual health insurance market, though, it's doubtful the government will interfere significantly with a company like Health Insurance Innovations that is filling the void.

The outlook remains bright.  Near term comparisons promise to remain positive.  The long term opportunity hold exceptional potential.

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