A recent acquisition will broaden Health Insurance Innovations' potential market. The company has been working with Health Pocket, the new unit, for the past six months. Much of the acceleration in growth the company has enjoyed is due to that relationship. Health Pocket offers a database for consumers that contains virtually every health insurance policy for sale in the United States. An easy to use interface enables potential buyers to search by key variables including price, deductibles, doctors, disease coverage, and geography. Once a prospect narrows down his choices a toll free number appears, directing him to an agent who can explain the details and determine the right deal. A click to chat option is available, as well. The percentage of callers who purchase is much greater compared to callers responding to banner ads and other general promotions. Growth in new business has topped 100% at Health Insurance Innovations over the past two quarters, driven in part by Health Pocket's high quality sales leads. That trend in the short term medical segment appears likely to continue.
The Health Pocket deal will open up the Medicare Advantage and Small Group segments, as well. Health Pocket currently is diverting those leads to other companies, earning a small commission. Health Insurance Innovations plans to steer them to its own agents and affiliated call centers, sharply raising revenue per policy. Customers who are best served by Obamacare plans, due either to the likelihood of subsidies or other factors, will be directed to the appropriate exchange. Those deals will generate a modest commission. The Medicare Advantage and Small Group markets each are at least 500% larger than the short term medical segment. Revenue could exceed the short term business in 2-3 years, perhaps sooner. Margins promise to be similar.
Profitability is likely to widen as volume expands. In-house agents and external call centers earn commissions on the business they close. Those expenses are variable. But Health Insurance Innovation's technology platform is highly scalable. Those costs are likely to increase far less rapidly than sales.
Our 2014 estimates assume that consolidation expenses will temporarily impact profits. Some non-recurring costs are inevitable as the two companies officially join forces. Health Insurance Innovations already is spending heavily on sales and marketing. Those efforts might be reorganized to put some weight behind the Medicare Advantage and Small Group initiatives. But the total amount spent may not expand too much. If they do, earnings may finish below our forecast of $.40 a share. (Prior to the merger we had estimated income of $.55 a share on $80 million in sales.)
Next year sales could advance 67% to $150 million to provide income of $.95 a share. New business may climb at an even faster pace. Revenue is recognized on a month to month basis, though, so even if a mountain of policies is written the recognition of that business will be spread out. Medicare Advantage and Small Group plans ordinarily renew at a higher rate than short term policies, creating the potential for additional leverage down the road. In 2-3 years revenues could attain $250-$300 million to yield income of $2.05-$2.65 a share. Applying a P/E multiple of 20x to the midpoint of that range suggests a target price of $47.00 a share, potential appreciation of 265% from the current quote.
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