Health Insurance Innovations' CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: Health Insurance (HIIQ)

Health Insurance Innovations, Inc. (NASDAQ:HIIQ)

Q3 2013 Earnings Conference Call

November 12, 2013 10:00 AM ET


Joan Rodgers - Chief Accounting Officer

Michael Kosloske - Chief Executive Officer

Michael Hershberger - Chief Financial Officer

Jim Dietz - Senior Vice President, Finance and Business Development


Steve Baxter - Bank of America Merrill Lynch

Steven Schwartz - Raymond James

Carl McDonald - Citigroup


Good day, ladies and gentlemen. And welcome to the Health Insurance Innovations, Inc. Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll have a question-and-answer session, and instructions will follow at that time. (Operator Instructions). And as a reminder today's conference is being recorded.

I would now like to turn the conference over to your host for today, Ms. Joan Rodgers, ma’am you may begin.

Joan Rodgers

Thank you, Mary, and good morning, everyone. We are delighted to have you join us today for a discussion about Health Insurance Innovations' third quarter 2013 financial results. On the call this morning we will have Michael Kosloske, our Chief Executive Officer; Jim Dietz, our Chief Financial Officer; and Michael Hershberger, our Senior Vice President of Finance and Business Development.

As a reminder today's conference call is being recorded and webcast from the Investor Relations section of our website and replay of the call will be available from the Investor Relations section of our website following the call.

We will make forward-looking statements on this call. All statements other than statements of historical facts are forward-looking statements. Actual results could differ materially from those projected or expected in these forward-looking statements. Listeners are urged to carefully review and consider the various disclosures made by the company in this conference call and the risk factors disclosed in the company’s annual report on Form 10-K for the year ended December 31, 2012, as well as other reports filed with the Securities and Exchange Commission. Copies of the company’s SEC reports are available on our website at and on the SEC’s website. The company disclaims any obligation to update any forward-looking statements after this conference call.

At this time all participants have been placed in a listen-only mode. The forum will be opened for questions following the presentation.

With that, I would now like to turn the call over to our CEO, Mike Kosloske.

Michael Kosloske

Thank you for joining us today for our third quarter 2013 conference call and webcast. I hope you had a chance to read our press release that was distributed earlier this morning.

We are very pleased with our third quarter results, particularly that we are in-line with the guidance we provided last May on our first quarter call. We are on track to achieve 2013 full year guidance of 25% to 35% premium equivalent growth year-over-year. Let me point out some highlights for the quarter. We posted record quarterly revenue of $14.7 million up 26.7% over last year’s third quarter. We have record quarterly premium equivalents of $26 million up 24.9% from the same period last year. Policies in force reached a record level of $67,597 at the end of third quarter, 26.8% higher than September 30, 2012. Adjusted EBITDA was up 50% to $1.8 million compared to $1.2 million in the same period 2012. And finally non-GAAP gross margin as a percentage of premium equivalents was 25.1% compared to 17.9% for the third quarter of 2012.

This gross margin increase relates to both our higher margined ancillary business and to the secured acquisition which will be discussed later. In just the past three months, we have taken several key steps to produce strong operational and sales growth position us well for the future.

These steps include; successfully closing the Secured Health and Life transaction hiring additional top talents and adding few resources. Our acquisition of Secured Health and Life in July is integrating well. Secured is a significant distributor of insurance products that include a call center a manager of down line call centers and is a distributor of HII insurance products. Sales, continued to be robust post acquisition.

Importantly Secured is a leading provider and manager of insurance sales leads using us proprietary techniques to lower lead costs per policy sale. Secured also provides sales automation services including plug and play technology to run call centers, highlights of these technologies include voice signature and analytical metrics in the real-time environment.

We are very pleased to welcome several new talented senior execs to HII, significantly enhancing our industry and corporate capabilities. Mia Erichson an experienced online and traditional marketing executive joins us as chief marketing office. She comes to us with decades of success building company brands, digital marketing expertise and boosting customer sales for Fortune 500 and 100 companies. Mia will launch a number of initiatives that will result in an intensified margin effort that we expect to grow our top line at an accelerated rate. Note that this effort will initially increase SG&A budget.

Michael Petrizzo joins us as Executive VP and General Counsel. Michael has significant experience with hundred of mergers, acquisitions and corporate development deal making and legal matter in the health insurance space.

Jim Dietz, who many of you know by now, joins us as Executive VP and Chief Financial Officer. Jim has extensive CFO experience in high growth public companies and financial management. After his early big eight accounting firm experience, Jim has been a CFO for 20 years. And most of that time, he spent with public companies and managing a business that grew from $100 million in revenue to $2.6 billion in revenue and went public on the New York Stock Exchange.

Michael Hershberger, former CFO has assumed a new role of Senior VP, Finance and Business Development and will continue to work closely with both Jim and me providing financial support to HII's operational teams, supporting our ongoing growth and efficient deployment of IPO proceeds.

Justin [Clemens] a top insurance sales executive previous with UnitedHealthcare joins us to Head HII's new brokerage focused sales initiatives. We are building a brokerage division to up-capture the 300% growth opportunity of employees leaving group coverage and buying individual major medical beginning in January 2014. This will also initially increase SG&A providing a strong payoff in 2014 and beyond.

I also want to highlight the appointment of a leading healthcare financial executive, Paul Gabos to our Board of Directors in August. Paul was most recently Chief Financial Officer of Lincare Holdings Inc. until the company’s acquisition in August 2012 by Lingroup Ag for approximately $4.7 billion. When he started at Lincare the market capitalization was about $300 million.

Finally as announced yesterday marketing expert Jeffrey Eisenberg has been appointed to our Board of Directors. He is a managing partner of Eisenberg Holdings providing strategic marketing advice to leading companies including Google, Hewlett-Packard, Intel, GE Healthcare and NBCUniversal. Jeffery is a recognized authority in crafting digital marketing plans, optimizing customer online experiences, improving online conversion rates and building websites that influence customers to take action. He will provide valuable insight and perspective in streamlining our online marketing strategy to generate more leads subscriptions and sales for our expanding platform of products and services. Jeffery is also a Wall Street Journal, USA Today and New York Times’ best selling business author.

We're focused on building long-term shareholder value by growing HII into a large and profitable company. We've made these investments now to position ourselves to achieve this goal. We expect a significant sales trajectory increase towards the end of 2014 an inflection point so to speak, there will be time to some extent based upon the Affordable Care Act launch in January 2014. With this vertical business model we operate a win-win for our carriers, distributors and consumers gearing up for the largest increase of potential individual major medical insurance sales in the history of U.S. healthcare. We want to be ready to take full advantage of unprecedented degree of market expansion.

Our business model has evolved. We have on one-end of our vertical business model best in class insurance carriers that can provide any multitude of products.

On the other end, we have over 80 license agent call centers, including call centers that are exclusive to or owned by HII, which generate approximately half of our business. Brokers such as Marsh, [Aon] and others continue to sell HII products. HII brings the parties together as a product developer and online administrator with a great deal of operating leverage. The missing link was the affordable lead generation for our call center distribution. Secured health and life together with new market initiatives being launched by our new CMO provide that final piece. We’re currently creating a best in class lead revenue management engine that will be launched early next year.

To provide you with a little more background on our business, HII’s next generation cloud based technology platform that provides insurance agents and direct customers with real time health insurance advice and solutions allowing them to tailor plans to fit their budget and needs. Uniquely we assume no underwriting risk, we have no reimbursement risk and are not held minimum loss ratio requirement under the Affordable Care Act.

We also have thousands of agents who provide real time guidance to help consumers choose the best health plans and benefits whether it’s a public exchange Obamacare program or private exchange plans like HII.

As part of the Affordable Care Act and with the implementation of the public exchanges that become effective January 1, 2014, we are expecting significant growth based on six value drivers. First, HII STM plans which cost up to 50% less for the same or similar benefits offered on the public or private exchanges. Starting on January 1, 2014 all traditional individual major medical plans are expected to incur significantly higher prices, some could potentially double, enhancing our competitive advantage.

Second, due to the positive positioning of short-term medical plans as a less expensive comparable coverage alternative to public exchange plans STM will be taking off industry-wide. HII’s management was the first private exchanged specializing in short-term medical plans in 1998 and we continue to be the pioneer in this product space and technology and partnership innovations.

Third, compensation to highly skilled license agents will be significantly higher with HII’s short term medical plan versus other private and public exchanges, individual major medical plans, many individual major medical plans have already considerably lowered compensation to agents and are expected to lower them again prior January 1, 2014. Agent commissions have been lowered from an average of 30% to 5% coming up for January ‘14. This is important since 90% of all health insurance sales in the U.S. are currently conducted by licensed health agents. Brokers are now flocking to HII. In October 385 new brokers moved to HII in one week.

At the end of the third quarter our extensive and rapidly growing national distribution network now consists of 9,778 license insurance agents and 83 call centers, this compares to just 32 call centers at the time we went public in February of this year. Customer experience with our highly trained license brokers will be notably better than the exchange navigators who have just a few hours in training.

Fourth, recent provisions in the Affordable Care Act indicate the accretion of a new gap or bridge necessary for Americans who missed the once a year fourth quarter enrollment period under certain conditions and have a 35 to 45 day wait even if they catch the fourth quarter enrollment time. Short term medical plans stand poised as the best option to provide reasonable coverage to these employees to cover these gaps.

Fifth many employers are expected to drop coverage beginning January 1, 2014. We can now offer both public exchange and private exchange products creating a mutual beneficial opportunity for consumers and HII in a real time environment. We know this audience well; HII’s management team has sold over $1 billion in insurance products just to this audience. As noted, we just recruited top performers and top management from this group industry. We plan to roll this program out in Q1, this is a huge market opportunity. For example, if 30% of the 150 million employees working in businesses lose coverage, there could be as many as 45 million new entrance into the individual major medical plans base, increasing today’s marketplace by 300%.

Sixth and final, for the first time in our history, HII will begin marketing directly to the 70+ million Americans who are currently going online to investigate affordable care. Our new CMO is ready to launch new digital campaigns to reach these consumers directly. Consumers of all products and services rely on the internet to collect the information and make decisions about purchases. Our campaigns will assist them in this process, providing the option to speak directly with a licensed broker who can provide information about those specific plans that are best for their individual situation i.e. is my doctor covered or not and examples like that. Our proprietary technology platform allows these brokers to cope, find and print, customize policies in a real time online environment. This process if fully automated, quick and easy for the customers with highly scalable and reliable from the administrative and compliance perspective.

Our significant operating leverage results from the fixed and in place cost of our technology platform. For example, a typical HII member buys more than one product, which creates several sticky revenue streams with no additional cost to HII. Key to our corporate growth strategy is continuing product enhancement, providing the most affordable and effective products to our customers and distributors and the continued expansion of our distribution network.

Since our call last August, we launched several new products including the Principle Advantage Limited Medical Plan, Foundation Vision, a comprehensive insured vision program. A dental program designed in conjunction with CIGNA Dental and [HealthyMed], a new short-term medical plan, which is available in 45 states which we launched in a 30 day period.

We are pleased with the acceptance of our ancillary offerings, showing that our unique bundling technology is working. In third quarter 2013, 18% of our revenues are now ancillary sales. Ancillary policy growth brings us lots of sticky revenues with one sale. This is even more prudent for example since individuals may eventually drop their short-term medical plan for example they get a job with large employer, but may continue buying other products like dental products for many years.

We do continue to face some challenges. The gaming of the system we saw starting in April is still going on as certain competitors encourage traditional individual major medical customers to purchase policies through December 2013, knowing that they will need to drop these policies in 2014 to comply with Affordable Care Act regulations. In spite of this, we are pleased to have posted strong growth. If the Affordable Care Act is delayed we're likely to see our revenue growth inflection point to be delayed by some amount even if this happens and there is other way we still expect strong growth at our current pace.

In summary, we have a lot of opportunities to capitalize on with our broader seasoned management team, our ability to sell on and off exchange products, our rapidly growing distribution network, our brokers and call centers. Let me reiterate, we offer a win-win for our carriers, distributors and consumers and are gearing up for the largest increase of potential individual insurance sales in the history of US healthcare beginning in January 2014 as the Affordable Care Act takes effect. Thank you. Jim?

Jim Dietz

Thank you, Mike. Good morning. I am Jim Dietz, Chief Financial Officer of Health Insurance Innovations. Before I begin with my comments, I want to thank Mike Kosloske for the opportunity to lead the financial operations of HII, as well as for his support and that of Mike Hershberger since I joined the team in March and learned HII’s unique business model. I look forward to a close and long-term partnership with both of them.

I’d like to begin my comments with an overview of our third quarter financial results, as well as some details of our operations for the quarter. As we typically do, I will start by commenting on our non-GAAP top-line which we call premium equivalents. As a managing general underwriter, all funds flow through our accounts. Premium equivalents include earned premiums from all policies, including short-term medical and hospital indemnity plans, as well as ancillary policies such as critical illness, dental, accident, medical and cancer plans, together with discount benefit charges and membership enrollment fees.

The third quarter of 2013 produced premium equivalents of $26 million which represented a 24.9% growth from the third quarter of 2012 at a 7.4% sequential growth over the prior quarter, the second quarter of 2013.

For the first nine months of 2013 premium equivalents were $72.3 million, representing a 32.7% growth over the same period in 2012. GAAP revenue which we calculate by subtracting the risk premium paid to our insurance carriers and payments to our discount benefit vendors achieved similar growth levels.

In the third quarter of 2013, total revenues were $14.7 million, representing a 26.7% growth from the third quarter of 2012. And an 8% sequential growth compared to the second quarter of 2013. Year-to-date revenue of $40.8 million represents a 35.5% growth from the first nine months of 2012.

Both premium equivalents and revenue growth was driven by an increase in the total number of policies in force, which Mike mentioned. Policies in force grew from approximately 53,300 at the end of the third quarter of 2012 to approximately 67,600 at the end of this quarter, which is 26.8% year-over-year increase. Short-term medical policies in force grew from 24,400 at the end of Q3 2012 to approximately 27,500 at the end of Q3 2013. Hospital indemnity policies grew from approximately 7,600 at the end of Q3 2012 to approximately 8,800 at the end of this quarter.

We continue to expand on our technology driven bundling strategy, which has resulted in strong growth in sticky and higher margin ancillary product policies. Ancillary policies in force ended the third quarter of 2013 at approximately 31,300 which represents just over a 10,000 policy increase over the last 12 months. During the third quarter of 2013, revenue generated by short-term medical plans represented approximately 61.4% of revenue. Hospital indemnity plans contributed 20.4% of revenue. And ancillary products made up 18.2% of revenue.

Our adjusted EBITDA for the third quarter was approximately $1.8 million, representing a 50% increase year-over-year. For details of our computation of adjusted EBITDA, please see the reconciliation of net income to adjusted EBITDA which is attached with our press release. As we’ve discussed in prior quarters most of our cost, much of our cost structure is comprised of variable cost which creates a high degree of operating leverage in our business model.

There are three primary variable costs that are built into our business model. The first category of variable cost includes payments to insurance carriers for agreed upon risk premiums and fees paid to third-party obligors for discount benefit programs. In the third quarter, this category represented 43.2% of our premium equivalents. The second variable cost category is payments to third-party distributors primarily commissions at total 30.5% to premium equivalents in the third quarter. The final variable cost category is payments to ACH and credit card processors that amounted to 1.2% of our premium equivalents for this quarter.

We analyze our business internally using a non-GAAP metric that we refer to as our gross margin. We define this metric as premium equivalents less the three variable cost categories I just enumerated. For the third quarter, these three categories collectively accounted for 74.9% of our premium equivalents and subtracting the variable cost from revenue yields a non-GAAP gross margin of 25.1%. This quarter’s 25.1% margin is favorable by 720 basis points over the third quarter of 2012 which is a notable improvement accomplished by the July, 2013 acquisition of our largest distributor Secured Health and Life. Also contributing was the continued positive impact of the TSG contract termination and strong continued sales of more profitable ancillary products due to our effective bundling strategy as I just mentioned.

After these variable costs, the cost of operating our business is relative fixed. Our administrative infrastructure is in place and we have very little capital expenditures that need to be incurred as we grow our business. So as our premium equivalents grow, we expect our operating margins to expand as well.

Like prior quarters, the year-over-year analysis of general and administrative expense is influenced by increases in cost associated with our public company status, which began with our February 2013 IPO. Total selling, general and administrative costs of $6.3 million in the third quarter of 2013 were $3.8 million than the third quarter of 2012. Part of the quarter-over-quarter increase includes $1.6 million of non-cash stock-based compensation which is higher than typical because of the accelerated method of accounting that we use to amortize compensation cost. In addition, we incurred $107,000 of transaction cost this quarter associated with the Secured acquisition. And finally, we consolidated the Secured business unit this quarter, which added $1.3 million to selling, general and administrative expenses.

We expect the purchase of Secured to produce attractive and growing additions to company operating margins. In the case of Secured's operating cost, the offsetting benefit is reflected in the over 500 basis point increase in non-GAAP gross margin, because commissions are no longer paid to this now [captive] distributor. Otherwise SG&A expenses in 2013 continue to reflect the higher legal, auditing, SOX 404 control implementation and other administrative costs that are associated with typical public company operations.

Separately, as Mike discussed, we are very excited about the recent personnel additions including our new CMO. Initiatives and related costs associated with establishing new sales, marketing and other organic growth capabilities have been made selectively based on expected revenue and earnings impacts and these expenses and the associated returns are expected to grow as we move forward as a larger and growing business.

Turning to cash used in operations for the nine months ended September 30, 2013 was about $3.4 million. That compares to cash provided by operations of $4.6 million for the nine month period in 2012. The HII’s cash flows from its core operations are a bit obscured because GAAP classifies the TSG Agency transaction, as well as our investment in advanced commissions as operational cash flows. Absent the $5.5 million paid to terminate the TSG contract which reduced commissions, which continues to reduce commissions and the $1.1 million advance to our distributors to help and grow HII policy applications, our core business would have generated $3.2 million of operating cash inflows. The adjusted number is slightly lower than last year due to the significant spending in 2013 on professional fees and other cost associated with our IPO.

As Mike mentioned, the integration of Secured, which closed in mid July is proceeding quite well. We expect Secured to add appreciably to earnings after a short transitional period. The managers of the Secured business unit shared optimistic outlook for growth of revenues and earnings in 2014. For the first quarter of HII’s ownership, a required change in revenue reporting methods reduced Secured’s contribution to revenue and EBITDA by an approximate amount of $450,000. This is a one-time impact that we and our accountants prefer to put behind us at this time. Secured also had slightly higher cost related to beginning to accelerate its business, such as higher spending on certain personnel cost, as well as lead purchases. Going forward our previous expectations $3 million of EBITDA and growing from there are unchanged.

With that I’d like to turn it back over to the operator for Q&A.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Kevin Fishbeck from Bank of America Merrill Lynch. Your line is open.

Steve Baxter - Bank of America Merrill Lynch

Hi. This is Steve Baxter on for Kevin. I was wondering if you could talk about some of the quarter-over-quarter trends and revenue by product. Looks like your growth in short-term was quite strong, looks like 16%, but ancillary was closer to flat. I guess maybe you would have expected that to grow as well. So I was wondering if you could have some other drivers there in the quarter?

Michael Kosloske

Yeah. I would categorize it this way that we are looking at from our ancillary sales business we have a new initiative to create a lifetime customer. And we are putting those initiatives in with Mia joining us as the CMO. So we expect to see those revenues on the ancillaries become a bigger and bigger piece of the block due to the stickiness.

Steve Baxter - Bank of America Merrill Lynch

Okay. That makes sense. Is it possible to get a little color though on the short-term growth because I mean 16% was certainly higher rate than maybe you had seen in the past couple of quarters. That’s a quarter-over-quarter comparison, sorry I wasn’t clear?

Michael Kosloske

Yeah. Could you repeat the question?

Steve Baxter - Bank of America Merrill Lynch

Yeah, it looks like the quarter-over-quarter growth in short-term medical was particularly strong in the quarter. I was wondering if you could highlight some of the drivers there relative to the other products?

Michael Kosloske

Yes, every moment we get close to January 1, our sales are increasing. We also are seeing higher volume of cost coming in due to the news and the implementation, at the beginning of the implementation of Obamacare. So as we approach January 1, our sales trajectory continues to rise.

Steve Baxter - Bank of America Merrill Lynch

Okay, thanks. And when you guys talked about the higher stock comp number in the quarter, do you expect that to continue to be at around that level or do you think now that you have made a number of these key hires for senior management this number should drop off in future periods?

Michael Kosloske

Well, that’s an excellent question. We will see reduced amount in coming quarters. We use an accelerated method of recognizing those expenses from a GAAP perspective and so the first year typically shows the lion’s share of the expense. So the fourth quarter likely will show a large expense, but as we move into 2014, that amount will be reduced.

Steve Baxter - Bank of America Merrill Lynch

Okay. So that makes sense. So then I guess absent that going forward, I guess would you say you characterize SG&A spend then as being flat from the lower number of not having as much stock comp in 2014 or do you think that we’re going to potentially be an elevated level, above current level, just trying to focus on those two components.

Michael Kosloske

We are absolutely focused on long-term, how do we get the company to most revenues, most profits. We expect SG&A maybe early part of ‘14 to be up because we’ve hired, we’ve started a whole new brokerage department. We’ve hired a whole new marketing to consumers that we haven’t had through Mia and then we expect towards the end of ‘14 to have a tremendous payback of those results.

Steve Baxter - Bank of America Merrill Lynch

Okay, great. Thank you very much.


(Operator Instructions). Our next question comes from Steven Schwartz from Raymond James. Your line is open.

Steven Schwartz - Raymond James

Jim, you were talking about Secured Health, you gave the number, with regards so I think it was the SG&A, you talked about Secured Health contributing to what’s called the sales margin for like of anything distributing margin for like of a better term. Could you give the number on that, how much did Secured Health saving commissions?

Jim Dietz

Yeah, I can help you so through that. I mentioned $1.3 million as the SG&A components. When you look at an easy way to think about this Steven is to take a look at the increase in non-GAAP gross margin which was about 500 basis points this quarter. If you take that 500 basis points times the $26 million in premium equivalents, that yields about $1.3 million in reduced commissions. The number was right around that number.

So that’s for 74 days, and if you take that out to fourth quarter, if the $1.5 million to $1.6 million and if you then extrapolate that to a full year, it will be a little over 6 million to 6.25 million. So that’s right on par with what we expected because I think we previously communicated that about two-thirds of Secured business relates to the production of policies for HII and acquisition of Secured will reduce commissions on an annual basis by roughly that 6 million to 6.25 million.

Steven Schwartz - Raymond James

Okay, all right, great. And then Mike you talked a lot about SG&A being up, okay we all want. Is there is a way to may be frame that with some numbers, how much are you thinking you're going to spend on the direct marketing effort and how much do you think you're going to spend on the brokerage effort?

Michael Kosloske

Yes. We are putting that together as we speak. So our next update to the public, we will certainly reset that.

Steven Schwartz - Raymond James

Okay. And then I guess you kind of mentioned that there are number of states I gather from reading the papers that are trying to convince insurers to keep plans in place for March. Is that kind of the delay that you were talking about as a potential challenge?

Michael Kosloske

When you are going through the biggest change in the history of healthcare, I think there is going to be a messaging issues. We’ve heard issues on that gov as far as concerns of people getting on boarded. So could that lead to a potential 90 delay that the government decides? I don't know. Could there by messaging questions that pop up early? So what we're looking forward is we're making a significant investment to maximize profit revenue and we think that there will be an inflection point for our efforts sometimes towards the end of 2014. Again that assumes a January 1, 2014 implementation of Obamacare. If that delayed 90 days, then there could be a potential delay. But even if it is delayed, our sales are strong and continuing on pace.

Steven Schwartz - Raymond James

Okay. Thank you, guys.


(Operator Instructions). Our next question comes from Carl McDonald from Citigroup. Your line is open.

Carl McDonald - Citigroup

There had been some talk over the past couple of months that ending the short-term medical contract would become a qualifying event that would enable you to buy health insurance on the exchange even if it was outside of the open enrollment period. Has HHS officially signed off on that, just interested in where that stands?

Michael Kosloske

First of all, that’s a huge thing. Basically what Carl I was saying is that you can buy a short-term medical, let’s say for six month product. At the end of that term, you can jump right into the exchange, whether it’s a fourth quarter enrollment period or not. So it really makes it for lack of a better term no brainer on our product. And we've heard the same rumors on the street. We have not received confirmation from HHS on that, but we do have several competitors that are announcing that to the distribution and that is something that we're looking into.

Carl McDonald - Citigroup

And the second question, just interested if you have any evidence at this point of small groups actually drop in coverage, the perspective that I've gotten from the insurers, the combination of early renewal, plus some of the confusion about the healthcare [gov] now working has basically increased the amount of small employers that are renewing coverage for ‘14 rather than dropping into the exchange?

Michael Kosloske

Yeah, I would say the best way to address that Carl is that we literally have a land grab of particularly small group brokers that are flocking to Tampa because their commissions are getting cut from 30% down to 5%. Our product is better for the consumer, half the cost, that competitive advantage will increase January 1 when rates are expected to increase on all of competitors individual major medical products. And so we have seen a tremendous amount of interest and we think that the best one to be a very, very large opportunity again HII management has done a billion in that space.

So this is what we've done this before and we’re building again bringing on the gentlemen from United and others to run our brokers department. We are seeing a lot of interest and I think those scripts are really looking for leadership and what's unique about us is we are the private exchange for those employer groups.

But also think progressive, we’re going to recommend what’s best for the consumer and that's mean going on the public exchange, we’re going to recommend that and we’ll make a revenue either way as a distributor for the public exchange or distributing HII on a private exchange as the importers up private exchange program. So we are very optimistic on what we are seeing on the streets with that opportunity.

Carl McDonald - Citigroup

What would you say would potentially cause the 2014 revenue story to derail, so thinking more about the inflection appointment I would assume even on an underlying basis, you could see revenue growth 30% to 35%. So what would cause you to come out and say, we’re going to grow revenue 30% to 35% ‘14 consistent with ‘13?

Michael Kosloske

Well, for me it’s not a matter of if it’s when, so it depends is Obamacare delayed, is your messaging issues as it comes out, this is a huge change, consumers are very confused and we need time to execute our plans we have. For the first time we’re going to be branding and marketing in a very analytical, scientific way through digital marketing with Mia. So it’s a timing issue and so again we could not be more optimistic.

Carl McDonald - Citigroup

And last question for me is with the conversion of the shares, should we expect any material change in the fourth quarter share count or that happen in ‘14?

Michael Kosloske

No, that will be a 2014 event. We put that comment into the press release to let our investors know that between now and our next conference call, we’ll be initiating a process through filing an S1 registration statement, but I think the key point to take away from that section of our press release is that this is an administrative function and has no dilutive effect in our current shareholders.

Carl McDonald - Citigroup

Thank you.


Thank you. Our next question is a follow-up from Steven Schwartz from Raymond James. Your line is open.

Steven Schwartz - Raymond James

Just a couple, actually a quick follow-up on Carl’s question on the share count and the registration. I don’t know the accounting, this is some by registering the shares I understand they are not for sale, it’s really just a function of getting the market cap right for the various services. But does this change the (inaudible) accounting at all?

Michael Hershberger

No, Steven, it does not. The shares will be registered and then held in advance subject to Mike’s decision to exercise the exchange of B shares for A shares. The total shares outstanding won’t change after the registration. When an exchange happens the consequence is that HII will then have more shares outstanding, it will have an equivalent increase in the amount of income. So there will be no dilution because both the numerator and denominator will increase by exactly the same percentage.

Steven Schwartz - Raymond James

Right, but the same funky tax accounting that you have got the past for accounting, that continues for the time being?

Michael Hershberger

That is true, it’s not change in the short term.

Steven Schwartz - Raymond James

All right. And then just Mike you have given your numbers on this before, you mentioned the 385 in one weekly, the brokers maybe you talked to call centers added for the quarter if any, I am sure if you are targeting that or not in brokers added during the quarter?

Michael Kosloske

Yes, we are aggressively focused on organic growth and putting all the pieces in place to have that inflection point sometime towards the end of ‘14, but what we are seeing is what we talked about on our road show, the land grab. When brokers find out we exist and that were an option, there are coming to Tampa, they are signing contracts, they are getting rates produce January 14 when their commissions our chopped yet again and their products go up and price yet again.

Steven Schwartz - Raymond James

Okay, I understood, but can you put a number on that for the quarter?

Michael Kosloske

We will do that on our next call as far as what we have done and what we are doing upto Steve, but I mentioned just to give an indication we had 385 new brokers in one week in October.

Steven Schwartz - Raymond James

Okay, thanks.


Thank you. I show no further questions at this time and would like to turn the conference back over to Mike Kosloske for closing remarks.

Michael Kosloske

I would just like to thank everyone for their time today. And we’re very excited to build out this platform to achieve maximize topline and bottomline growth. And we appreciate everyone’s time this morning.


Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.

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