We lease 7,858 square feet of space for our headquarters in Tampa, Florida under a lease that expires in 2015. In addition, we sublease approximately 4,000 square feet of space for our Insurance Academy in Boca Raton, Florida under a lease that expires in 2015. We believe that suitable additional or alternative space will be available in the future on commercially reasonable terms to accommodate our foreseeable future expansion.
Management’s Discussion and Analysis of Financial Condition and Results of Operations below presents the Company’s operating results for each of the two years in the period ended December 31, 2012, and its financial condition as of December 31, 2012. 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 report entitled “Special Note Regarding Forward-Looking Statements.” Among the factors that could cause actual results to differ materially are those discussed in “Risks 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 of this report.
Our technology platform provides customers, who we refer to as members, immediate access to our products through our distribution partners anytime, anyplace. The health insurance products we develop are underwritten by insurance carrier companies, and we assume no underwriting, insurance or reimbursement risk. Members can price and tailor product selections to meet their needs, buy policies and print policy documents and identification cards in real-time. Our sales are executed online and offer instant electronic fulfillment. Our technology platform uses abbreviated online applications, some with health questionnaires, to provide an immediate accept or reject decision on applications for all products that we offer. Once an application is accepted, individuals can use our automated payment system to complete the enrollment process and obtain instant electronic access to their policy fulfillment documents, including the insurance policy, benefits schedule and identification cards. We receive credit card and Automated Clearing House (“ACH”) payments directly from members at the time of sale. Our technology platform provides significant operating leverage as we add members and reduces the costs associated with marketing, selling, underwriting and administering policies.
We are an industry leader in the sale of 12-month STM insurance plans, an alternative to traditional IMM plans which provide lifetime renewable coverage. 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. We also offer 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. We design and structure insurance products on behalf of insurance carrier companies, market them to individuals through our large network of distributors and manage member relations via our online member portal, which is available 24 hours a day, seven days a week. Our online enrollment process allows us to aggregate and analyze consumer data and purchasing habits to track market trends and drive product innovation. We have established relationships with several highly rated insurance carriers, including Starr Indemnity & Liability Company, Companion Life, United States Fire, ING, Markel and CIGNA, among others. In addition, as of December 31, 2012, the large independent distribution network we access consists of 46 licensed agent call centers and 264 wholesalers, including Marsh, eHealthInsurance and MasterCard, among others, that work with over 8,275 licensed brokers. Our data-driven product design, technology platform and extensive distribution network have enabled us to grow our revenues from $29,878,000 in 2011 to $41,940,000 in 2012.
As of December 31, 2012, we had 23,747 STM plans in force, compared with 18,059 on December 31, 2011, with an average monthly retention rate of 79% from December 31, 2011 to December 31, 2012. We earn our revenues from commissions and fees related to the sale of products to our members. Our ancillary products have created several additional revenue streams and resulted in a significant portion of our business being generated by monthly member renewals. For the year ended December 31, 2012, our premium equivalents, revenue and EBITDA were $75,872,000, $41,940,000 and $4,543,000, respectively, representing a 42.6%, 40.4% and 65.7% increase compared to premium equivalents, revenues and EBITDA of $53,206,000, $29,878,000 and $2,742,000, respectively, for the year ended December 31, 2011. For more detail about the use of premium equivalents and EBITDA as business metrics and a reconciliation of premium equivalents and EBITDA to revenues, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Key Business Metrics-Premium Equivalents” and “EBITDA.”
The following discussion and analysis of our financial condition and results of operations covers periods before and after the Acquisition. The discussion and analysis of periods prior to September 30, 2011 do not reflect the purchase accounting adjustments discussed above and in the financial statements and notes thereto included elsewhere in this report. However, the general nature of our operations was not impacted by the Acquisition. As such, for comparative purposes we will discuss changes between the periods without reference to the effects of the Predecessor and Successor periods, which is consistent with the manner in which we evaluate the results of operations. All references to the year ended December 31, 2012 relate to the annual period ended December 31, 2012 of the Successor. All references to the year ended December 31, 2011 relate to the combined three-month period ended December 31, 2011 of the Successor and the nine-month period ended September 30, 2011 of the Predecessor. The presentation of combined Predecessor and Successor operating results (which is the arithmetic sum of the Predecessor and Successor amounts) is a non-GAAP presentation, which is provided as a convenience solely for the purpose of facilitating comparisons of current results with combined results over the same period in the prior year. Effects of the Acquisition will be discussed where applicable.
As the managing general underwriter of our individual health insurance plans and ancillary products, we receive all amounts due in connection with our plans on behalf of the providers of the services. We refer to these total collections as premium equivalents, which typically represent a combination of premiums, fees for discount benefit plans (a non-insurance benefit product that supplements or enhances an insurance product), fees for distributors and our enrollment fees. From premium equivalents, we remit risk premium to carriers and amounts earned by discount benefit plan providers, who we refer to as third-party obligors, such carriers and third-party obligors being the ultimate parties responsible for providing the insurance coverage or discount benefits to the member. Our revenues consist of the balance of the premium equivalents.
Commission rates for all insurance plans are approved in advance by the relevant carrier. Our commission rates and the length of the commission period typically vary by carrier and plan type. Under our carrier compensation arrangements, the commission rate schedule that is in effect on the policy effective date will govern the commissions over the life of the plan.
our 12-month STM plan and often more than 12 months for our hospital indemnity and discount benefit plans, provided that the policy or discount benefit plan is not cancelled. A member may be enrolled in more than one policy or discount benefit plan simultaneously. A plan becomes inactive upon notification to us of termination of its policy or discount benefit plan, when the member’s policy or discount benefit plan expires or following non-payment of premiums or discount benefit fees when due.
EBITDA. We define this metric as net income before interest expense, 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.
Our revenues consist primarily of commissions earned for our insurance policies and discount benefit plans issued to members, enrollment fees paid by members and administration fees paid by members as a direct result of our enrollment services. We recognize revenues upon the member’s acceptance of a policy. We expect our revenues to increase as we add new members.
Our third-party commissions consist of fees and commissions paid to distributors for selling our products to members, which we pay monthly for existing members and on a weekly basis for new members. We expect third-party commissions as a percentage of revenue to remain generally consistent with prior periods.
Interest expense primarily consists of interest incurred on our outstanding bank note. On February 13, 2013, we repaid our term loan with a portion of the net proceeds raised from the IPO.
Other income includes fees charged to distributors for advanced commissions, whereby we pay distributors commissions on policies sold in advance of when they would ordinarily be due to the distributor. These advanced commissions are made to distributors with an established track record of selling our products. Advanced commission fees range from 0% up to 2% of the premiums for each month that we advance commissions. Advanced commissions to a distributor are based upon the number of future months of expected premium equivalent multiplied by a distributor’s commission rate. We expect other income to increase as we expand our advanced commission structure with the application of the net proceeds of the IPO.
Revenues for 2012 were $41,940,000, an increase of $12,062,000, or 40.4%, compared to 2011. The increase was primarily due to a 94.0% increase in the number of policies in force. The number of hospital indemnity and ancillary policies in force as of December 31, 2012 and 2011 increased as we increased our focus on the sales of our other products to complement our STM sales. The following table presents the number of our policies in force by product type as of December 31, 2012 and 2011:
As of December 31, 2012, we had $750,000 of cash. Since the fourth quarter of fiscal 2009, we have funded our operations primarily with cash flows from operations and, to a lesser extent, working capital and borrowings, as described below.
We experienced positive cash flows from operations during 2012. We expect that we will continue to generate positive cash flows from operations on an annual basis, although this may fluctuate significantly on a quarterly basis. We believe that our available cash, cash flows expected to be generated from operations and net proceeds from the IPO will be adequate to satisfy our current and planned operations for at least the next 12 months. We believe that the net proceeds from the IPO will be sufficient to implement our advanced commission strategy.
On March 14, 2013, we entered into an agreement to terminate certain contract rights with TSG, a managing general agent of the Company, for an aggregate cash price of $5,500,000. Pursuant to Financial Accounting Standards Board (“FASB”) guidance, the full amount plus transaction costs is expected to be expensed during the first quarter of 2013. We do not expect to incur any material future expenses associated with the transaction.
The following summary of cash flows for the periods indicated has been derived from our financial statements included elsewhere in this report (in thousands):
During the year ended December 31, 2012, cash provided by operating activities was $5,342,000 as compared to net cash provided in operations of $2,247,000 for the year ended December 31, 2011. This increase of $3,095,000 was primarily due to revenue growth and our scalable technology platform.
During the year ended December 31, 2012, cash used in investing activities was $251,000 as compared to $5,392,000 for the year ended December 30, 2011. The decrease of $5,141,000 was primarily due to payments made in 2011 for the Acquisition.
Our financing activities have consisted primarily of issuance of long-term debt, periodic repayments of debt, payment of fees for equity issuance, capital contributions from members and distributions of earnings to our members.
During the year ended December 31, 2012, cash used by financing activities was $4,959,000 as compared to cash provided of $3,756,000 for the year ended December 31, 2011. Cash used by financing activities during the year ended December 31, 2012 consisted of payments made on debt and other obligations of $905,000, payments made with respect to equity issuance costs of $1,009,000, and, distributions to members of $3,237,000 less proceeds received from issuance of note payable of $100,000 and proceeds of $92,000 from the issuance of noncontrolling interest in Insurance Center for Excellence, LLC. Cash provided by financing activities for the year ended December 31, 2011 consisted of bank loan proceeds of $4,250,000 and member contributed capital in the amount of $1,135,000 less payments on debt and other obligations in the amount of $328,000 and distributions made to members in the amount of $1,301,000.
(1) On February 13, 2013, we repaid our term loan with a portion of the net proceeds raised from the IPO.
(2) Payments to holders of Series B Membership Interests pursuant to our tax receivable agreement are excluded from our contractual obligations. For additional information, see “Item 1. Business-Our History and the Reorganization of Our Corporate Structure-Tax Receivable Agreement”.
from the IPO as if all such transactions had been completed as of January 1, 2011 with respect to the unaudited consolidated pro forma statements of operations data and as of December 31, 2012 with respect to the unaudited pro forma consolidated balance sheet data. The unaudited pro forma consolidated financial statements reflect pro forma adjustments that are described in the accompanying notes and are based on available information and certain assumptions we believe are reasonable, but are subject to change. We have made, in our opinion, all adjustments that are necessary to present fairly the pro forma financial data.
The unaudited pro forma financial information should be read together with “Item 1. Business-Our History and the Reorganization of Our Corporate Structure,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes included elsewhere in this report.
with regard to the unaudited pro forma consolidated statements of operations, a provision for corporate income taxes on the income attributable to Health Insurance Innovations, Inc. at an effective rate of 37.8%, which includes a provision for U.S. Federal income taxes and assumes the highest statutory rates apportioned to each state, local and /or foreign jurisdiction;
the purchase of the units of Health Plan Intermediaries, LLC owned by Naylor Group Partners, LLC;
the grant to Michael D. Hershberger, our Chief Financial Officer, of restricted stock in connection with the IPO; and
The pro forma adjustments above give effect to activities directly related to completion of the IPO on February 13, 2013. Certain events subsequent to that date were not considered events directly related to the IPO, but rather subsequent events that occurred in the first quarter of 2013 and part of normal, recurring operations and standard, ordinary compensation of members of our board of directors or other unanticipated subsequent events. Those events include the following:
On March 8, 2013, our compensation committee approved equity awards for our executive officers and certain other senior management under our Long Term Incentive Plan. The equity awards consist of an aggregate of 78,500 shares of our Class A common stock.
On March 8, 2013, 100,000 shares of Class A common stock were issued through the over-allotment option.
The unaudited pro forma financial data are presented for informational purposes only and should not be considered indicative of actual results of operations that would have been achieved had the reorganization transactions and the IPO been consummated on the dates indicated, and do not purport to be indicative of statements of financial condition or results of operations as of any future date or any future period.
(2) As a newly formed entity, Health Insurance Innovations, Inc. did not have assets or results of operations until the recent completion of the IPO.
(3) Represents adjustments to reflect (i) the portion of Health Plan Intermediaries Holdings, LLC’s accumulated earnings that Health Insurance Innovations, Inc. received in connection with the conversion of the existing shares of common stock of Health Insurance Innovations, Inc. into shares of Class B common stock and (ii) the related additional amount paid in capital resulting from the transaction.
As described in “Item 1. Business-Our History and the Reorganization of Our Corporate Structure,” after the IPO and the reorganization transactions that transpired, our only material asset was the ownership of approximately 35% of the Membership Interests in Health Plan Intermediaries Holdings, LLC and our only business will be to act as the sole managing member of Health Plan Intermediaries Holdings, LLC. Accordingly, pursuant to FASB guidance, we will consolidate the financial results of Health Plan Intermediaries Holdings, LLC into our financial statements.
Under FASB guidance, Health Plan Intermediaries Holdings, LLC meets the definition of a variable interest entity. Further, Health Insurance Innovations, Inc. is the primary beneficiary of Health Plan Intermediaries Holdings, LLC as a result of its 100% voting power and control over Health Plan Intermediaries Holdings, LLC and as a result of its obligation to absorb losses and its right to receive benefits of Health Plan Intermediaries Holdings, LLC that could potentially be significant to Health Plan Intermediaries Holdings, LLC. As a result, Health Insurance Innovations, Inc. will consolidate the financial results of Health Plan Intermediaries Holdings, LLC and record a noncontrolling interest for the economic interest in Health Plan Intermediaries Holdings, LLC held by the existing members to the extent that the book value of their interest in Health Plan Intermediaries Holdings, LLC is greater than zero. Health Insurance Innovations, Inc.’s and the noncontrolling membership pro forma economic interest in Health Plan Intermediaries Holdings, LLC are 35% and 65%, respectively, as of December 31, 2012. Pro forma net income attributable to the noncontrolling interest on the statements of operations represents the portion of earnings or loss attributable to the economic interest in Health Plan Intermediaries Holdings, LLC held by the noncontrolling members. Noncontrolling interest on the balance sheet represents the portion of net assets of Health Plan Intermediaries Holdings, LLC attributable to the noncontrolling members based on total membership interest of Health Plan Intermediaries Holdings, LLC owned by such member.
(1) We have historically operated our business through Health Plan Intermediaries, LLC. On November 7, 2012, Health Plan Intermediaries, LLC assigned all of the operating assets of its business through a series of transactions to Health Plan Intermediaries Holdings, LLC, and Health Plan Intermediaries Holdings, LLC assumed the operating liabilities of Health Plan Intermediaries, LLC and began conducting operations. As a result, Health Plan Intermediaries Holdings, LLC currently operates all of our business. Pursuant to FASB guidance, we assessed whether any pro forma adjustments in connection with the assignment were necessary. First, we concluded that Health Plan Intermediaries, LLC and Health Plan Intermediaries Holdings, LLC were under common control at the time of the assignment. In addition, after eliminating the effects of intra-entity transactions, the results of operations of the entities before and after the assignment were substantially the same. Accordingly, we determined that the transactions did not result in any pro forma effect. Accordingly, the unaudited pro forma consolidated statements of operations for the years ended December 31, 2012 and 2011 and the unaudited pro forma consolidated balance sheet as of December 31, 2012 present the historical results of Health Plan Intermediaries, LLC as a starting point for the pro forma amounts.
(3) Represents expected total stock compensation expense related to Mr. Hershberger’s restricted stock grant calculated in accordance with FASB guidance. Upon the consummation of the IPO, Mr. Hershberger was granted to an amount equal to 3% of Health Insurance Innovations, Inc.’s enterprise value. We calculated total stock compensation expense over the term of the grant by accounting for an estimated 400,000 shares granted and a grant date price of $14.00, which represents the IPO price, to arrive at a total stock compensation amount of $5,600,000. Taking into consideration the accelerated graded vesting schedule of the grant whereby 40% of the total shares granted vest in 2013 and then the remaining shares vest 20% every October 1 from 2014 through 2016, we calculated $3,487,000 and $1,253,000 of estimated stock compensation expense for the pro forma twelve months ended December 31, 2011 and December 31, 2012, respectively.
(5) Represents amounts to be eliminated in connection with the IPO following application of a portion of the net proceeds of the IPO to pay off all of our outstanding debt, which represent a five-year term loan bearing fixed interest at 5.25%.
(8) As described in “Item 1. Business-Our History and the Reorganization of Our Corporate Structure,” immediately after the IPO and the reorganization transactions that transpired, our only material asset was the ownership of approximately 35% of the Membership Interests in Health Plan Intermediaries Holdings, LLC and our only business will be to act as the sole managing member of Health Plan Intermediaries Holdings, LLC. Accordingly, pursuant to FASB guidance, we will consolidate the financial results of Health Plan Intermediaries Holdings, LLC into our financial statements. The ownership interests of the other members of Health Plan Intermediaries Holdings, LLC (Health Plan Intermediaries, LLC and Health Plan Intermediaries Sub, LLC) will be accounted for as a noncontrolling interest in our consolidated financial statements after the IPO. Represents adjustments to reflect noncontrolling interest resulting from the existing members’ ownership interest of 100% of the Series B Membership Interests of Health Plan Intermediaries Holdings, LLC. Immediately following the IPO, the noncontrolling interest is approximately 65%. Net income (loss) attributable to the noncontrolling interest represents 65%, or $980,000 of net income of $1,418,000 for the year ended December 31, 2012 and 65%, or $747,000 of net loss of $1,149,000 for the year ended December 31, 2011. These amounts have been determined based on the initial public offering price of $14.00 and the assumption that the underwriter’s option to purchase additional shares is not exercised.
(9) Pro forma basic and diluted net income per share was computed by dividing the pro forma net income attributable to our Class A stockholders by the 4,666,667 shares of Class A common stock that we issued and sold in the IPO and the vested shares of Mr. Hershberger’s Class A restricted stock grant. The shares of Class B common stock do not share in our earnings and are therefore not included in the weighted average shares outstanding or net income available per share.
Through December 31, 2012, we had not entered into any off-balance sheet arrangements, other than the operating leases noted above, and do not have any holdings in variable interest entities.
Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the applicable periods. We base our estimates, assumptions and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Different assumptions and judgments could change the estimates used in the preparation of our financial statements, which, in turn, could change the results from those reported. We evaluate our estimates, assumptions and judgments on an ongoing basis. The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our financial statements are described below. We have elected under the JOBS Act to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.
Our revenues consist primarily of commissions earned for our insurance policies and discount benefit plans issued to members, enrollment fees paid by members and administration fees paid by members as a direct result of our enrollment services. The member’s payment includes a combination of premiums, fees for discount benefit plans, fees for distributors and enrollment fees, which are collectively referred to as “premium equivalents.” Reported revenues are net of risk premium remitted to insurance carriers and amounts earned by third-party obligors. Commissions and fees attributable to the sale of STM plans and hospital indemnity policies represent substantially all our revenues for the periods presented. Revenues are net of an allowance for policies expected to be cancelled by members during a limited cancellation period. We establish the allowance for estimated policy cancellations through a charge to revenue. The allowance is estimated using historical data to project future experience. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported. We periodically review the adequacy of the allowance and record adjustments as necessary. The net allowance for estimated policy cancellations was $77,000 as of December 31, 2012.
Revenue is earned at the time of sale. Commission rates for all of our products are agreed to in advance with the relevant insurance carrier and vary by carrier and policy type. Under our carrier compensation arrangements, the commission rate schedule that is in effect on the policy effective date governs the commissions over the life of the policy. In addition, we earn enrollment and administration fees on policies issued.
We report our revenues net of amounts paid to our contracted insurance carrier companies and third-party obligors as we are not the ultimate party responsible for providing the insurance coverage or discount benefits to the member. As a result, we recognize the net amount of revenues earned as the agent in these transactions.
In the first step, we determine the fair value using a combination of three valuation approaches: the cost approach, the market approach and the income approach. The cost approach uses multiples from publicly available transactional data of acquired comparable target companies. Transactions are identified that have occurred over the past three years in the subject Company’s industry. The market approach uses a guideline company methodology which is based upon a comparison of the reporting unit to similar publicly-traded companies within our industry. We derive a market value of invested capital or business enterprise value for each comparable company by multiplying the price per share of common stock of the publicly traded companies by their total common shares outstanding and adding each company’s current level of debt. We calculate a business enterprise multiple based on revenue and earnings from each company, then apply those multiples to our revenue and earnings to calculate a business enterprise value. Assumptions regarding the selection of comparable companies are made based on, among other factors, capital structure, operating environment and industry. As the comparable companies were typically larger and more diversified than our business, multiples were adjusted prior to application to our revenues and earnings to reflect differences in margins, long-term growth prospects and market capitalization.
After computing a separate business enterprise value under the above approaches, we apply a weighting to them to derive the business enterprise value of the reporting unit. The weightings are evaluated each time a goodwill impairment assessment is performed and give consideration to the relative reliability of each approach at that time. Based on these weightings, we calculated a business enterprise value for the reporting unit. We then add debt-free liabilities of the reporting unit to the calculated business enterprise value to derive an implied fair value of the reporting unit. The implied fair value is then compared to the reporting unit’s carrying value. Upon completion of the analysis in step one, we determined that the fair value of the business exceeded its respective carrying value. As such, a step two analysis was not required.
Property and equipment is carried at cost, less accumulated depreciation. As a result of the Acquisition and the related application of purchase accounting to the acquired assets and liabilities, there is a new basis of property and equipment subsequent to the acquisition date. Depreciation expense for property and equipment is computed using the straight-line method over the estimated useful lives of the respective assets, with two to three years for computer equipment and seven years for furniture and fixtures. Leasehold improvements are depreciated over the shorter of the lease term or estimated useful life. We periodically review long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. No impairment losses were recognized for the periods presented.
In July 2012, the FASB issued amended guidance relating to goodwill and other intangible assets which permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with GAAP. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then no further action is required. This guidance is effective as of January 1, 2013 with early adoption permitted. Since this guidance only changes the manner in which we assess indefinite-lived intangible assets for impairment, adoption is not expected to have a material effect on our financial position or results of operations.