Why Health Insurance Innovations Dropped 21.9% Today

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What happened

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After short sellers suggested the company is overvalued because of investigations into its marketing practices, questions regarding its licensure, and insider selling, Health Insurance Innovations (NASDAQ: HIIQ) shares lost 21.9% of their value today.

So what

Health Insurance Innovations sells short-term health insurance and hospital indemnity plans online and via third-party distributors. 

The company's sales and share price have been increasing. However, short-sellers took aim at the company today in a report that cites a 42 state investigations into its sales practices, a rejection of its application for licensure in Florida, and poor marks on consumer-reporting websites, including the Better Business Bureau. The report also highlights $50 million in insider stock sales as the company's shares have been rallying.

At the time of this writing, management is hosting a conference call that is (ostensibly) addressing the issues raised by short-sellers, so investors will want to tune in and hear what Health Insurance Innovations says about these matters. In the meantime, here's what management had to say about the investigation in its most recent 10-Q filing with the SEC:

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The Company received notification in April 2016 from the Indiana Department of Insurance that a multistate examination had been commenced providing for the review of HCC Life Insurance Company's ("HCC") short-term medical plans, Affordable Care Act compliance, marketing, and rate and form filing for all products. In May 2016, the Company received notice that the Market Actions Working Group of the National Association of Insurance Commissioners determined that the examination would become a multistate examination. As the Company was a program manager of HCC products at that time, the notification indicated that the multistate examination will include a review of the activities of the Company and a review of whether the Company's practices are in compliance with Indiana insurance law and the similar laws of other states participating in the examination. The Indiana Department of Insurance is serving as the managing participant of the multistate examination, and the examination includes, among other things, a review of whether HCC (and the Company) has engaged in any unfair or deceptive acts or non-compliant insurance business practices. At present, forty-two states have joined the multistate examination. On June 1, 2016, the Company responded to an initial document production request in this matter. The Company received notice on March 16, 2017, that Indiana may expand the scope and time period of the examination to include a review of the Company's marketing, sales, and administration of insurance products for all parties with whom HII conducted business. This notice was provided through an additional "warrant" which is similar to an investigatory subpoena. Additional discussions with the lead investigators took place on March 29, 2017, in which the Company sought modifications to the scope of any potential expansion, and offered to provide additional information on a voluntary basis, but in the meantime, the Company has nevertheless focused on providing the information requested by the expanded warrant. In addition to the multistate examination led by Indiana, we are aware that several other states, including Florida and South Dakota are reviewing the sales practices and potential unlicensed sale of insurance by independently owned and operated licensed-agent call centers utilized by the Company.


The Company is aware of and managing additional claims and inquiries in other states that, except for the inquiries described below, the Company does not believe are material at this time. Except as otherwise described below, it is too early to determine whether any of these regulatory examinations will have a material impact on the Company. The Company is proactively communicating and cooperating with all applicable regulatory agencies, and has provided a detailed action plan to regulators that summarizes the Company's enhanced compliance and control mechanisms."

Now what

Second-quarter revenue of $61.8 million was 39% higher year over year, and adjusted EPS of $0.46 was up 70% from one year ago. Health Insurance Innovations reported 359,000 policies in force in June, and as a result, it upped its full year sales growth forecast to a range of between 22% to 25% from prior guidance for between 15% to 20%. If it hits that target, then it expects to report adjusted EPS of $1.45 to $1.55, up 29% to 38% from last year. 

The numbers, however, might not take into consideration any costs associated with settling any ongoing investigations or any risk associated with failing to receive a license in Florida. There's also a risk that healthcare reform -- or lack thereof -- in Washington has negative unintended consequences for the short-term health-insurance market. 

The company's growth makes this stock intriguing, but until management adequately addresses the questions short-sellers are raising, I expect Health Insurance Innovations' stock will be too volatile for most investors to consider owning it. Instead, it's probably best to add it to a watch list and focus on other stocks, at least until the dust settles.

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Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.