Description
UICI (UCI: NYSE) is a holding company primarily involved in offering health and life insurance as well as selected financial products to niche consumer and industrial markets. The insurance market is focused on writing health insurance toward the self-employed market, while to a much lesser extent also serving the student insurance market, life insurance, special risk, and senior market.
The company has a market cap of $543 million and is currently trading at book value, 50% of revenues, is repurchasing shares, and is experiencing significant growth in its health insurance market.
After a number of years of losing their identity, UICI has over the past 18 months begun to rid themselves of non-core businesses (including a sub-prime credit card business that experienced significant losses) and has refocused their efforts on the following four businesses: (1) The Agency Field Forces; (2) the Health Insurance Administrative and Service Center; (3) the Student Insurance Group; and (4) the investment in Healthaxis, Inc.
The agents of the insurance subsidiaries of UICI have had their interests realigned with that of management and a stock ownership plan has been implemented which promotes agents to own significant positions in UICI stock. By having the agent’s financial interests aligned with management’s interests, the agents are now more focused on writing the most profitable high quality business they can write. They have clearly tied the interests of management, employees and shareholders together.
In their Insurance Center, UICI has taken great strides in reducing operating expenses while engaging a significant investment in increasing efficiency and productivity of their back office support systems. Included in this initiative are substantial investments in technology in order to provide a better experience for the customer as well as the agents.
The Student Insurance division is the only company in the U.S. that sells, underwrites, issues policies, provides customer service and pays claims all within a single company. This is a market that UICI plans to grow significantly in the future.
UICI owns 47% of Healthaxis, Inc (HAXS), and is also the largest customer of Healthaxis. Healthaxis is focused on improving the paperwork nightmare that exists within most of the healthcare industry. To date, Healthaxis has not been a profitable enterprise, yet with the hiring of a new CEO during the past year, it is anticipated that Healthaxis can provide a profitable return to UICI. The carrying value of the investment in Healthaxis is $9.6 million, while the value of the 47% interest is currently worth $18.9 million based upon Healthaxis’ current market price.
With a refocused business plan, UICI has begun its ascent back to a very profitable company. Through 2001Q3, UICI has earned $0.77 a share. However, these earnings include various non-cash items such as the equity interest loss in Healthaxis, the variable stock compensation system for its agents, and goodwill amortization. Excluding these non-cash items results in earnings of $1.03 through 2001Q3 and projected at $1.36 for the full year, on a stock price of $11.40, for a multiple of 8.4X. Should the variable stock compensation cost be added in, the figures for the year would be $1.23 a share, or a multiple of 9.3X.
The exciting portion of this business is the health insurance UICI is writing primarily targeted to the self-employed. The health insurance industry is currently experiencing huge increases in health insurance premiums of up to 60%, however UICI is able to have the customer benefit from joining a pool of over 1 million insured people in order to realize the ability to choose one’s own doctor and not be tied to the restrictions of a PPO. Through operating efficiencies and a better system that exists in the health insurance industry, UICI is able to offer a very competitive product without the significant annual premium increases that many are experiencing in the health insurance industry.
Through the first nine months of the year, the annualized premiums written for the self-employed market have increased 59% as compared to last year. This large increase in volume is also combined with writing a higher percentage of higher margin, indemnity products while experiencing a very similar loss ratio. It is anticipated that his market will continue to grow significantly over the next five years and provide a substantial increase to profits. The student insurance division has also returned to profitability during 2001 and UICI is focused on continuing to grow this business profitably.
The company has also re-instituted a share repurchase program and has been authorized to purchase up to 4,500,000 shares, of which the company has purchased 964,800 shares this year. Given the recent decline in the stock price, it is anticipated this repurchase schedule will continue in the coming months.
After experiencing significant operating difficulties in 1999 and 2000, the two primary insurance subsidiaries of UICI have been upgraded to a rating of “A” by Fitch. The new management team brought in over the past few years have turned this company around and refocused it on its core businesses. UICI had taken on a considerable amount of debt exposure and over the past year has been able to significantly reduce short and long-term obligations.
UICI is now trading equal to its book value of $11.41, is experiencing significant growth in its insurance products to the self-employed, has a stable balance sheet, is repurchasing shares and it trading in a single digit multiple to earnings.
Catalyst
The ability of UICI to continue to deliver on its refocused plan delivered a year ago. Thus far, they have delivered and the future of health insurance premium growth to the self-employed looks very promising. Currently trading at book value and at only 50% of sales, while repurchasing shares makes this a valid valuation play trading at a significant discount to its intrinsic value.