IPO Preview: Health Insurance Innovations

| About: Health Insurance (HIIQ)

Based in Tampa, FL, Health Insurance Innovations (NASDAQ:HIIQ) scheduled a $70 million IPO with a market capitalization of $200 at a price range mid-point of $15, for Friday, February 8, 2013.

Eight IPOs are scheduled for the week of February 4. The full IPO calendar is available here.

S-1 filed January 25, 2013.

Manager, Joint Managers: Credit Suisse/ Citigroup/ BofA Merrill Lynch
Co Managers: Raymond James

HIIQ is an online insurance broker/distributor focused on Short Term Medical (or STM) plans. HIIQ believes that ObamaCare's implementation in 2014 is going to increase demand for STMs up considerably.

HIIQ designs and structures insurance products on behalf of insurance carrier companies, markets them to individuals through a large network of distributors and manages member relations

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Glossary of financial terms

HIIQ may be a good way to benefit from ObamaCare, but the P/E ratio is a bit high. IPOdesktop is neutral on HIIQ.

HIIQ is an industry leader in the sale of 12-month short-term medical, or STM, insurance plans, an alternative to traditional Individual Major Medical, or IMM, plans, which provide lifetime renewable coverage.

HIIQ designs and structures insurance products on behalf of insurance carrier companies, markets them to individuals through a large network of distributors and manages member relations via HIIQ's online member portal, which is available 24 hours a day, seven days a week.

STM plans generally offer qualifying individuals comparable benefits for fixed short-term durations of six or 12 months at approximately half the cost of IMM plans.

While applications for IMM insurance may take up to 60 days to process, STM plans feature a streamlined underwriting process offering immediate coverage options.

HIIQ offers guaranteed-issue hospital indemnity plans for individuals under the age of 65, which pay fixed cash benefits for covered procedures and services, and a variety of ancillary products such as pharmacy benefit cards, dental plans, vision plans and cancer/critical illness plans that are frequently purchased as supplements to STM and hospital indemnity plans.

HIIQ has established relationships with several highly rated insurance carriers, including Starr Indemnity & Liability Company, Companion Life, United States Fire (a member of the Crum & Forster group), ING, Markel and CIGNA among others.

In addition, as of September 30, 2012, the large independent distribution network HIIQ accesses consists of 32 licensed agent call centers and 248 wholesalers, including Marsh, eHealthInsurance and MasterCard, among others, that work with over 7,300 licensed brokers.

HIIQ focuses on the large and under-penetrated segment of the U.S. population who are uninsured or underinsured.

HIIQ's target market consists of 64 million Americans, including 50 million Americans who were uninsured in 2010, according to the U.S. Census Bureau, and 14 million non-elderly Americans who purchased individual health insurance plans in 2010, according to a 2010 Kaiser Family Foundation survey.

As of September 30, 2012, HIIQ had approximately 24,416 STM members.

HIIQ expects the number of uninsured and underinsured to significantly increase due to the rising costs and burdensome underwriting requirements of traditional IMM plans and a decline in employer-sponsored health insurance programs.

As of September 30, 2012, HIIQ had 24,416 STM plans in force, compared with 16,838 on September 30, 2011, with an average monthly retention rate of 80% from September 30, 2011 to September 30, 2012.

HIIQ earns revenues from commissions and fees related to the sale of products to our members. Ancillary products have created several additional revenue streams and resulted in a significant portion of business being generated by monthly member renewals.

HIIQ believes ongoing changes in the health insurance industry will expand and reshape the target market.

For example, the Patient Protection and Affordable Care Act, or PPACA, and the Health Care and Education Reconciliation Act of 2010, or HCERA, which we refer to, collectively, as Healthcare Reform, were signed into law on March 23, 2010. After facing a number of legal challenges, Healthcare Reform was upheld by the U.S. Supreme Court on June 28, 2012.

According to a 2011 McKinsey survey, the implementation of ObamaCare will likely increase the number of Americans in the individual health insurance market from 14 million to more than 100 million starting in 2014.

HIIQ believes this increase will be primarily driven by two key factors: employers dropping group coverage and an additional 45 million uninsured Americans entering the individual insurance market.

The McKinsey survey estimates that approximately 30% of employers would "definitely" or "probably" drop employer-sponsored insurance starting in 2014. The estimated penalty employers will face for not providing their employees coverage is $2,000 per employee for employers with over 50 employees (there is no penalty for employers with less than 50 employees), which is significantly less than the estimated price currently paid for employee coverage ($9,000 to $14,000 per employee).

Assuming a 30% drop in employer-sponsored insurance, approximately 50 million Americans would join the individual health insurance market starting in 2014. In addition, because Americans will face penalties if they are uninsured, HIIQ expects that a large number of the current uninsured population of 50 million will enter the individual health insurance market.

Accordingly, after 2014, HIIQ expects that the individual health insurance market will grow more than 600% to over 100 million policyholders, representing annual individual aggregate health insurance premiums in the United States of approximately $361 billion, compared with approximately $50 billion in 2010.

For example, the minimum Medical Loss Ratio ( or MLR) thresholds require that IMM carriers use 80% of all premiums collected to pay claims. This has significantly reduced distributor commission rates on traditional IMM policies, forcing many distributors to abandon the traditional face-to-face IMM sales model.

Starting in 2014, IMM carriers will also be subject to a pre-existing condition mandate, requiring them to accept all customers regardless of their pre-existing conditions. This "must-carry" pre-existing conditions requirement will further increase the costs of IMM coverage.

Unlike traditional IMM plans, HIIQ's STM products are exempt from the minimum Medical Loss Ratio (or MLR) thresholds and "must-carry" pre-existing conditions requirements under ObamaCare, allowing HIIQ to offer attractive distributor commission rates while providing affordable products for individuals.

State health insurance exchanges
In addition, ObamaCare also requires that states establish health insurance exchanges where uninsured individuals can select and purchase health insurance plans.

HIIQ believes that these exchanges will further the transition from group-based insurance coverage to individual health insurance coverage, and that HIIQ's STM products will be an attractive option in the non-subsidized exchange environment.

Moreover, consumers are increasingly accessing the Internet to find affordable health insurance solutions. 75 million Americans who used the Internet to access information related to health insurance in 2010.

82% of revenues from Med-Sense members
HIIQ has an agreement with Med-Sense Guaranteed Association, or Med-Sense, a non-profit association that provides membership benefits to individuals and gives members access to certain of HIIQ's products.

Under the agreement, HIIQ primarily markets membership in the association and collects certain fees and dues on its behalf. In return, HIIQ has sole access to its membership list, and Med-Sense exclusively endorses the insurance products that HIIQ offers.

Members of the association are given access to a wide variety of HIIQ products that are otherwise unavailable to non-members.

For the month of September 2012, 81.7% of HIIQ's business was derived from individuals who became members of Med-Sense.

Savers Choice
HIIQ intends to establish an affiliation with Savers Choice of America, an association offering similar benefits, as an alternative to Med-Sense.

HIIQ intends to have several of its carriers issue policies to Savers Choice of America members beginning in January 2013.

In September 2012, HIIQ entered into an agreement whereby MasterCard, through its approved pre-paid card member networks, will assist HIIQ in targeting and acquiring new relationships or "leads" for marketing HIIQ products.

Proprietary, Web-Based Technology Platform
HIIQ believes its technology platform represents a distinct competitive advantage because it reduces the need for customer care agents and provides significant operating leverage as HIIQ adds members and product offerings.

Advance Commission Structure
HIIQ intends to continue to focus on attracting additional distributors through expansion of its advance commission structure. HIIQ believes distributors increasingly demand alternative methods to fund the large and growing costs of lead generation. HIIQ estimates that these costs usually range from $2 to $20 per lead and represent a significant startup cost for distributors.

HIIQ is in the process of growing its advance commission structure, whereby HIIQ pays distributors commissions on policies sold in advance of when they would ordinarily be due to the distributor.

Commissions are advanced for up to six months and are made to distributors with an established track record of selling HIIQ products. In return, HIIQ reduces subsequent commission fees payable to the distributor by up to 2% of premiums for each month that commissions are advanced.

HIIQ believes this structure will assist distributors in funding their lead generation costs and will provide HIIQ with a competitive advantage in attracting and retaining distributors and will increase sales.

HIIQ is a holding company and its only material asset after completion of the reorganization and this offering will be the interest in Health Plan Intermediaries Holdings, LLC. Accordingly, HIIQ is dependent upon distributions from Health Plan Intermediaries Holdings, LLC to pay taxes and other expenses.

This kind of holding company organization structure is designed only to shield the major shareholder. There are absolutely no benefits for public shareholders, who would be better off with a traditional IPO structure.

The number of member enrollments through HIIQ's technology platform has generally increased in the third fiscal quarter. Conversely, HIIQ has generally experienced a decline in member enrollments in the fourth fiscal quarter.

HIIQ began operations in 2008, and historically, the business was operated through Health Plan Intermediaries, LLC. On September 28, 2011, HIIQ entered into an agreement to purchase the units of Health Plan Intermediaries, LLC owned by Naylor Group Partners, LLC for $5,330,000 plus closing costs of $135,000 .

Prior to the purchase, Health Plan Intermediaries, LLC was 50% owned by Naylor Group Partners, LLC and 50% owned by HIIQ's Chairman, President and Chief Executive Officer, Mr. Kosloske. Following the purchase, Mr. Kosloske became the sole member of Health Plan Intermediaries, LLC.

No patents


eHealth Insurance

HCC Medical Insurance

As of September 30, 2012, HIIQ had 51 employees.

No dividends

Michael W. Kosloske
HIIQ is controlled by Mr. Kosloske, and after this offering will continue to be controlled by entities associated with Mr. Kosloske. After the completion of this offering, Mr. Kosloske will beneficially own in the aggregate approximately 65% of the combined voting power of our common.

HIIQ expects to net $63 million from its IPO.
The proceeds are allocated to use $3,490,000 to repay all of the outstanding debt under the term loan and up to $25,000,000 to provide the funds necessary to expand HIIQ's advance commission structure

Disclaimer: This IPO report is based on a reading and analysis of HIIQ's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.