Health Insurance Innovations ( Nasdaq - HIIQ ) -- Expands its Platform

Health Insurance Innovations (HIIQ $12.75) is a leading provider of short term medical plans.  It provides ancillary products, as well, including hospital indemnity, pharmacy, vision, and dental insurance.  A growing percentage of customers bundle more than one plan.  The company works with several major carriers like ING, Cigna, Nationwide, and U.S. Fire.  Those companies provide the actual underwriting.  Health Insurance Innovation works with them to design the products.  Primarily, though, it acquires the customers through its own agents and an external network of more than 100 call centers.  A variety of marketing techniques drive business to those sites.  The short term policies offered by the company are significantly less expensive than comparable Obamacare plans (excluding subsidies).  They normally extend for 6-11 months, making them exempt from the new law's stipulations regarding pre-existing conditions and guaranteed issue.  For healthy individuals, they provide attractive coverage because the same services are provided and the price is much lower, often as much as 40%-50%.  In the past a lot of prospective customers were reluctant to buy short term medical plans because they couldn't be renewed automatically.  That's still the case.  But under the new law if a chronic disease is acquired an individual can switch to an Obamacare policy, ensuring treatment.  Most of Health Insurance Innovation's customers are young and healthy.  Fewer than 5% are prevented from renewing due to health factors.  Those people now can buy a guaranteed issue plan on an exchange, eliminating that small risk.  Business has accelerated during the first half of 2014 as a result.

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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Health Insurance Innovations ( Nasdaq - HIIQ ) -- Keeps its Edge

Health Insurance Innovations (HIIQ $10.00) launched a series of low cost ("skinny") policies last week.  The company is a leading provider of short term medical plans.  Those products generally provide the same coverage as conventional major medical insurance.  But they are exempt from regulatory features that tend to drive up prices like guaranteed issue (can't reject an applicant), guaranteed renewability, and mandated coverages (chiropractors, fertility clinics, etc.).  HII's prices are substantially lower as a result, particularly for young and healthy customers.  That group is slated to take it on the chin when the Affordable Care Act goes into effect in 2014.  The Government and the insurance carriers are trying to create the impression that anyone without medical insurance will have to buy it through an "exchange," or pay a steep fine.  Those products are designed to be way over-priced in relation to risk for healthy young Americans.  A loophole in the law is allowing the carriers to offer cheaper deals for that group, for 2014 only, by letting them sign up by December instead of in January.  The insurance companies began exploiting that provision in April, the idea being to get that healthy group on board now and then escalate the rates in 2015.

HII recently launched an even lower priced set of policies to thwart that competitive threat.  Coverages were reduced in response to the insurance companies' "skinny" offerings.  The main difference is a cap on daily hospital payments at $3,000 instead of the local "customary" rate.  Prices are about $80 a month for a healthy 30 year old man.  That's about half of what the insurance companies are offering today with their introductory pricing, and 25% of what a comparable exchange plan will cost down the road.

The latest initiative is likely to re-establish HII's sales momentum.  Margins are expected to be similar to the company's existing offerings.  Solid gains are likely this year and in 2014 as healthy consumers opt for the company's low cost policies.  With the new law, moreover, if a customer does come down with a catastrophic disease he can move to the exchange and buy a guaranteed issue plan.  That removes the one big negative that used to impact HII's business in the past.

There are two principal long term risks.  The first is that HII and the rest of the short term medical industry become too successful and the Government outlaws their business.  The other is a change in pricing by the Government so healthy people pay a number more consistent with their risk, like every other kind of insurance.  Neither appears likely to happen.  Even simple corrections to the law aren't being made due to political factors.  Major changes lie far in the future.  And it's likely that short term medical plans will prove to be a positive element in the overall scheme by getting more people covered.

Growth could be explosive as the new insurance environment takes effect.  In 2-3 years revenues could reach $175 million to produce income of $2.00 a share.  Applying a P/E multiple of 20x suggests a target price of $40 a share, potential appreciation of 300% from the current quote.

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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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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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