(EDGAR Online via COMTEX) -- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations below presents the Company's operating results and its financial condition as of and for the period ended December 31, 2019, and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included herein can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Except for the historical information contained herein, this report and other written and oral statements that the Company makes from time to time contain forward-looking statements, which involve substantial known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. See the section of this annual report entitled "Special Note Regarding Forward-Looking Statements." Among the factors that could cause actual results to differ materially are those discussed in "Risk Factors" in Item 1A of this report. In addition, the following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in connection with the information presented in the Company's consolidated financial statements and the related notes to its consolidated financial statements included in Part IV, Item 15, of this report.
Health Insurance Innovations, Inc. is a Delaware corporation incorporated on October 26, 2012. In this management's discussion and analysis, unless the context suggests otherwise, references to the "Company," "we," "us" and "our" refer (1) prior to the February 13, 2013 closing of an initial public offering ("IPO") of the Class A common stock of Health Insurance Innovations, Inc. and related transactions, to Health Plan Intermediaries, LLC ("HPI") and Health Plan Intermediaries Sub, LLC ("HPIS"), its consolidated subsidiary, and (2) after the IPO and related transactions, to Health Insurance Innovations, Inc. and its consolidated subsidiaries. The term "HPIH" refers to the stand-alone entity Health Plan Intermediaries Holdings, LLC. The terms "HealthPocket" or "HP" refer to HealthPocket, Inc., which was acquired by HPIH on July 14, 2014 (and is now wholly owned by Health Insurance Innovations Holdings, LLC, or "HIIH," a wholly owned subsidiary of HPIH formed on December 17, 2018). The term "Benefytt Reinsurance" refers to Benefytt, LLC, a wholly owned subsidiary of HIIH which was formed on May 1, 2019. The term "TogetherHealth" collectively refers to the three subsidiaries TogetherHealth PAP, LLC, TogetherHealth Insurance, LLC, and Rx Helpline, LLC, which were acquired by HPIH on June 5, 2019, and are all wholly owned subsidiaries of HPIH. The term "TIB" refers to Total Insurance Brokers, LLC which was acquired on August 5, 2019 and is wholly owned by HPIH. The term "ASIA" refers to American Service Insurance Agency LLC, a wholly owned subsidiary which was acquired by HPIH on August 8, 2014. HP, HIIH, Benefytt Reinsurance, TogetherHealth, TIB, and ASIA are consolidated subsidiaries of HPIH, which is a consolidated subsidiary of HIIQ.
We are a technology driven distributor of Medicare and affordable health and life insurance products that meet the demands and needs of our consumers. We market products to individuals through televised commercials, e-commerce and other licensed-agent distribution channels, consisting of both our internal distribution network, and an external distribution network of independently owned and operated distributors.
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker ("CODM"), or decision-making group, in deciding how to allocate resources and in assessing performance. Our President and Chief Executive Officer is our named CODM. As of December 31, 2019, the Company determined that we have two reportable segments within our operating platform, Medicare and IFP. The Company periodically reviews the structure of our organization and CODM communications to assess the continued appropriateness of our segment reporting. The CODM reviews our financial information in a manner substantially similar to the accompanying consolidated financial statements with emphasis on Medicare and IFP as two distinct operating segments. The Medicare and IFP segments are described further below:
Medicare - The Medicare segment consists of consumer engagement activities which generate leads that we both sell to third-parties and feed to our business process outsourcing partners ("BPO") and captive distribution channels to support the distribution of a range of Medicare-related health insurance plans, including Medicare Advantage, Medicare Supplement, and Medicare Part D prescription drug plans.
IFP - The IFP segment focuses on the sale and service of individual and family health insurance plans ("IFP") which encompasses short-term medical ("STM") insurance plans and health benefit insurance plans ("HBIP"). We also offer supplemental products which include a variety of additional insurance and non-insurance products that are frequently purchased as supplements to IFPs.
The adoption of the revenue recognition standard (ASC 606) highlighted the seasonality of our revenues. We generally expect to recognize greater revenue in the first and fourth quarters of each year as a result of the increase in submitted policies during these quarters due to the annual Medicare open enrollment period and the Patient Protection and Affordable Care Act open enrollment period.
Acquisition of TogetherHealth and Entrance into Medicare Business
On June 5, 2019, the Company entered into a Membership Interest Purchase Agreement (the "Purchase Agreement") with RxHelpline, LLC ("RXH"), TogetherHealth PAP, LLC ("THP"), TogetherHealth Insurance, LLC ("THI" and, collectively with RXH and THP, "TogetherHealth"), TogetherHealth Soup, L.P. ("Seller") and certain principals of TogetherHealth, pursuant to which HPIH purchased 100% of the outstanding limited liability company interests of TogetherHealth (the "Interests"). The closing of the transactions contemplated by the Purchase Agreement occurred on June 5, 2019, simultaneous with the signing of the Purchase Agreement.
On July 29, 2019, the Company entered into a Stock Purchase Agreement to acquire the interests of a corporation which owned and operated a domain name in the insurance industry. The acquisition was accounted for as a purchase of an asset and classified as an intangible asset on the balance sheet.
On August 5, 2019, the Company entered into a Membership Interest Purchase Agreement with TIB, a captive Medicare and IFP distribution company, to acquire 100% of the outstanding limited liability company interests. The $22.3 million purchase price of the distribution company was allocated to the identifiable assets acquired and liabilities assumed based on estimates of their fair value with the excess purchase price recorded as goodwill.
These acquisitions marked the beginning of the Company's strategic shift toward Medicare as the core product line.
Exploration of Strategic Alternatives
On July 26, 2019, we announced that our Board of Directors commenced a process to explore, review and evaluate a range of potential strategic alternatives focused on maximizing shareholder value. These alternatives could include, among other things, a sale of the Company or a portion thereof, a strategic business combination, changes in the Company's operations or strategy, or continuing to execute on the Company's current business plan. On March 3, 2020, the Company announced that the review of potential strategic alternatives was ongoing.
Change in Business Strategy
On December 20, 2019, we announced a change in our overall business strategy to accelerate growth within the Medicare segment. The IFP segment will be de-emphasized moving forward and our focus for IFP will be to maximize cash flows and enhance e-commerce capabilities. By decreasing emphasis on new business within the IFP segment, we will be able to use cashflows from the IFP segment to invest in accelerating growth of the Medicare segment.
As a result of these strategic plans to emphasize the Medicare segment, we expect for margins and profitability of our overall business to change over time. Our Medicare segment consists of significantly higher margin business than that of IFP. So, we currently expect for our overall profitability to improve as Medicare becomes a larger percentage of total revenue.
We expect for this change in strategy to have a negative impact on total revenue and profitability in 2020 when compared to 2019. In years following 2020, we expect a positive impact to both revenue growth and total profitability of our business as a result of this change.
Exchange of Remaining Class B Common Stock
On February 12, 2020, the holders of our Class B common stock notified the Company that have elected to exchange all remaining shares of Class B common stock, together with an equal number of Series B Membership Interests in HPIH, into an aggregate of 1,016,667 shares of our Class A common stock (the "Final Class B Exchange") pursuant to the Exchange Agreement, dated February 13, 2013, among the Company, HPIH, and the holders of the Class B common stock (the "Exchange Agreement"). Under the terms of the Exchange Agreement, the closing of the Final Class B Exchange is scheduled to occur on April 7, 2020 unless the Company elects to effectuate the Final Class B Exchange on an earlier date. Upon the closing of the Final Class B Exchange, the Company will cease to have any shares of Class B common stock outstanding and will own 100% of the equity interest in HPIH.
Corporate Name Change and Ticker Symbol Change
On March 3, 2020, the Company announced that the Company will file a Certificate of Amendment to its Certificate of Incorporation to change the Company's name to "Benefytt Technologies, Inc." effective as of March 6, 2020, and the Company's trading symbol on the Nasdaq Global Market will also be changed from "HIIQ" to "BFYT" effective as of March 6, 2020.
Executive Overview of Fourth Quarter and Full Year 2019 Results
Our key metrics and financial results for 2019 are as follows:
Full year revenue from our Medicare segment was $67.8 million.
Fourth quarter revenue from our Medicare segment was $55.9 million.
Full year profit for the Medicare segment was $32.1 million.
Fourth quarter profit for the Medicare segment was $29.7 million.
Expected Duration Units
Expected duration units submitted for Medicare were 2.3 million for the year ended December 31, 2019.
Full year revenue from our IFP segment was $314.0 million, a decrease of 10.6%.
Fourth quarter revenue from our IFP segment was $105.0 million, a decrease of 20.4%.
Full year profit for the IFP segment was $66.8 million, an increase of 12.4%.
Fourth quarter profit for the IFP segment was $22.2 million, an increase of 17.2%.
Expected Duration Units
Expected duration units of submitted IFPs were 4.8 million and 5.1 million, respectively for the years ended December 31, 2019 and 2018, a decrease of 5.8%.
Policy in Force Growth
Policies in force as of December 31, 2019, totaled 498,047, compared to 387,000 as of December 31, 2018, an increase of 28.7%.
Revenue was $381.8 million, compared to revenue of $351.1 million in 2018, an increase of 8.7%.
Net income was $36.7 million, compared to net income of $19.0 million in 2018, an increase of 93.2%.
Adjusted EBITDA was $82.1 million, compared to $59.4 million in 2018, an increase of 38.2%.
GAAP diluted earnings per share was $2.47, compared to $0.97 in 2018, an increase of 154.6%.
Adjusted earnings per share, also referred to as adjusted net income per share, or adjusted EPS, was $4.24 compared to $2.60 in 2018, an increase of 63.1%.
In 2019, we continued to focus on our top initiatives: (i) expanding our entrance into the Medicare space, (ii) improving the lifetime value of policies sold, (iii) new product development, (iv) expanding compliant distribution, (v) improving the member experience, and (vi) enhancing technology.
Key Business Metrics
We rely upon the following key business metrics to evaluate our business performance and facilitate long-term strategic planning:
Revenues. Our revenues primarily consist of commissions and fees earned for Medicare and IFP products issued to members, referral fees, and fees for discount benefit plans paid by members as a direct result of our enrollment services, brokerage services, member management, or referral sales. Revenues reported by the Company are net of risk premiums remitted to insurance carriers and fees paid for discount benefit plans.
Commission rates that we receive for the sale of products are agreed to in advance with the relevant contracted party and vary between contract and policy type. Under our compensation arrangements, the commission rate schedule that is in effect on the policy effective date governs the commissions over the life of the policy. We continue to receive a commission payment as a member renews their policy, or until a plan expires or is terminated.
Expected Duration Units. An expected duration unit represents the cumulative number of months the Company expects to collect from each policy submitted during the period. This metric is important because the vast majority of our revenues are recognized up front at the time the policy is sold. This portion of revenue represents the total amount of commissions we expect to collect over the life of each policy sold. Our expected duration units are an important indicator of our revenues. We have included expected duration units in this report because it is a key measure used by our management to understand and evaluate our core revenue performance and trends, to prepare our annual budget, and to develop short- and long-term operational plans. In particular, the inclusion of expected duration units can provide a useful measure for period-to-period comparisons of our business. Expected duration units has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.
The following table presents expected duration units by product type:
Expected Duration Units by Product Type Year Ended December 31, 2019 2018 Change (%) Medicare Medicare Advantage 2,091,400 - - Medicare Supplement 49,300 - - Medicare Part D 115,900 - - Supplementals 11,700 - - Total Medicare 2,268,300 - - IFP STM <12 Months 151,300 462,200 (67.3 )% STM ? 12 Months 1,109,000 338,200 227.9 % Total STM 1,260,300 800,400 57.5 % Health Benefit Plans 1,192,500 1,754,600 (32.0 )% Supplementals 2,325,700 2,518,200 (7.6 )% Total IFP 4,778,500 5,073,200 (5.8 )% Total Expected Duration Units 7,046,800 5,073,200 38.9 %
Submitted Applications. Our submitted applications are an important input of our expected revenues when included in context with the corresponding expected average duration of the submitted application. A member may be enrolled in more than one policy or discount benefit plan simultaneously. Submitted applications will differ from the amount of approved applications. We have included submitted applications in this report because in conjunction with expected duration units, it is a key measure used by our management to understand and evaluate our core revenue performance and trends, to prepare our annual budget and to develop short- and long-term operational plans. In particular, the inclusion of submitted applications can provide a useful measure for period-to-period comparisons of our business.
The following table presents submitted applications by product type:
Submitted Applications by Product Type Year Ended December 31, 2019 2018 Change (%) Medicare Medicare Advantage 53,900 - - Medicare Supplement 1,200 - - Medicare Part D 3,000 - - Supplementals 300 - - Total Medicare 58,400 - - IFP STM <12 Months 38,000 117,200 (67.6 )% STM ? 12 Months 105,800 35,600 197.2 % Total STM 143,800 152,800 (5.9 )% Health Benefit Plans 126,400 190,100 (33.5 )% Supplementals 257,400 278,700 (7.6 )% Total IFP 527,600 621,600 (15.1 )% Total Submitted Applications 586,000 621,600 (5.7 )%
The following table presents approved applications by product type:
Approved Applications by Product Type Year Ended December 31, 2019 2018 Change (%) Medicare Medicare Advantage 49,600 - - Medicare Supplement 1,100 - - Medicare Part D 2,800 - - Supplementals 300 - - Total Medicare 53,800 - - IFP STM <12 Months 38,000 117,200 (67.6 )% STM ? 12 Months 105,800 35,600 197.2 % Total STM 143,800 152,800 (5.9 )% Health Benefit Plans 126,400 190,100 (33.5 )% Supplementals 257,400 278,700 (7.6 )% Total IFP 527,600 621,600 (15.1 )% Total Approved Applications 581,400 621,600 (6.5 )%
Approved applications represent the number of submitted applications that were approved by the relevant insurance carrier for the identified product during the relevant period. Medicare approved applications are calculated assuming a 92% conversion of submitted applications.
Constrained Lifetime Value per Approved Application ("CLTV"). We have included CLTV in this report because it is a key measure used by our management to understand and evaluate our core revenue performance and trends, to prepare our annual budget and to develop short- and long-term operational plans. CLTV is the constrained lifetime value of both the sales and marketing, and member management performance obligations, expected to be recognized over the life of the products, divided by the number of approved applications received during the reporting period. Total CLTV excludes the fulfillment-only applications that represent low margin products where the Company outsourced all sales and marketing obligations and some of its member management services. We believe that excluding these fulfillment-only applications from CLTV provides greater insight into our core operations. The inclusion of CLTV can provide a useful measure for period-to-period comparisons of our business. CLTV has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.
Prior to the adoption of CLTV, the Company used Constrained Lifetime Value per Submitted Application ("LVSA") as a key metric. While there is little distinction between submitted and approved applications for IFP, approved applications are a more useful metric for management with respect to Medicare products and therefore now uses CLTV as a substitute for LVSA.
The following tables present the Constrained Lifetime Value ("CLTV") per approved application, by product type ($ in thousands):
Year Ended December 31, 2019 2018 Change (%) Medicare(1) $ 1,155 $ - - % Short Term Medical<12 months 342 437 (21.7 )% Short Term Medical ?12 months 934 1,203 (22.4 )% Total STM 787 625 25.9 % Health Benefit Plans 759 829 (8.4 )% Supplemental 350 340 2.9 %
(1) CLTV per approved application for Medicare is presented gross of customer care and enrollment expenses ("CC&E"). Including CC&E, Medicare CLTV per submitted application for the year ended December 31, 2019 was $996.
The following tables present expense metrics per approved application, by product type ($ in thousands): Year Ended December 31, 2019 Medicare variable marketing cost per approved application(1) $ 374 Medicare variable CC&E cost per approved application(2) 246 Total Medicare cost per approved member $ 620
(1) Medicare variable marketing cost per approved application includes direct costs incurred in member acquisition for all Medicare products from our direct marketing partners and online advertising channels divided by Medicare approved applications in each period.
(2) Medicare CC&E cost per approved application includes compensation and benefits costs for personnel engaged in assistance to applicants during the enrollment process divided by Medicare approved applications in each period. CC&E costs include amounts netted against revenue for certain Medicare BPO relationships.
EBITDA. We define this metric as net income before interest, income taxes, and depreciation and amortization. We have included EBITDA in this report because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, the exclusion of certain expenses in calculating EBITDA can provide a useful measure for period-to-period comparisons of our business. However, EBITDA does not represent, and should not be considered as, an alternative to net income or cash flows from operations, each as determined in accordance with GAAP. Other companies may calculate EBITDA differently than we do. EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.
Adjusted EBITDA. To calculate adjusted EBITDA, we calculate EBITDA, which is then further adjusted for items such as stock-based compensation and related costs, and items that are not part of regular operating activities, including tax receivable adjustments, fair value adjustments to contingent consideration, indemnity and other related legal costs, and severance, restructuring, and acquisition costs. Adjusted EBITDA does not represent, and should not be considered as, an alternative to net income or cash flows from operations, each as determined in accordance with GAAP. We have presented adjusted EBITDA because we consider it an important supplemental measure of our performance and believe that it is frequently used by analysts, investors and other interested parties in the evaluation of companies. Other companies may calculate adjusted EBITDA differently than we do. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.
The following table presents a reconciliation of net income to EBITDA and adjusted EBITDA ($ in thousands):
Year Ended December 31, 2019 2018 2017 Net income $ 36,730 $ 18,964 $ 26,491 Interest expense (income) 5,646 25 (19 ) Depreciation and amortization 11,842 4,799 4,044 Provision for income taxes 10,093 10,672 16,818 EBITDA 64,311 34,460 47,334 Stock-based compensation and related costs 10,731 12,878 7,890 Fair value adjustment to contingent consideration (3,472 ) - - Transaction costs 1,986 321 745 Tax receivable agreement liability adjustment (212 ) 1,471 (11,835 ) Indemnity and other related legal costs 7,721 6,614 1,557 Severance, restructuring and other 1,043 3,687 248 Adjusted EBITDA $ 82,108 $ 59,431 $ 45,939
Adjusted net income. To calculate adjusted net income, we calculate net income then add back amortization (but not depreciation), interest, tax expense, items such as stock-based compensation and related costs, and other items that are not part of regular operating activities, including, tax receivable adjustments, indemnity and other related legal costs, severance, restructuring, and . . .
Mar 04, 2020
(c) 1995-2020 Cybernet Data Systems, Inc. All Rights Reserved