A Changing Regulatory Environment makes Health Insurance Innovations Interesting

When I sold Health Insurance Innovations in the spring their business was under attack from the department of Health and Human Services (HHS).  The HHS had decided that short term medical insurance policies (STM) were an end run around the affordable care act (not an unreasonable conclusion) and was proposing a rule change (subsequently implemented) whereby STM policies would be limited to “less than three months, and coverage could not be renewed at the end of the three month period”.

So I sold.  It seemed like a broken business model, which was unfortunate as Health Insurance Innovations had just hit their stride.

But then the Republicans swept the election.  The Affordable Care Act will likely be spun back into some other form.  The headwinds become tailwinds.  While it’s not clear what form health care insurance will take going forward, I think it’s reasonable to assume the changes will be positive to Health Insurance Innovations.

While took some time for investors to notice that his tiny sub $100 million market cap company had just had its prospects turn for the better (small caps are not efficient), the stock has been on a tear since the day after the election.

Because I’m not sure exactly what the eventual impact will be, I’ve taken cues from the market, adding as the stock goes up.  This has worked out pretty well as I put on a small initial position in the 6’s, then added in the 8’s, the 9’s and then at 10.

But I’m not adding any further.  I don’t have a large position, but its enough given that I don’t really have a sense of what will succeed the ACA, and Health Insurance Innovations has some legal and regulatory issues that are yet to be resolved and that lend to some uncertainty.  These state regulatory examinations of some of their third-party distributor call centers are described in the latest 10-Q.

My optimism that the eventual outcome of the ACA rework will be positive for Health Insurance Innovations is because their business relies more on a platform than any particular insurance product.    Their AgileHealthInsurance.com platform is a comparison and online enrollment tool that can sell any type of health insurance product.  The site lists products available from multiple carriers and helps consumers pick a product that meets their needs and is the most affordable option.

The company supplements AgileHealth with a retail channel where they sell through third party call centers and I believe still own one call center (ASIA). They restructuring two others,  Secured and ICE in November 2015.  They stock theses channels with policies from a wide range of carriers, including HCC Life Insurance Company, Companion Life Insurance Company, Standard Life and Accident Insurance Company, Nationwide Mutual Insurance, and US Health Group.

Health Insurance Innovations engages with the carriers to create new products depending on the current regulation environment and demand.  They have primarily sold short term medical and auxiliary health plans because that is all that the ACA has allowed for.  On the third quarter call they talked about how they are working with carriers to create product alternatives to STM.

I think that there is a good probability that whatever replaces the ACA will have more choice.  This is in the direction Republicans typically lean.  More choice should play into the hand of Health Insurance Innovations, their platform and their carrier relationships.

The stock is not expensive.  If I gave you the following metrics what would you value the company at?

• 9 month year over year revenue growth of 30% and policies in force growth of 46%
• Adjusted EPS of 33c in the third quarter and full year revenue guidance of between 88c and 95c EPS
• 2017 topline growth of 20%
• Net cash ($5 million of debt and $14 million of cash) on the balance sheet

Note that I am adjusting the company’s 2016 revenue to account for the impact of moving owned call centers to be third party and the associated accounting treatment of this.  GAAP revenue growth has been over 70% year over year.

Even after a pretty tremendous move up, at $11 the stock is not really pricing in its earnings and growth.

Of course up until November 8^th this made sense.  While the company said they could overcome the inevitable revenue decline from STM, I don’t think many believed this.  There was already evidence that new applications were flattening from the second to third quarter (see the submitted IFP applications in the third quarter press release).  Even as the company showed that Limited Indemnity Medical insurance (LM) made up 45% of Individual and Family Plans in the third quarter, the stock price hardly budged.

Now that the future of the ACA is uncertain, and given that Republicans tend to err on the side of choice, things seem to be setting up much better for the company.  While its hard to buy into a stock that has run up as much as Health Insurance Innovations has in as little time as it has, I don’t think you can make the argument that it is unreasonably expensive at this price.  I’m willing to hold on here and see if it has further to go.