Description

Overview

HIIQ has been written up before, but a lot has changed—and this is currently the best risk/reward we’ve ever seen in the stock. First, the company is less than 60 days away from announcing the end of its sales process. (HIIQ has hired Bank of America Merrill Lynch to run a sales process for the company, and management has indicated a resolution to the strategic alternatives within 60 days from their Q3 earnings call on November 12th, 2019.) Should a sale occur anywhere slightly near where its identical comps have sold this year, you’d earn a ~100% return in less than 60 days.

On the other hand, if management is dissatisfied with the bids it receives at the end of this process and chooses to remain public, we believe there is still ~100% upside potential for the company over the next year given the fundamentals of the business and its cheap valuation. HIIQ has compounded revenues at 35% between 2014-2019 and trades at ~5x 2019 EPS and 1.25x EV / 2019 revenue today.

Additionally, even if HIIQ shares remain flat, shareholders can arguably earn a high double digit return simply by lending out their stock, given HIIQ’s current very high short interest. We believe the company has been the victim of a series of short reports over the past two years by certain repetitive actors that continually publish an apocalyptic scenario for HIIQ. We go into detail below on how each one of their previous short predictions proved wrong. (E.g., the FTC would file suit against HIIQ by September 30, 2019—never happened. A negative Bloomberg article on HIIQ will be published that will publicly ruin the company—it came out on September 17th, 2019 and HIIQ’s stock actually went up because there was nothing substantial in the article). 

We believe these constant “scare-and-dump” short attacks on HIIQ have created a large dichotomy between Wall Street’s perception and valuation of HIIQ and Main Street’s perception of the company. We have spent considerable time speaking with industry experts and thought leaders, former employees, have attended industry conferences, and spoken with competitors on HIIQ’s business model. The feedback we received on HIIQ has made us conclude that Wall Street has been led by a few short sellers to develop a severely negative bias against HIIQ that is incorrect, which is what creates the current attractive opportunity for investors.

About The Company

HIIQ is essentially an insurance brokerage with a well built-out technological backbone. The company obtains leads on customers that are seeking insurance products, predominantly health insurance. 

The company primarily uses an external sales force (BPO) to convert a lead into a paying customer. Recently, the company has started developing its own internal sales force (captive agents) to convert customers at a higher margin than through the BPO channel (approximately 20% more profitable). Today, HIIQ has over 100 captive agents in its work force.

The company generates revenue by taking a commission on each policy it sells to an insurance carrier. HIIQ’s main costs are the fees it pays to its internal sales agents as well as its BPO / external sales force partners.  

Products Sold

Today the company sells four main products:

1. Medicare: the company’s newest and fastest growing segment. HIIQ sells Medicare Advantage plans, Medicare Supplement, and Medicare Part D plans. 

2. Short-Term Medical: these are low-premium plans that offer customers temporary health insurance to fund gaps in their coverage, such as those due to a job loss.  (https://www.uhc.com/individual-and-family/short-term-health-insurance)

3. Health Benefit Insurance Plans: plans that pay a set amount of money when the enrollee incurs certain covered medical events.

4. Supplemental Products: life insurance, dental / vision plans, telemedicine, cancer / critical illness plans, etc.

Market Opportunity

Medicare Market Opportunity

Currently, there are 22mm out of 60mm seniors who are enrolled in a Medicare Advantage plan. This market is estimated to grow at a 5-8% CAGR through 2025. Today, HIIQ has 14,305 policies in force, representing a market share of only 0.1%. The company’s new Medicare product has a long growth runway:

Additionally, there are 14mm people on a Medicare Supplement plan:

TogetherHealth Acquisition

In June 2019, HIIQ acquired TogetherHealth to develop its Medicare business. The medicare business is the fastest growing segment in health insurance today. TogetherHealth grew its business by 35% this year:

TogetherHealth’s Growth in Lead Generations:

HIIQ is now also building out its internal sales force in order to convert those leads themselves (instead of just selling the leads to other brokers) and earn additional commission that comes with selling policies to insurance carriers. As the company grows its sales force with time, this should lead to higher conversion for the company. 

The medicare market is an extremely lucrative opportunity. Insurers who we’ve spoken with have stated that winning new business from companies like HIIQ and eHealth provides them with a significantly higher ROI on customer acquisition compared with their own direct marketing channels. No surprise that organizations solely devoted to sales are more effective with sales.

With 35mm people still on a traditional Medicare plan today (instead of a Medicare Advantage plan), there is still a long runway for HIIQ’s Medicare Advantage business to continue to grow at double digit rates. As HIIQ builds out its internal sales force to convert their 1.35mm Medicare Advantage leads into policies sold, this will substantially increase the company’s operating margins. 

We believe HIIQ is undergoing virtually the same transition as eHealth did several years ago before eHealth became the $2bn market cap company it is today. eHealth used to be involved in selling primarily just health insurance policies—like HIIQ—until it made a strategic shift 3 years ago to focus mainly on selling Medicare Advantage policies—like HIIQ just did. eHealth’s stock has returned approximately 900% in the past 3 years since they made their pivot to selling Medicare Advantage.

Competitive Landscape

HIIQ indirectly competes with:

1. Local insurance agents

2. Direct sales from insurance carriers

3. Private and public exchanges 

Some of HIIQ’s direct competitors include:

• eHealth

• GoHealth 

• Tranzact

• HealthMarkets

• AssuranceIQ 

We met and spoke with many of these competitors at the main industry conferences, Insuretech and SIIA. Our understanding is that while these industry participants compete with one another, there is also a symbiotic relationship between one another, as they sell their excess leads among one another. 

Competitor Precedent Transactions

Virtually all of these identical competitors to HIIQ have been acquired in the past 9 months at significantly higher valuations than where HIIQ trades today (HIIQ trades at ~1.25x revenues):

March 2019: Willis Towers Watson acquires Tranzact for $1.2bn at 4x revenues (https://www.cdr-inc.com/news/press-release/willis-towers-watson-acquire-tranzact) 

July 2019: UnitedHealth acquires HealthMarkets at 3x revenues  (http://www.startribune.com/unitedhealth-grows-in-market-questioned-by-critics/513350362/)

August 2019: Centerbridge acquires GoHealth for $1.5bn at 5x revenues (https://www.chicagobusiness.com/health-care/affordable-care-act-boon-chicagos-gohealth)

September 2019: Prudential Financial acquires AssuranceIQ for $2.35bn at 4.5x revenues (https://www.pionline.com/money-management/prudential-financial-snaps-assurance-iq-235-billion) 

Given that HIIQ’s Medicare channel is showing substantial growth even in its infancy and still has a significant growth runway, we believe the company can earn a similar multiple to these competitors in their current sales process.

Taking a step back, all these businesses are structured in essentially the same way. There is:

1. A lead-generation arm

2. A comparison site

3. An internal sales force to convert leads

4. A BPO arm

Competitor Overview

GoHealth

GoHealth generates leads via its website https://www.gohealthinsurance.com/, sells excess leads to customers like HIIQ and eHealth, provides comparison shopping for health insurance, and also acts as the BPO for HIIQ and insurance carriers. GoHealth has 2,200 employees.

The company has the following solutions for consumers and agents:

The company has the following solutions for customers like HIIQ and insurance carriers:

Tranzact

Tranzact has 1,300 employees and 850 licensed sales agents working for the company. The company uses digital marketing / social media / email campaigns to drive leads on behalf of insurance carriers and then converts those leads using its internal sales force into paying customers.

HealthMarkets

HealthMarkets generates leads and operates a health insurance marketplace through its website https://www.healthmarkets.com/. HealthMarkets employs 550 people directly and has over 3,000 licensed insurance agents through BPO relationships.  

AssuranceIQ

AssuranceIQ employs 120 people and generates leads and operates a health insurance marketplace through its site https://www.assurance.com/. Licensed agents help enroll customers into different plan options. 

eHealth

eHealth generates leads and operates a health insurance marketplace through its website brands: https://www.ehealthinsurance.com/, https://www.ehealthmedicare.com/, https://medicare.com/, and https://www.planprescriber.com/. The company used to purchase leads from TogetherHealth prior to HIIQ’s acquisition of the company. As of December 31st, 2018, the company had a total of 1,079 employees including 569 captive agents. Today, eHealth has a sales force of ~1,500 agents with roughly 600 captive agents and 900 licensed agents through BPO. The company has been expanding its use of captive agents over the past several years. In 2018, eHealth had a 50/50 ratio between captive agents and BPO.

Health Insurance Innovations

Like all of these above companies, HIIQ generates leads and operates an insurance marketplace through a variety of website brands: https://www.agilehealthinsurance.com/, https://www.healthpocket.com/, and http://hcfast.com/. The company also generates leads through TV advertising via its acquisition of TogetherHealth. HIIQ employs 220 individuals including over 100 captive agents. The vast majority of HIIQ’s salesforce is through BPO relationships today. The company is currently in the process of building out its captive agent channel, similar to its competitors, which would lead to greater economics / margins for HIIQ.   

Short Reports & Criticisms of HIIQ

We are by no means claiming that sales organizations are the cleanest businesses in the world. Basically everyone knows there are always bad apples when it comes to sales. But Wall Street has taken HIIQ to another level with a stream of short reports and “gotcha” Tweets. There have been approximately 8 short reports on HIIQ since September 2017, and 8mm of the company’s 12.3mm basic shares outstanding are shorted today. The cost to borrow shares is a high double digit rate.

To understand the origins of these reports, it is important to understand the history of HIIQ.

Legacy HIIQ

Legacy HIIQ was founded in 2008 by Michael Kosloske, who put the company on a path to revenues of close to $180mm by 2016. As the founder of a fast growing start-up, Kosloske was acutely focused on growing the business as fast as possible, and there was little emphasis placed on building out other parts of the company. This eventually led to growing pains and one big compliance issue with one of HIIQ’s BPO partners, Simple Health.  

Simple Health was one of the third-party / external sales agents that HIIQ used to sell health insurance policies. Simple Health falsely led people to believe that they were purchasing comprehensive health insurance plans instead of the limited benefit plans that HIIQ offers. Simple Health was subsequently sued and shut down by the FTC for deceptive marketing.

Myth #1: The short reports claimed that there was significant collusion between HIIQ and Simple Health.

Fact #1: Wrong. The FTC did not wind up naming HIIQ as a defendant in the lawsuit against Simple Health. No matter how much the shorts tried to link the two firms together, there turned out to be no illegal link of activities between HIIQ and Simple Health. Also, for context, many of HIIQ’s competitors, such as GoHealth, also worked with Simple Health, based on our channel checks. But investors didn’t worry about these companies being dragged into any investigations tied to Simple Health because these companies weren’t attacked by shorts. (GoHealth was just recently acquired by Centerbridge as stated above).

Myth #2: The short reports claimed that HIIQ would be on the hook to pay a $100+ million fine for a multi-state investigation for poor internal compliance procedures. 

 https://seekingalpha.com/article/4105714-health-insurance-innovations-penalties-exceed-100-million-undisclosed-domino-effect    

Nov 27th, 2018: http://www.aureliusvalue.com/research/hiiq-boiler-rooms-worthless-policies-and-defrauded-families/

Nov 30th, 2018:

http://www.aureliusvalue.com/research/why-would-hiiq-sell-policies-from-this-boca-raton-insurer/

March 20th, 2019: http://www.aureliusvalue.com/research/hiiq-new-ftc-revelations-contradict-managements-assertions/

April 10th, 2019:

http://www.aureliusvalue.com/research/hiiq-the-big-deception/

Fact #2: HIIQ paid only a $3.2mm fine after a full multi-state investigation and agreed to significantly increase its compliance procedures to please the regulators:

https://www.sec.gov/Archives/edgar/data/1561387/000149315218017413/form8-k.htm

Myth #3: The health insurance policies that HIIQ sells are worthless insurance policies.

Fact #3: Short-term medical insurance has been sold for decades in the United States including by even the largest, most reputable carriers like UnitedHealth. Contrary to common perception, industry experts note that basically 90% of the denied payouts are because individuals lied on their forms about pre-existing conditions. There is a large market of several million people who purchase these products annually, and it would not make sense to get rid of these products because there is no alternative to protect people against gaps in their insurance coverage other than through the use of  STM plans. (https://www.uhc.com/individual-and-family/short-term-health-insurance) 

According to the Kaiser Family Foundation:

49% of the population is covered under employer sponsored health insurance

21% covered under Medicaid

14% covered under Medicare

1% covered under Other Public insurance

7% covered under non-employer sponsored health insurance

9-10% uninsured

This means that ~22mm Americans purchase their own non-employer sponsored health insurance which includes products that HIIQ sells. Another 27mm uninsured individuals are eligible to purchase cheaper health insurance options that HIIQ offers. HIIQ currently has 1.5% market share among those who purchase non-employer sponsored health insurance.

New HIIQ

In 2016, Gavin Southwell took over as CEO of the HIIQ. The company no longer had a mantra of growing at all costs and there was greater emphasis placed on building out the rest of the business. New executives were brought into the company; Michael Kosloske eventually left HIIQ, and the company significantly beefed up its compliance practices over the past 3 years. Contrary to the common perception by Wall Street, legacy HIIQ is not the same business as the HIIQ of today.

As the main shorts’ thesis based on HIIQ’s relationship with Simple Health and a potential FTC and multi-state investigation have died out, the shorts have now pivoted to pitching a new negative story: HIIQ has a broken business model. 

Our industry contacts on Main Street, who don’t have an agenda, have totally different opinions on HIIQ. HIIQ is a well-regarded, major player in the non-traditional insurance market by all the industry executives we spoke with. Additionally, there are 5 companies (as discussed above) that essentially have the exact business model as HIIQ, and 4 of them were purchased by Fortune 500 companies or a tier 1 private equity firm. This reinforces our view that HIIQ is clearly a valuable asset in high demand.

Lastly, we also note that CEO Gavin Southwell owns 750,000 shares of HIIQ stock (~$15 million worth), making him highly aligned with shareholder interests.

A Repeat of eHealth

The company’s closest publicly traded peer, eHealth, trades at over 4x NTM revenues today versus 1.25x revenue for HIIQ. eHealth underwent a similar transition that HIIQ is undergoing today: shifting the focus of its business from individual and family plans to Medicare plans. See charts below showing eHealth’s similar transition to HIIQ today:

eHealth’s total annual revenue growth was stunted as this transition occurred, but this was the time to buy the stock:

eHealth revenue breakdown vs. HIIQ revenue breakdown:

eHealth:

Health Insurance Innovations: 

As the transition from IFP policies to Medicare policies occurred for eHealth, eHealth’s stock generated substantial alpha, increasing by 9x from $10 per share to over $90 per share and it’s multiple re-rated from 1x revenues to over 4x NTM revenues: 

Valuation

We value HIIQ by separating out its faster growing, higher margin Medicare business from its IFP health insurance segment. In Q3, HIIQ’s medicare segment accounted for 15% of its business. In Q4, the company expects the percentage of revenues from its medicare business to increase to 35%. Given the company’s Medicare business was only launched in Q3, we apply these ratios to the company’s full year revenues to determine HIIQ’s annualized Medicare revenue stream. We note that if we value eHealth’s ~10% non-medicare revenue at 1.5x 2019 revenue, eHealth’s ~90% Medicare revenue would be valued at 5.5x 2019 revenue, higher than what we show in our sensitivity analysis. Recall that HIIQ’s comps sold at 3.0x-4.5x revenues, but we will use lower numbers for conservatism. And as HIIQ’s Medicare Advantage business grows to represent 50% of the company’s revenues by 2020, we note that there is considerably more upside potential. 

Assuming HIIQ’s business stays at 15% Medicare:

Assuming HIIQ’s business is 25% Medicare (even if they miss guidance, there is still significant upside):

Assuming HIIQ hits their guidance in Q4 2019 of 35% Medicare business:

As the company grows its Medicare book from its first year to the second year of implementation and beyond:

In short, because of the short reports on HIIQ over the past year (which have proved false), investors are getting the opportunity to buy HIIQ today while it is in the midst of a sales process ending in 60 days—while HIIQ’s comps have been acquired this year at way more than double the valuation of where HIIQ trades today. If the company is not sold at the end of this process, you are buying a double-digit growing company at ~5x 2019 EPS and 1.25x EV / 2019 revenue today. 

Catalyst

• Completion of the company's sales process in the next 60 days
• HIIQ completing the same pivot eHealth accomplished when it moved its business to Medicare Advantage, and HIIQ earning a similar multiple to eHealth