HIIQ: The Big Deception
HIIQ-specific complaints were effectively 0.00% of policies in force
-CEO Gavin Southwell, November 2017 conference call
IMPORTANT – Please read this Disclaimer in its entirety before continuing to read our research opinion. The information set forth in this report does not constitute a recommendation to buy or sell any security. This report represents the opinion of the author as of the date of this report. This report contains certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. All are subject to various factors, any or all of which could cause actual events to differ materially from projected events. This report is based upon information reasonably available to the author and obtained from sources the author believes to be reliable; however, such information and sources cannot be guaranteed as to their accuracy or completeness. The author makes no representation as to the accuracy or completeness of the information set forth in this report and undertakes no duty to update its contents. The author encourages all readers to do their own due diligence.
You should assume that as of the publication date of his reports and research, Aurelius and possibly any companies affiliated with him and their members, partners, employees, consultants, clients and/or investors (the “Aurelius Affiliates”) have a short position in the stock (and/or options, swaps, and other derivatives related to the stock) and bonds of Health Insurance Innovations. They therefore stand to realize significant gains in the event that the prices of either equity or debt securities of Health Insurance Innovations decline. Aurelius and the Aurelius Affiliates intend to continue transactions in the securities of Health Insurance Innovations for an indefinite period after his first report on a subject company at any time hereafter regardless of initial position and the views stated in Aurelius’ research. Aurelius will not update any report or information on this website to reflect such positions or changes in such positions.
Please note that Aurelius, the author of this report, and the “Aurelius Affiliates” are not in any way associated with Aurelius Capital Management, LP, a private investment firm based in New York, and any affiliates of or funds managed by the latter company.
We are short Health Insurance Innovations (NASDAQ: HIIQ).
We believe HIIQ management has made a series of misleading statements that conceal thousands of customer complaints that have not been disclosed to investors.
Documents recently filed by the FTC reveal that HIIQ received more than five thousand complaints from customers being defrauded by boiler rooms run by Steve Dorfman. The tables below show that HIIQ received 1,976 complaints in 2016, 2,335 complaints in 2017, and 1,025 complaints in 2018 (before Dorfman was shut down by the government). These were described as “escalations” by HIIQ and the customers frequently complained that agents had misrepresented HIIQ products:
Source: FTC court filing
We would not be surprised if HIIQ has received tens of thousands of customer complaints in aggregate, that management has not disclosed to investors, because we believe Dorfman is only one player inside a vast ecosystem of unscrupulous actors selling HIIQ policies. We also find it likely that the total number of victims is far higher because most people don’t realize they’ve been scammed until they get sick and learn that the policy they purchased doesn’t cover what they were told it does.
Yet HIIQ management has consistently made statements to investors suggesting that HIIQ has received virtually no customer complaints and has “market leading customer satisfaction”. For example, on a November 2017 conference call, CEO Gavin Southwell declared that “HIIQ-specific complaints were effectively 0.00% of policies in force” during the quarter. In August 2018, Southwell again referenced “an absolutely tiny, tiny number of complaints” and stated that “people who are attacking this, they’re not attacking it based on any data or facts”. In October 2018, Southwell again touted that “we can show them [regulators] a very happy customer base, we can show them a very low number of complaints”.
Source: November 2017 Conference Call and Investor Presentation
By adding qualifiers when referring to complaint data such as “HIIQ-specific” or “Department of Insurance”, management may claim that its statements are technically true. But we find them highly misleading because they have failed to mention the thousands of complaints which have indisputably poured in from customers who say agents lied to them.
Investors and Sell Side analysts have relied on management’s representations to promote the (fictitious) narrative that virtually no HIIQ customers complain. For example, after the closed-door December 2018 analyst day, one analyst touted the “stunningly limited number of complaints”. The analyst stated that a table provided by management showing only 25 customer complaints (via the Department of Insurance) “was the most powerful chart of the day” and “should help silence the Twitter-based critics”. We note that CEO Southwell and CFO Hershberger collectively sold more than four million dollars worth of stock in early February 2019 personally, just over a month after the analyst day (here, here).
While management has consistently touted the company’s compliance program, internal HIIQ emails contained in the FTC filing demonstrate that HIIQ management was aware that Dorfman’s boiler rooms were misleading unsuspecting families throughout 2017. In a 2017 email, HIIQ’s Agency Compliance manager wrote “this appears to be a widespread issue”, “we still have inaccurate information being presented along with agents speaking to subjects they have no visibility on”. Another HIIQ supervisor wrote “Dee stated that the incorrect information being given by Simple Health to members is getting out of control”.
We believe HIIQ management is misleading investors about the true nature of its business. We continue to believe it is now only a matter of when, not if, HIIQ’s business will implode. We therefore see enormous downside potential.