Elevance Health Inc (ELV) 2002 Q1 法說會逐字稿

Good morning. Welcome to the Cobalt Corporation first quarter 2002 results conference call. All party pant ins a listen-only mode. Following the formal presentation, instructions will be given for the question and answer session. If anyone needs assistance during the conference, please press star followed by the 0. The conference is being recorded today, Tuesday May 7th, 2002. I would like to turn the all over to Bill [Safro], Manager of Corporate Communications.

Thank you. Good morning, everyone. Welcome to the Cobalt's earnings conference. The President, Chairman and CEO will begin with a review of the quarter. Joining him to answer questions is Gail Hanson, our Chief Financial Officer.

Before we begin, I'd like to refer you to the statement on our news release, and with that, I'd like to introduce you to Thomas Hefty.

Thank you, Bill. Thank you for joining us for today's call. In addition to Gail Hanson, with us today here are Michael Bernstein who heads up our me to Milwaukee health care plans and Steve Bablitch who directs our health care plans in the rest of the state of Wisconsin, along with Dr. Jim [Harder], our medical director.

This quarter completes the first full year as a Blue Cross plan and obviously pleased with results. 55 cents a share overall. As we outlined last year and during our earlier calls, where we raised earnings guidance, we continue to focus our business efforts in two areas. First, improving margins in our core health plan business and we achieved that paring unprofitable business, the cancellation of the medicare risk business at year end and calling selected unprofitable markets in the Milwaukee area for comp care.

Second, harvesting value from some of the specialty businesses where we do not enjoy a strategic advantage, and this quarter, we made important step ins completing the AMS buy back of shares and reaching agreement for reduction in AMS holdings with the now filed secondary offering of AMS shares. In that area, we also completed the sale of our specialty behavioral health care system and Gail Hanson will discuss in more detail how the developments flow through the quarterly earnings.

Beyond the continuing financial turn around, several other positive developments I'd like to share with you. We announced earlier the Wisconsin Supreme Court gave the final approval for the Blue Cross conversion in Wisconsin. In business, the Blue Card business where we process for other Blue plans continues to grow very rapidly, volumes up almost 50%, compared to a year ago.

And in that national Blue Cross arena, entered into a marketing agreement with High Mark Blue Cross of Pittsburg for marketing national accounts. Second, we continue to strengthen our core health business franchise, both our comp care Blue HMO and metro Milwaukee and unity HMO in central Wisconsin received notification of three year NCQA accreditation. In terms of the franchise value, we have the Blue brand, NCQA accreditation for the largest two HMO's and long-term arrangements with the highest health care providers in the marketplace. Reflecting the long term agreements with highest quality health care delivery systems, this month, we reached an agreement extending from additional three year HMO with Mayo regional health group in Wisconsin.

And finally, we achieved another step in our plan to create a [investment] subsidiary for government medicare administration business. In this business, we're the largest processor in the country in terms of claims volume with roughly 20% of the national market. During the quarter here, we successfully completed the government audit necessary for that separation. In terms of our core health business, pricing remains firm in all of our markets. Our loss ratio on insured medical business improved to 87.9%, and we believe that further progress can be achieved in the coming quarters. Our observed pricing trends after benefit buy downs are now 12 to 18%. Depending on region and type of product. In each area, those pricing trends now exceed our observed claim trends which have moderated and are now in the range from 10% up to 16%.

You can see we continue to gain advantage in each of those markets. As a reminder, this year, there are no changes in provider contracting in Cobalt. This provides with claim trending. The claim processing continues to be stable with the inventory pending claims for Blue branded businesses down slightly, about a 5% reduction in inventory pending claims from year end.

At about a 15% reduction in pending claims from a year ago. Overall, the balance sheet has been strengthened and the number of days of claims held in reserve is increased slightly since year end. Turning to the revenue lines, revenue was down as anticipated with a paring of unprofitable business. Here, the SA&G ratio was expected to increase slightly as we stated in our earlier earnings guidance.

We've been able to manage those expenses and adjust more rapidly overall. Although our insured medical SA&G ratios are up slightly to 10.8%, our overall SA&G ratios for Cobalt dropped to 13.9%, against total health revenues compared to 14.8% in the fourth quarter last year, and 14.9% in the first quarter of 2001.

Beyond those ratios, I would point out that these numbers include an accrual which we took in the first quarter of $700,000, for severance and reorganization expenses to be expended in the upcoming quarter.

In terms of pipeline for marketing for 2003, introduced this month to define contribution plan into the market. In specialty, our combined dental HMO and PPO unit created at the end of last year. Brought together the dental HMO and Blue branded PPO from Blue Cross into a single unit and a single Blue brand. This is one of the advantages of the Blue conversion and merger.

Our internet marketing begun in late 2000 continues to have steady improvement. Here we offer a Blue branded product reflecting the cost savings of internet marketing. And finally, our insured managed care workers product continues to be strong as pricing has been extremely firm in the workers' compensation market, not only here in Wisconsin, but across the country. And that tight market has brought renewed interest in the cost saving knee curs of managed care workers compensation and as a reminder, been in that business for 12 years.

In closing, and with regard to guidance, we're obviously very pleased by the quarter. We improved our margins. We're focusing on the core Blue business. Harvested value from our specialty businesses and from AMS and we ended the quarter with a more conservative balance sheet. Our internal goals, stretch goals and exceed public expectations. And I am pleased that we achieved those internal goals in the first quarter. We continue to build confidence in those number, and therefore, we're not raising earnings guidance of 75 cents to 90 cents for the full year at this time. Again, those numbers exclude AMS and the earnings from discontinued operations during the first quarter.

Gail Hanson will now give you some more detail on our quarterly results. Gail?

Thank you, Tom.

I want to remind the listeners that our earnings are broken into two components. Income from continuing operations and income from discontinued operations net of tax. The discontinued operations of 23 cents per share represents the business of innovative businesses group, the subsidiary sold to APS at the end of March of 2002. Included in those discontinued operations is an after tax gain on that sale of approximately $9.9 million. Continuing operations of 32 cents per share include the results of Cobalt's remaining businesses and investments in American medical security group. Cobalt share of American medical security group AMS, the earnings net of tax, our share $2.8 million or 7 cents a share in earnings for the quarter. Included in that 2.8 million dollars, approximately $400,000 or a penny a share gain on the repurchase of AMS shares, the shares purchased in the quarter. AMZ's earnings released yesterday, and as well, increased the guidance for the year.

Included in the continuing operations is a nonrecurring favorable settlement of approximately 6 cents a share after tax from a settlement with a vendor partially offset by reserves. The favorable impact reported at holding company. Also recorded at the holding company as Tom mentioned this quarter $700,000 pretax severance charge relating to down sizing in line with declines in membership and sales of a subsidiary. After removing the AMZ earnings, the nonrecurring items for settlement and accrual, Cobalt earnings would equal 21 cents per share. This exceeds the upper end of the range we gave on April 12th at our guidance call. The range 19 cents -- 17 to 19 cents for the quarter. The cash flow statement in our -- when you see it in our 10-q shows cash flows from operation of 9.4 million dollars in the quarter. Due largely to anticipated payments on claims for cancelled groups.

From December 31st, 2001, to March 31, 2002, claim reserves on two specific cancelled locks declined. The medicare risk claim reserves declined by 2.8 million dollars, and the claim reserves on the elimination of certain HMO membership declined by 11.8 million dollars after taking the declines into effect, the rest of the operations produced positive cash flow.

The days in reserve which we calculate on the medical business of the company increased from 60.3 days to 62.3 days as of the end of the first quarter. The reserves remain strong. With the sale of behavioral health business, which constituted the majority of the specialty services reporting segment, Cobalt consolidated the segment reporting to 4 segments by combining the specialty services segment with specialty risk segment. As Tom mentioned, we have completed the first accept step on the orderly reduction of our holdings in American medical security. The second step is the secondary offering of 3 and a half million shares that has been filed to the security and exchange commission. Upon completion, Cobalt's ownership will decline from current 39% to less than 12%.

This ownership decline result ins a change in the method of accounting for the AMZ investment. When the equity method to cost method of accounting. Under the current method, Cobalt's investment carried at equity book value which is approximately $12.97 per share. Compared to market value at the close of business yesterday of $17.50.

Therefore, any sale would produce a book gain at those levels. Cobalt currently includes in earnings per share the prorata share of AMZ earnings. Under the cost accounting method after the AMZ sale, Cobalt's investment in AMZ carried at market value and income from the AMZ investment reported by Cobalt's only paid to dividend. I think one of the real stories in the AMZ sale is that our investment in AMZ uses up considerable amount of statutory capital.

The AMZ investment accounts for 34 million of Blue Cross's company action level requirement. The sale of AMZ will dramatically reduce capital requirements and improve both Cobalt's capital position and flexibility. As you look at our numbers, a reminder, the four segments continue to report in the first quarter of 2002 all reported profitable earnings. With that, I'll turn the call back to Tom.

Thank you again for joining us and pleased with the quarter. Open it for questions.

Thank you, sir. Ladies and gentlemen, at this time we'll begin the question and answer session. If you have a question, please press star followed by is 1 on your phone. If you would like to decline from the polling process, please press star followed by the 2. You will hear a prompt acknowledging your selection. Your questions will be polled in the order received. If you are using speaker equipment, you will need to lift the hand set before pressing the numbers. One moment, please, for our first question.

Our first question comes from James lain with Solomon Smith Barney. Go ahead.

Hi. Good morning. Congratulations on the quarter. Two questions and then get back in the queue. First, since comp care, the HMO in Milwaukee lost more than $8 million in the fourth quarter of 2001, and the sequential improvement in the insured products results was about $3 million, is it logical to assume that a slightly profitable comp care in the fourth quarter of this year would suggest that insured product operating profit could be in the area of 8 to 9 million? What I'm trying to get at is just what kind of sequential improvements we might see in the balance of the year. My second question was, could you tell us what comp care did in the first quarter, what you booked, and what the improvement sequentially in the insured business operating profit was from medicare?

So the first thing is just about insured profit growth in the balance of the year. The second thing, is what did the comp care turn around contribute to the first quarter and what did the medicare exposure reduction contribute in the first quarter? Thanks.

I'll ask Gail to deal with the first question. Michael Bernstein is here and will talk briefly about the comp care improvement. It is pared on unprofitable business. The mix is better. Mike can talk about the differences.

Sure. Good morning, Jim. We reported in earlier guidance call that comp care's medical improvement from the end of the year to the first quarter was about 700 basis points, which is exactly what we were hoping to accomplish. That left a modest loss for the first quarter on the net basis for comp care and we're seeing sequential improvement and expect by the fourth quarter that comp care itself as a product line -- we're managing it in concert with Blue Cross. The product will be in the black in the fourth quarter. And, our challenges is managing administrative expense and trying to restore growth.

For the medicare risk business (inaudible) just a reminder that that business cost us $24 million in the year 2000 and at the end of 2000, put up a premium deficiency reserve. The fourth quarter of 2001, we had revenues on that business of $16 million.

Our net underwriting loss on the business was $350,000. So the premium deficiency reserve mitigated some of the losses, but it continued to lose business on a net underwriting basis and that's off the books starting in 2002.

Okay. So on an apples to apples basis, medicare change didn't -- medicare going off didn't change much because most of the losses covered by a premium deficiency reserve in the fourth quarter, and comp care -- it sounds like comp care improved a lot sequentially from the $8 million loss in the fourth quarter. Did anything else go in the negative direction or given the fact that you're estimating earnings, you sort of took a conservative approach given that it's a beginning of the year?

Jim, this is a quarter where all of our units and coverage types, sort to speak, our pricing exceeded the trend and made improvement across the board.

Okay. Thanks, and congratulations again to Mike and his team. Thanks.

Our next question comes from John Stabo. Please go ahead with your question.

Hi, good morning. It's Amy on for John. Quick question for you. Given the changes in comp care, do you expect the statutory capital requirements to come down for the subsidiary, and if so, when would that take affect?

We do expect a statutory capital requirements to come down. Actually, for both Blue Cross and comp care as we exited the medicare risk business and exited unprofitable HMO business, that premium rolls off our books over 12 months so it rolls off a quarter a quarter, and as that premium rolls off, the capital requirements will be reduced so we've already seen that in the first quarter and will continue to see that throughout the remainder of the year.

If you looked at the statutory capital position from last year end to end of the first quarter, it has improved.

Okay. Then just one follow up on comp care. Talked in the past after the AMZ devest which you are, may merge into Blue Cross Blue Shield is that still the plan? How soon after the reduction in AMZ holding could that happen?

Let Michael Bernstein talk about an operationally. Again, focusing on Blue branded business. We have branded comp care to use the Blue brand, and organizationally, after the completion of the Blue Cross conversion and the merger with Wisconsin united services, free to do that and Mike will talk about the calendar for implementation.

We're in the planning process of merging comp care and Blue Cross and trying to understand the most favorable capital plan might be for doing that. And I expect that we will be executing that plan yet this year but probably in the fourth quarter.

Okay. Great. Thanks very much.

The next question from John Rasman from Lehman Brothers.

A quick clarification and then another question. The 75 to 90 cent guidance, what are you including in the first quarter? 21 cents that Gail mentioned or the 25 cents?

It is the 21 cents.

Okay. That's helpful. And then, you mentioned Blue Card business up, I think, 50% or so, Tom, in the first quarter. Could you talk about the driver there is? Is there a change in geographic mix or where exactly is that growth coming from?

The national account Blue business is our new joint marketing arrangement with High Mark. The Blue card business is essentially self insured processing for Blue branded business sold elsewhere, but for companies having employees in the state of Wisconsin. And it is that segment in which the Blues have greatly expanded their market share in recent years, and it is where the Blue franchise system provides great franchise value with the growth. So, it is a story of Blue brand at the consumer level, in terms of defined contribution plans, in terms of individual and small group products, and it's a story of national account growth because the Blue Card system is really the only national account product that covers all 50 states in terms of national managed care companies today.

Okay. That's helpful. So basically the High Mark agreement is driving it. Just last question. I think you mentioned the Mayo contract renegotiation in the past quarter. Can you give us a sense of the rate increases on the provider side in the past quarter and then any other big contracts coming up we should know about. Sounded like the provider basis is stable this year. It's my guess there's nothing too big coming up.

I'll let Steve talk about Valley and the university arrangement in central Wisconsin, and in terms of the largest provider in Milwaukee, we have a long term, multi-year contract. Steve talk about Valley and the university.

Valley is our joint venture arrangement with the Mayo system in o Clair. What we're seeing in terms of rate increases for the first quarter is in the mid teens, right around the 18% range. The HMO that we have in south central Wisconsin and Madison is our joint venture with the university of Wisconsin hospital and clinic. And we're seeing, again, mid teen, slightly below Valley at about 16%.

The joint venture renewal with Mayo has been negotiated. We are about to ink the deal. That is an extension of our existing agreement which is three years, ending this year. So we'll commence a new three-year agreement with Mayo beginning January 1 of 2003.

Okay. That's helpful. I'll get back in queue.

Next question is a follow up from Mr. James Lane. Please go ahead with your question.

Yeah. Thank you. Looking forward, I was wondering if you could comment on if there is -- if there are anymore non-strategic smaller businesses or at this point, do you feel like the portfolio is exactly where you want it?

The other question I had was related to the Blue Cross Blue shield financial monitoring process. What's the process for being released from that program? And does it have any business implications or was it more of a sort of a precautionary move by the association? Thanks.

In terms of the last question, it has no business implications. It reflected the capital leverage that was on the company. And, with the sale of AMS, again, we have to carry capital both in terms of state regulation and the national association monitoring process.

With the orderly reduction in AMZ holdings, we'll have a substantial improvement and would anticipate being off that process by year end.

In terms of your other question, could you repeat it in terms of the first question?

Sure. My other question, Tom, was just, are you -- is the portfolio of products and services and businesses that Cobalt has now really going to be the core? Or are there anymore non-strategic components to the business that could also potentially produce some cash dollars to the parent company?

There are some. We continue to look at the portfolio. As you may know, from following the company over the years, we were into specialty businesses before they became fashionable. And so, we have a full portfolio of specialty companies, from electronic claims and software, to health care recovery services, to the other range of ancillary products.

We continue to look at those. Our goal is to focus on the core business. And, as opportunities develop, you may see us make additional transactions.

Okay. Just one follow on and then won't get back into the queue. I would assume that given the fact that you paid down a little bit of debt in the quarter that statutory capital adequacy now is fairly solid. I would assume otherwise you'd keep the cash at the parent or be putting it down into subsidiaries. Is that a correct assumption?

Yes, Jim. The statutory capital at the business units continues to improve, so we feel comfortable on the progress there. As we make money and as the capital requirements are reduced by the lower level of business. Both of those things act in our favor.

Jim, I'd add, as you know, the Wisconsin data is available on the web site for the commissioner of insurance. And, as we look at the marketplace, there are three small provider sponsored HMOs that are significantly leverages. Again, you can look at the data yourself. As our financials turn around and we look forward, I think you'll see us looking to take advantage of those in Wisconsin market opportunities.

Great. Thank you.

Our next question is a follow up from Mr. John Rasman with Lehman Brothers.

Hi, thanks. A quick question on the self funded business. The profitability that turned this quarter, could you talk a little bit about what the difference there was? Didn't look like a dramatic change in revenues. Was there a new expense control going on there or maybe just what was key driver that took profits in that segment?

We continue to cut expenses internally and the Blue Card profitability goes through that line, and as I mentioned earlier, Blue Card continues to grow very nicely.

Okay.

Yes.

For the Blue Card program, we don't maintain membership. We get paid a fee for the claims processed and a percentage of the discounts that are passed on to Blue Cross plans in other states. And so, that as volume goes up, the earnings on that business go up and it's very low cost to us.

All right. So that's sort on I guess the whole side.

Could be in the PPO product line. Or it could be in the ASL product line for local business. The home processing. As it's referred to in the Blue Cross franchise world.

Okay. Thanks.

Ladies and gentlemen, if there are any additional questions, please press star followed by the 1. If you are using speaker equipment, you'll need to lift the hand set before pressing the numbers. One moment, please, for our next question.

At this time, there are no additional questions. Please continue.

Okay. Thank you, and with that, we'll conclude our conference call for Cobalt Corporation's first quarter 2002. Like to remind you to listen to the replay of this on the web site. Www.cobaltcorporation.com. Thank you and have a good day.

Thank you, sir. Once again, ladies and gentlemen, this concludes the Cobalt Corporation's first quarter 2002 results conference call. We thank you for participating. You may now disconnect.