Elevance Health Inc (ELV) 2003 Q1 法說會逐字稿

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  • Operator

  • Good morning ladies and gentlemen and welcome to the Cobalt Corporation First Quarter Earnings Conference Call.

  • At this time all participants are in a listen only mode.

  • Following today's presentation instructions will given for the questions and answer session.

  • If anyone needs assistance at any time during the conference, please press star followed by the zero.

  • As a reminder, this conference is being recorded today, Wednesday, April 30, 2003.

  • During the course of the call Cobalt management may comment upon expected pricing or cost trends or make other projections or forward-looking statements regarding the future of financial performance of the company.

  • Cobalt cautions you that these forward-looking statements are merely predictions based on certain circumstances, and that statements involving a number of risks and uncertainties may cause actual results to differ materially from those projected. (inaudible) that can cause actual results to differ are discussed in Cobalt's most recent Form 10K and the companies other periodic filings with the SEC.

  • At this time I would like to turn the conference over Mr. Steve Babwich (ph), Cobalt's Chairman and Chief Executive Officer.

  • Steve Babwich - Chairman and Chief Executive Officer

  • Thank you operator.

  • Good morning and thank you for joining us for Cobalt's Corporation First Quarter Earnings Conference Call.

  • With me today are Gail Hanson (ph), our Chief Financial Officer, Mike Bernstein (ph), our President and Chief Operating Officer, and Dennis Fallen (ph), our Senior Vice President for Sales and Marketing.

  • I will begin with a discussion of our first quarter performance and then Dale Hanson will review in greater detail our financial results.

  • Dale, Mike and I will then be available to answer your questions.

  • Let me begin by saying that we are very pleased with the continued solid financial performance of the company.

  • With this quarter's results, we now believe that the turn around is behind us and we can focus our energies and attention on growth.

  • Cobalt's first quarter income from continuing operations before tax and income from affiliates was $18.2 million, a 57 percent increase over the $11.6 million reported in the first quarter of 2002.

  • On an after tax basis, the company earned net income of $11.1 million, or $0.26 per diluted share on revenue of $408.6 million.

  • Let me remind you that the effective tax rate in 2003 is 39 percent compared 10 percent in the first quarter of 2002.

  • As a result of our solid financial performance in 2002, we exhausted our net operating loss carry forwards, which increased our effective tax rate.

  • We are especially pleased that all our business segments reported a profit for the fifth consecutive quarter.

  • As a reminder, we report in four business segments, insured medical, including group and individual, self-funded, specialty products and government contracts.

  • Our insured medical care ratio improved to 86.6 percent in the first quarter of 2003, declining from 87.9 percent in the first quarter of 2002.

  • Likewise, we saw an improvement in our SG&A ration and our insured medical business.

  • This ratio for the first quarter of 2003 was 10.8 percent compared to 11.2 percent for all of 2002.

  • Based on the strength of our first quarter performance, we are increasing our guidance for 2003 from our previously stated range of $1.00 to $1.05 to a target of $1.10 per diluted share.

  • In our fourth quarter earnings call I reported on two significant events that actually occurred in the first quarter of 2003.

  • I will just mention them here briefly and then move on.

  • On January 3 we sold all of our remaining shares of stock in American Medical Securities.

  • Beginning a year ago our goal was to divest ourselves of that stock since it no longer represented a strategic holding for us.

  • We have now done so.

  • Also, in the first quarter of this year we completed a successful offering of over 6 million shares of Cobalt stock for the Wisconsin United for Health Foundation as a part of the orderly liquidation foundations shares of stock.

  • We raised $72 million in that offering and we are pleased that our efforts will help to improve the public health in the state of Wisconsin.

  • In the category of promises made and promises delivered from this new management team, I am pleased to announce the sale of one of the company's non-core assets, Comprehensive Receivables Group, Inc., a Michigan based collection company with $6.0 million of revenue.

  • As we have repeatedly said, we will continue to examine our non-core assets and divest ourselves of them as the opportunities present themselves.

  • Our goal has been to focus on our core businesses and to leverage the strength of the Blue and Blue Shield brand, and that is what we are doing.

  • As for growth, I am pleased to report that we enjoyed a net increase of 85 hundred medical members in the first quarter, increasing our medical membership to approximately 809 thousand members as of March 31, 2003.

  • Thus far, our increased membership is concentrated in three segments; national accounts, self-fund ASO and the very profitable individual products franchise.

  • We are particularly pleased that our recent acquisition of CMS, which was intended to restore and strengthen our ability to profitably grow in the final self-funded TPA market, has already contributed to our growth.

  • As a reminder, our membership count does not include any blue card equivalence.

  • These are pure membership numbers.

  • As you are aware, beginning in May of 2002 and culminating in December 2002, there was a management change at the top of this organization.

  • As a part of that change we have developed new strategies that we believe will grow our medical memberships.

  • Around 2002 we focused our time and energies on the financial performance of the company and succeeded in making huge improvements in our financial picture, which I reported on at some length in our fourth quarter 2002 earnings call.

  • We are now on solid financial footing and we are spending much of our time and attention on our growth strategy.

  • You may recall that Mike Berstein (ph) and I articulated a strategy of refocusing our attention on the independent agent and broker distribution channels for future growth, particularly in the insurance small and middle markets.

  • Toward that end, we brought on Dennis Fallen (ph) as our Senior Vice President of Sales and Marketing in November to implement a comprehensive strategy.

  • His plan required restructuring our employed sales force to eliminate channel conflict, improve agent commissions and incentives, introduce online quoting for small groups, work extensively on relationship mending, and institute broad and aggressive communication plans.

  • Dennis (ph) and his team implemented their plan in the first quarter and a new commission schedule went into effect on April 1.

  • We believe that our efforts have created a great deal excitement and an interest in the independent agent community.

  • While our strategy is still too young to produce tangible sales results, there are important indications that agents are responding.

  • Our new business quota activity has increased month over month by 26 percent during the first quarter of 2003.

  • In fact, our first quarter quote volumes are 32 percent higher than both of the third and fourth quarters of 2002.

  • This is particularly note worthy when you consider that the end of the year search typically produces the greater volume of quoting activity.

  • We are optimistic that we will achieve medical membership growth of 3 percent this year.

  • We have high expectations that the restored agent distribution channel will generate nice growth in the latter part of 2003, but more significantly in the first quarter of 2004.

  • Importantly, we have not relaxed the underwriting discipline that was so instrumental in dramatically improving our medical care ratio in 2002.

  • Thus, our plan strategy for membership growth will not undermine our bottom line performance.

  • I will now conclude my formal remarks with the comments on pricing trends.

  • Premium trend after buy downs in 2003, has been running at an 18.8 percent compared to a flat 14 percent in 2002.

  • The medical cost trend is showing a weighted average of 12.3 percent after buydowns, which reflecting a welcome moderation in claim cost trends.

  • Now I will turn the call over Gail Hanson, our Chief Financial Officer, who will discuss in more detail the company's financial performance for the first quarter.

  • Gail.

  • Gail Hanson - Chief Financial Officer

  • Thank you, Steve, and good morning.

  • First quarter 2003 results from our core operations showed significant improvement over the first quarter of 2002.

  • Net income of $11.1 million or 26 cents per diluted share exceeds consensus expectations of 24 cents per share.

  • There are various components of earnings and quarter-to-quarter comparisons that require explanation.

  • First quarter 2003 income from continuing operations before tax expense and income from investment in affiliates was $18.2 million, a 57 percent increase from the $11.6 million reported in the first quarter last year.

  • Income tax expense increased to $7.1 million in the first quarter of 2003, reflecting a 39 percent effective tax rate.

  • Income tax expense for the first quarter of 2002 was $1.2 million, reflecting a favorable 10 percent effective tax rate as a result of the benefits from net operating loss carry forwards.

  • These carry forwards were exhausted during 2002 as a result of strong operating results and gains on the sale of non-core assets.

  • The 2003 income tax rate reflects full statutory rates.

  • Income from continuing operations in the first quarter of 2002 included a settlement of approximately $2.6 million pre-tax or six cents per diluted share after tax from an arbitration settlement with a vendor, partially offset by an increase in litigation reserves.

  • This was disclosed and discussed in our first quarter 2002 earnings call and release.

  • Income from investment in affiliates was zero in the first quarter of 2003 compared to $2.9 million or seven cents per diluted share in the first quarter of 2002.

  • The 2002 earnings were generated from the company's investment in American Medical Security Group.

  • As Steve indicated, on January 3, 2003 the Company sold the remainder of its American Medical Security holdings, and reported a small net realized gain on the sale.

  • Income from discontinued operations, net of tax, was zero for the first quarter of 2003.

  • In the first quarter of 2002 the Company reported 9.4 million, or 23 cents per diluted share, from discontinued operations, relating to the innovative Resource Group subsidiary, which was sold in March 2002.

  • These components of earnings are reconciled in our earnings release.

  • The improvements in pretax operating earnings is largely attributable to the 130-bases point reduction in the medical-care ratio, from 87.9 percent in the first quarter of 2002, to 86.6 percent in first quarter of 2003.

  • There is a degree of seasonality in our insured business that is demonstrated by the improving medical-care ratio from the first through fourth quarters of 2002.

  • The seasonality is observable from a higher medical-care ratio in the first quarter of 2003, than in the fourth quarter of 2002.

  • We are targeting an 85.6-percent medical-care ratio for the full year of 2003.

  • The selling, general and administrative expense ratio on insured medical business was 10.8 percent in the first quarter of 2003.

  • During 2002 we allowed the SG&A ratio to increase to 11.2 percent for the full year, as we intentionally maintained staffing levels to avoid any disruption in customer service, as we exited unprofitable business.

  • Office closings and staff reductions, announced in the fourth quarter of 2002, were carried out during the first quarter of 2003.

  • We realized some benefit from these actions during the first quarter of 2003, but expect to see the full impact on the insured medical SG&A ratio, beginning with the second quarter.

  • I'd now like to turn to the balance sheet.

  • The increase in cash and investments is the result of strong cash flow from operations of $33.4 million in the first quarter of 2003.

  • The cash was used to pay down the short-term line of credit, reducing the total debt for Cobalt from 37.5 million, as of December 31, 2002, to 28.6 million, as of March 31, 2003.

  • The debt-to-total capital ratio, as of the end of March, improved to 8.3 percent, which is significantly below the industry average.

  • Days and in claims payable for the insured medical segment were 60.4 as of March 31, 2003, compared to 60.9 days as of December 31, 2002.

  • Days and claims payable has been in a tight range over the past four quarters.

  • Claim reserves at March 31, 2003 have been established in a manner consistent with prior periods.

  • We have not published a 2002 reserve development table for the first quarter of 2003, due to estimates inherent in this calculation, with only three months of actual claim payment experience.

  • We will include this disclosure in our second quarter earnings release.

  • Reserving (ph) during the first quarter of 2003 had a neutral impact on earnings.

  • On the strength of the first quarter results, we have increased our 2003 guidance, from a range of a dollar to a dollar five, to a target of $1.10 per diluted share.

  • This equates to pretax earnings of $78 million.

  • This guidance assumes a medical-care ratio of 85.6 percent on the insured medical business for the full year of 2003.

  • The Claim Management Services acquisition included $3.6 million in identified and tangible (ph) assets, which was calculated based upon the appraisal that was completed during the first quarter of 2003.

  • The amortization expense related to these intangibles during 2003 will be 1.3 million.

  • Finally, during this earnings call we have discussed certain non-cap financial matters.

  • Consistent with SEC guidance of reconciliation of these measure to gap, net income is attached to our press release and is available on our website at www.cobaltcorporation.com.

  • Now I'd like to turn the call back over to Steve Babwich (ph).

  • Steve Babwich - Chairman and Chief Executive Officer

  • Thank you Gail (ph).

  • As you may have seen in our earnings release, we have announced that we will hold our first annual investor day on June 17 in New York City.

  • This will give us a chance to showcase the company's talented individuals that comprise our management team and to present the investors on a variety of topics important to the company, including our staff initiative, operational efficiency information technology and products.

  • We will issue a more detailed description of the event within the next few days.

  • Now operation, you may please open up the call to any questions.

  • Thank you.

  • Operator

  • Thank you sir.

  • Ladies and gentlemen at this time we will begin the question and answer session.

  • If you have a question, please press star followed by the one on your push button phone.

  • If you would like to decline from the polling process, please press star followed by the two.

  • You will hear a three-tone prompt acknowledging your selection.

  • Your questions will be polled in the order they are received.

  • If you are using speaker equipment, you will need to lift the handset before pressing the numbers.

  • One moment for our first question.

  • Our first question from Charles Brady (ph) with Solomon Smith Barney.

  • Please go ahead with your question.

  • Charles Brady

  • Thanks, good morning.

  • Couple questions, first, you mentioned the quote activity up 20 percent in the first quarter and that was before the new commission structure was put into place.

  • Can you give any color on why you think the quote activity was up?

  • Steve Babwich - Chairman and Chief Executive Officer

  • Sure Charles (ph).

  • I think I'll ask Mike Bernstein (ph) to handle that.

  • Mike Bernstein - President and Chief Operating Officer

  • Charles (ph) it's Mike (ph).

  • Interestingly, if you compare first quarter quote activity and fourth quarter quote activity where you would expect to have the strongest quote activity because of the renewal cycles that we experience and everybody else experiences.

  • We actually saw 32 percent increase in the quote.

  • And furthermore, about 90 percent of the quote activity came through the agents and broker distribution channel.

  • And we're gratified with the significant increase in activity in that channel.

  • That's because of all of the relationship work that we've been doing over that time.

  • And you know they tell us that commissions are secondary to relationship on the reasons they sell a given insurance companies product.

  • And I suppose this bears that out.

  • It's just that we expect that the actual closing rate may improve as the new commission structures take (inaudible).

  • Steve Babwich - Chairman and Chief Executive Officer

  • Good.

  • Let me also add to that.

  • That since the new management team was announced last end of May, Mike (ph) and I spent much of our time improving the relationship with the agent in any series of meetings and events.

  • And we promised them certain deliverables, which we've now delivered on, including the commission fix and alike.

  • And as point of fact, they'd like to offer our products, but our commission schedule is so out of whack that it wasn't all that attractive to them.

  • And so I think a little - a little bit of the activity was just the increased excitement that we had as Blue Cross plan was all of our products telling the agents things that they wanted to hear for quite some time.

  • And then with the first quarter, and which we delivered commission fix and all the other things we had been talking about, I think they were seeing some of that coming and part of that quoting activity I think is anticipatory.

  • But now it's the proof is in the pudding and we have delivered on what we said we were going to deliver.

  • Charles Brady

  • What quarter do you think we'll see the impact on that organic enrollment growth - higher quote activity in the new commission structure?

  • Steve Babwich - Chairman and Chief Executive Officer

  • You know all along we've been projecting that as really a first quarter 2004 event.

  • Because as you know, the big RFP's start coming out this summer and what we've been really doing is gearing ourselves towards that.

  • I mean, part of this is they like to hear our words, but they like to see the action as well.

  • And so now we've proven the action in the first quarter.

  • That gives some lag time as we prepare responses to the RFP's and work with the agents in landing that new business.

  • So while I think we'll see a little pick up in the third and fourth quarter, maybe in the 50 to 250 market segment, we are really gearing all this growth activity and strategy towards a 2004 good first quarter.

  • Charles Brady

  • And is that consistent with the fact that commissions are generally paid to brokers in the smaller group accounts that renew through out year though where the January 1 I would think of as more of the larger accounts that may going through consultants?

  • Steve Babwich - Chairman and Chief Executive Officer

  • I think that's a fair assumption that we will - that is why we expect that some of the increase quoting activities could translate into some membership growth in the third and fourth quarter.

  • But we are seeing on quote activities from the brokers and agents all the way up to into the jumbo accounts.

  • Charles Brady

  • I see.

  • And related questions, your new commissions structure rolling out - it rolled out April 1, is that available anywhere publicly where we could see it?

  • If not, could you just sort of, you know, talk through qualitatively what the meaningful changes are and also what the net dollar impact is?

  • And if you could compare it to your biggest competitors in the market, you know, United and Humana and particular especially in light of United also rolling out a new commission structure.

  • Now, I 'm not sure if that hit your state yet, but on a national basis they've been rolling out a new commission structure.

  • If there's anything you can ad in terms of how your new structure compares with their new structure.

  • Steve Babwich - Chairman and Chief Executive Officer

  • Sure.

  • I think what I'm going to do is ask Dennis Fallen (ph), our Senior VP for Sales and Marketing to address that.

  • Dennis Fallen - Senior Vice President for Sales and Marketing

  • Thanks.

  • Charles (ph), first of all the - there's two pieces.

  • It's a commission schedule, which is effective for new accounts as well as renewals.

  • And renewals are done on the actual renewal dates.

  • It's just not started on for one for all accounts.

  • There also includes a bonus plan and the bonus plan for net growth and new business was affected back to one for an annual basis.

  • I would compare it's more lined up with the competition in regards to paying on a contract basis versus on premium.

  • That is to show more in line with growth of new business versus increase in trend.

  • The (inaudible) schedule is - I have found competitive to the competition.

  • If you want to get an idea in line very much with United Healthcare, which is a prime competitor of ours in each side of Wisconsin markets.

  • The bonus plans are geared toward new growth and net results of what the agencies have provided.

  • A guide to group growth towards the upper half of the small group and mid-sized accounts.

  • That being the 25 to 200 markets as well as our core selling abilities and our ancillary lines.

  • Steve Babwich - Chairman and Chief Executive Officer

  • Ancillary lines would be such as dental, life and disability.

  • Charles Brady

  • And are you aware that this is a new United commission structure or t he existing one and whether the new structure has hit the broker's in your market yet?

  • Dennis Fallen - Senior Vice President for Sales and Marketing

  • It's based on the structure of going from a 250 on an increasing marginal basis up to 50.

  • And then the 50 is pretty much a negotiated base and what the agencies feel comfortable in loading into the account.

  • I have not seen any other introduced at this time Charles (ph).

  • Charles Brady

  • Got it.

  • Great.

  • I'll get back in queue.

  • Thanks.

  • Operator

  • Our next question comes from John Bablo (ph) with CIBC World Markets.

  • Please go ahead with your question.

  • John Bablo

  • Good morning.

  • Thanks.

  • I had a question about the membership.

  • I think the self-funded was a little better than we were thinking.

  • Maybe the risk side was a little bit less.

  • Was there a shift to ASO during the quarter?

  • Or did you just have some pretty good organic growth in the self-funded business.

  • Mike Bernstein - President and Chief Operating Officer

  • John (ph), it's Mike Bernstein (ph).

  • I think that a couple things happened.

  • One is that you'll recall that we closed that CMS acquisition on ...

  • John Bablo

  • Right...

  • Mike Bernstein - President and Chief Operating Officer

  • ... the 31st.

  • That enables up to very specifically target existing TPA market and we're seeing nice growth out of that program.

  • In fact, if you look at our ad-on schedules you'll also see that the only declining really experience in our insured block was a very modest decline in our point of service business.

  • One of the margins at least - one of the specific accounts that we lost was the county of Konosha (ph) and which we shifted from a insured account to a self- insured account.

  • And so we see exactly what you are asking about.

  • We did have some business shift from insured to self-insured and we found ourselves positioned better than before to absorb those kinds of shifts and benefit from them.

  • John Bablo

  • You would not have been able to get that without CMS before.

  • Is that what you're saying?

  • Mike Bernstein - President and Chief Operating Officer

  • Well, it's that account didn't move into CMS, but now we're able to take any account that is contemplating at least the potential of going from insured to self-insured and offer them both a high touch and a lower touch on self-insured solution.

  • John Bablo

  • And the improvement and the profitability in that business, was that just from the leveraging from the revenue?

  • Or were you able to get some cost savings out of CMS?

  • Mike Bernstein - President and Chief Operating Officer

  • I think that two things, one is that it is continued growth of the Blue Card program that you see in that segment.

  • John Bablo

  • Right.

  • Mike Bernstein - President and Chief Operating Officer

  • Remember, we - Blue Card in that segment.

  • And secondly, CMS - all of CMS growth is profitable growth and so we're enjoying that benefit as well.

  • John Bablo

  • OK.

  • And then just a point of clarification on the membership.

  • Short of that 3 percent, I think your target of 3 or 5 percent.

  • Was that just in the risk-based business?

  • And that was by the end of the year.

  • Is that right?

  • Mike Bernstein - President and Chief Operating Officer

  • The 3 to 5 percent you'll recall what guidance that we gave before the CMS acquisition where their membership was closer to 600 thousand than 800 thousand.

  • So if we now point at 3 percent, we're talking about the added membership that we picked up from CMS, so I think those numbers are closer to equivalent than they seem.

  • And we are setting medical membership as medical memberships?

  • We're not differentiating between the insured and self-insured.

  • John Bablo

  • OK, thanks.

  • Operator

  • Our next question comes from Josh Radkin (ph) with Lehman Brothers (ph).

  • Please go ahead with your question.

  • Josh Radkin

  • Hi, thanks.

  • Just a quick follow-up on the ASO - or the self-funded stagnate that's obviously seen a vast improvement off of I guess losses historically.

  • But just wondering, it still seems as though that segments profitability margins are actually lower than, you know, some of the competitors.

  • I'm wondering what your target margins are for that, you know, assuming you get some of the growth that we're looking for.

  • Gail Hanson - Chief Financial Officer

  • I think what you see in some of the competitors is they get a lot of their fees from selling their network.

  • We haven't capitalized on that thus far, so we're getting fees for just profiting the claims.

  • And we haven't established a specific target margin.

  • We think that 10 percent target for our non-Blue Cross is a reasonable target margin for non-Blue Card and then Blue Card is on top of that.

  • Josh Radkin

  • OK.

  • And then with the rental, is that, you know, it seems sort of like the business that CMS was in, but is that where some of the growth is going to come in the future or is that really just additional lines?

  • Unidentified

  • You know, interestingly, Josh, CMS was not in the network rental business.

  • It was one of the reasons they were so attractive to us.

  • Their customers all rent networks, but not from CMS.

  • They rent them from the various rental network vendors that are out there.

  • And so, we're positioned, I think, to leverage our very strong network throughout the state on CMS customers, and it's all on three bases.

  • And we intend to do that, and that hasn't even begun yet.

  • Steve Babwich - Chairman and Chief Executive Officer

  • Josh, this is Steve.

  • One of the things that we are doing is we are branding all the in-state business that are guiding the CMS acquisition.

  • And once we brand that they will then be eligible for our network, which provides us with a pretty good upside.

  • Josh Radkin

  • I see.

  • That's helpful.

  • And then just on the membership -- last question on the membership.

  • It's just in terms of geographical differences are you seeing any specific shifts in your membership in any of your three geographies?

  • Unidentified

  • No, not meaningfully.

  • I'd say that the shift from insured to self-insured that we saw in Kenosha was not geographically significant.

  • It just so happened that it occurred there.

  • Josh Radkin

  • OK.

  • And then just last question on the cost trend.

  • Can you just give us an update as to what you were seeing in the first quarter?

  • Were there any unexpected differences, whether it was utilization or unit price, in any of the components?

  • Unidentified

  • Sure.

  • We did see cost trends come in lower than we expected -- marginally lower than we expected.

  • We expected 13.4 percent and we saw about 12.3 percent in the aggregate cost trend on our insured business.

  • I'd say that it was across the board lower than expected.

  • Inpatient, professional and pharmacy costs came in lower than expected.

  • Outpatient costs came in dead on expectations.

  • And pharmacy was the biggest difference between expectations.

  • It came in significantly below expectations.

  • Josh Radkin

  • OK.

  • And then any drivers of that?

  • Was it the light flu season or weather that we've heard about more on a national basis, or just sort of across the board?

  • Unidentified

  • I really think it's across the board.

  • It's the benefit of all of the various moving pieces that you're seeing in the pharmacy world combined by a continued increase in the co-pays that our customers are buying.

  • Josh Radkin

  • OK.

  • So you think that some of the benefit changes are actually impacting the overall cost trend?

  • Unidentified

  • Absolutely.

  • Josh Radkin

  • Great.

  • OK, thanks.

  • I'll get back in queue.

  • Operator

  • Our next question comes from William McKeever with UBS Warburg.

  • Please go ahead with your question.

  • William McKeever

  • Congratulations on the quarter.

  • My question has to do with your competitors in Milwaukee.

  • Of course, you compete with United and Humana.

  • And I would think that they would continue to be disciplined on pricing.

  • Outside of those markets you compete with many integrated delivery systems.

  • What sort of behavior are you seeing in the marketplace with them?

  • What are they doing with their premiums and how are they reacting in the marketplace?

  • Steve Babwich - Chairman and Chief Executive Officer

  • This is Steve (ph).

  • We haven't seen much difference than what we saw last year, which was a very disciplined market.

  • Occasionally we see somebody going after a piece of business and they might move their pricing down a little bit, but there's been no trend that we can point that says that any one of the provider-owned HMOs is going after market share in competition with us.

  • William McKeever

  • OK.

  • And then on the employers, what's sort of the talk this time around here in April and May?

  • What do you think their focus is going into '04?

  • I'm not thinking specifically about pricing, but just what one or two top actions are they taking to try to prepare themselves for next year?

  • Unidentified

  • I think we'll probably see some more on drive towards consumer-driven products.

  • We have a tiered network product in the Milwaukee market that has picked up a little activity recently.

  • And I think, especially in Wisconsin, we'll be seeing the fifth year of possible double-digit increases.

  • We're seeing nothing that's going to moderate that at this point.

  • So, there will be, I think, somewhat of a push towards consumer-driven products.

  • William McKeever

  • OK.

  • And then just the last question on that.

  • What do you tell them in terms of the product list that you have that they can fit into what they're looking for?

  • Do you have a specific product for that market or can you just point to an array of PPO products?

  • Unidentified

  • I'd say we have the broadest range right now of consumer focused products that are already on the streets.

  • There's an awful lot of talk from our competitors about what they're going to bring to market.

  • Most of those, as you know, are national.

  • And they introduce them in some of their markets, but sell them in Milwaukee.

  • And so, there's very little consumer focused activity right now that is competitive.

  • And so, our tiered hospital product, which was introduced last fall, is probably the most mature product that's out there.

  • And I think it's getting a lot of looks.

  • William McKeever

  • OK, great.

  • Thank you.

  • Unidentified

  • Thanks.

  • Operator

  • Our next question comes from Chris Surgit (ph) with Steeple (ph) Nicholas (ph).

  • Please go ahead with your question.

  • Chris Surgit

  • Good morning.

  • Good quarter.

  • Some of my questions have been answered through the answers of the other questions, but I think it was during Gail's review that talked about sequential medical loss ratio of improvement.

  • And if you could just go over that again and kind of help us gauge how much of that is from the anniversary of chasing business away that wasn't profitable and how much is it on new business.

  • Gail Hanson - Chief Financial Officer

  • We have seasonality in our products, somewhat because of the product mix.

  • And if you looked at our Medicare supplement product, which we have 55,000 and increasing members, there we pay the co-pays and deductibles.

  • And in the other products the co-pays and deductibles are paid by the individuals and we pay the balance.

  • And so, to the extent we have a good portion of that Medicare supplement product, that is a first quarter increase in our medical costs.

  • Chris Surgit

  • Did you -- I guess I misinterpreted your comment then.

  • You weren't making anything more than a seasonality comment?

  • Gail Hanson - Chief Financial Officer

  • That's correct.

  • Chris Surgit

  • OK, sorry.

  • Nothing else.

  • Thanks.

  • Operator

  • Our next question comes from Craig Kennison with Robert W. Baird.

  • Please go ahead with your question.

  • Craig Kennison

  • Good morning and thanks.

  • The tax rate was slightly below what we had expected at 39 percent.

  • What are you assuming in the $1.10 guidance that you're providing?

  • Gail Hanson - Chief Financial Officer

  • We're assuming a 40 percent tax rate.

  • The 39 percent, realizing that we just came off of a tax rate that was much lower, and we're still working our way through a normalized tax rate.

  • So, we're assuming a 40 percent rate.

  • If we do get benefit from either our investment portfolio or other items and we can see that going forward, we'll guide to a lower rate.

  • Craig Kennison

  • I see.

  • That's helpful.

  • And then can you provide an update on any changes to the tax code that might be affecting HMOs in Wisconsin and basically update us on what the governor's plan is?

  • Steve Babwich - Chairman and Chief Executive Officer

  • Sure.

  • This is Steve (ph).

  • The governor proposed a tax on HMOs.

  • We have been working with the administration and the legislature to defeat that.

  • We are confident that it will not pass.

  • If it does, we're prepared with strategies that we are prepared to employ so that it will not affect our earnings.

  • So, we look forward to it not passing, and if it does we're prepared for it.

  • Craig Kennison

  • Thank you.

  • And then with regards to acquisitions, can you just give us an update as to whether anything is warming on that front and to what extent you're willing to use stock to consummate a transaction?

  • Thanks.

  • Unidentified

  • We've always said, or at least for the last nine months we have said, that we will take opportunities as they come up.

  • There are 13 provider-owned HMOs in this state, some of which would be in strategic markets for us, and so we focus on them.

  • And it's really a relationship issue in which we need to get comfortable and they need to get comfortable with us.

  • So, it's kind of a long-term deal.

  • We are in the -- in the course of this year we have -- we've got our eyes on a few and we are trying to make inroads so that we in the next year to a year-and-a-half can announce some acquisitions, at least one, maybe two.

  • And that also is a part of the growth strategy.

  • Our growth strategy is based on organic growth as well as acquisition in the state of Wisconsin.

  • Craig Kennison

  • Thanks.

  • Finally one question for you, Gail.

  • Just can you refresh our memory with respect to the eliminations line in SG&A?

  • I know there have been some changes to that line.

  • But I'd like to know exactly what drives that and where it's expected to settle out.

  • Gail Hanson - Chief Financial Officer

  • The eliminations line -- we used to have a third party administrator in our Worker's Compensation business and insurance company.

  • And there were services going back and forth.

  • And so, the eliminations line was larger because of that.

  • We've put those two companies together in 2003, and so the eliminations are smaller.

  • We expect revenue eliminations to be about -- let me just get the exact number for you, Craig -- to be about $20 million in the year.

  • I think that's probably about $14 million lower than it was in the prior year.

  • Craig Kennison

  • Terrific.

  • Thanks a lot.

  • Operator

  • Ladies and gentlemen, if there are any additional questions, please press star followed by the one at this time.

  • As a reminder, if you are using speaker equipment you will need to lift the handset before pressing the numbers.

  • Our next question comes from Charles Brady with Salomon Smith Barney.

  • Please go ahead with your question.

  • Charles Brady

  • Hi.

  • Thanks for the follow-up.

  • I wonder if you can break out the components of the medical cost trend in terms of the utilization versus pricing components and give any color on the inpatient and outpatient trends, if you could, given what we've been seeing coming out of public hospital companies, which was a pretty significant change in the utilization?

  • Unidentified

  • Yes.

  • Charles, we're seeing the inpatient trends be entirely cost rather utilization driven, which you might expect, although that may not be consistent with what you heard out of the for-profit hospitals.

  • We're seeing -- the only place we're seeing utilization and price matching as a components of the cost increase is on the professional side, where utilization continues to increase almost at the same rate as price.

  • And that is a growing component of our medical cost picture.

  • Charles Brady

  • Can you give us any numbers in terms of the percent changes in those components?

  • Or I can follow-up if you don't have it handy.

  • Unidentified

  • I just don't have clean numbers for you, Charles.

  • These numbers have a before buy down impact.

  • So, those are gross figures, and I'm not sure they'll be helpful to you.

  • Charles Brady

  • What about just qualifying, then, why you think there's a difference between what you're seeing and what the public for-profit hospital companies are reporting in terms of your pricing and utilization trends?

  • Is some of that because of the flu season, for example, where you have less of a senior population, and so would see less of a relative impact from the flu?

  • Or any other color you can give on the difference between what you're seeing and hearing from the public for-profit hospitals and what you're experiencing in your own book of business?

  • Unidentified

  • No.

  • We'd be speculating.

  • We had a very clean quarter as far as outbreaks.

  • It was a very solid quarter on the utilization front.

  • So, but beyond that we're not prepared with any color.

  • Charles Brady

  • Got it.

  • Thanks.

  • Operator

  • Our next question comes from John Bablo (ph) with CIBC World Markets.

  • Please go ahead with your question.

  • John Bablo

  • Thanks.

  • I just had a couple additional questions.

  • On the specialty membership, was there something that happened there sequentially?

  • I noticed it was down a bit.

  • Did you intentionally move away from some products there?

  • What happened?

  • Unidentified

  • We're going to try and answer that for you, John (ph).

  • John Bablo

  • You want me to give you another one in between?

  • Unidentified

  • Yes.

  • John Bablo

  • OK.

  • Question for Gail about the cash flow from operations.

  • It was quite a bit more than the net income.

  • Was there something unusual about the quarter in terms of cash flow that -- what would be sort of a normalized number?

  • Or was that the number?

  • Gail Hanson - Chief Financial Officer

  • No.

  • There are a couple of big numbers, and they go a couple of different ways.

  • When you see our cash flow statement published in our 10-Q, what you'll see is that our claims are medical and other benefits payable went up by almost $23 million as a result of our HMOs coming off of cap and just other changes in our business.

  • We -- also advanced premiums was up $20.8 million, which is something that advanced premiums go up, advanced premiums come down.

  • And so, that's part of the driver.

  • And then ...

  • John Bablo

  • How much was that, Gail?

  • Gail Hanson - Chief Financial Officer

  • It's $21 ...

  • John Bablo

  • Twenty-one, OK.

  • Gail Hanson - Chief Financial Officer

  • ... million.

  • And then accounts payable and other were down by about approximately $22 million.

  • So, those are the large components in the cash flow, and some of those are seasonal, but depending upon when we pay our employees incentives, for example, or when the companies pay us for advanced premiums.

  • Unidentified

  • John (ph), getting back to you on your specialty question on membership, it really came in the life and disability business.

  • That's where we saw a decline of -- it looks like it's about 13 percent.

  • Gail Hanson - Chief Financial Officer

  • The largest group there is the city of Milwaukee.

  • They were on sort of a quasi insured program, which did not -- and when we bid it, we bid it at a rate we thought was profitable, and we were underbid and decided not to step up to reduce our profit expectations.

  • So, that group was the biggest group that we lost.

  • John Bablo

  • And how much was that?

  • Gail Hanson - Chief Financial Officer

  • I can get back to you with a count.

  • I don't recall exactly the number of ...

  • John Bablo

  • OK.

  • I guess just a broader question there.

  • Do you think there's significant room for the penetration rate of those specialty products to go up, or do you think it's pretty much fully penetrated at this point?

  • Gail Hanson - Chief Financial Officer

  • There is a lot of room, largely on dental -- on cross selling of dental and cross selling of life with our accounts.

  • And I think that really is a strategy that Dennis Fallon (ph) and his staff are working on as well as with the agents.

  • So, we do think that there is opportunity for cross selling.

  • John Bablo

  • OK.

  • Gail, just a question on the divestiture.

  • Did that happen in the quarter?

  • And was that business unprofitable?

  • Unidentified

  • Was that ...

  • Gail Hanson - Chief Financial Officer

  • The ...

  • Unidentified

  • ... the CRG?

  • Gail Hanson - Chief Financial Officer

  • ...

  • CRG?

  • John Bablo

  • Yes.

  • Gail Hanson - Chief Financial Officer

  • That will happen as of the end of April.

  • John Bablo

  • OK.

  • Gail Hanson - Chief Financial Officer

  • Again, the business was just break even or marginally profitable and it was just so different from our core business.

  • It didn't make sense for us to retain it.

  • Unidentified

  • John (ph), that was really an incidental transaction.

  • I mentioned it simply to kind of re-emphasize the points that we are focusing on our core and we've been out saying that to the extent possible we will divest ourselves.

  • And it's kind of -- we deliver on what we say we're going to do.

  • John Bablo

  • Right.

  • OK.

  • Yes, just in terms of calibrating the model a little better, that's helpful.

  • Gail Hanson - Chief Financial Officer

  • Steve (ph) mentioned the $6 million in revenues.

  • John Bablo

  • Yes.

  • Is that going to come out of the other line?

  • Gail Hanson - Chief Financial Officer

  • It'll be out of specialty.

  • Unidentified

  • Specialty.

  • John Bablo

  • OK.

  • And just one last question about the cost trend moderation, particularly on the pharmaceutical side.

  • Do you think Claritin had an impact?

  • And was it, say, relatively more or less versus some of the behavioral changes you mentioned before?

  • I think Mike mentioned that.

  • Unidentified

  • You know, we're confident that Claritin did have an impact, but we're not prepared to quantify it.

  • It is one of the major components of that reduction in cost trend.

  • John Bablo

  • OK.

  • Thanks.

  • That was helpful.

  • Unidentified

  • Thank you.

  • Operator

  • Our next question comes from Adam Clover (ph) with Cochran Caronia (ph).

  • Please go ahead with your question.

  • Adam Clover

  • Thank you.

  • Good morning.

  • Unidentified

  • Good morning.

  • Adam Clover

  • As you continue to focus on your core businesses and your core markets, can we expect to see more divestitures over the next 12 to 18 months?

  • Unidentified

  • I think the simple answer is yes, but we're looking at them on an opportunistic basis.

  • We have a number of non-core businesses.

  • And as the market for them matures, we will look to divest.

  • Our core businesses really right now -- the biggest core business for us is the dental business, which is completely branded and the largest in the state.

  • And then we have life and disability and then other lines.

  • But how we defined core is really if it can be cross-sold in our sales strategy.

  • And you sell the dental and the life and disability to the same benefits person at the employer group as compared to some of our other products, such as worker's compensation.

  • Adam Clover

  • Thank you very much.

  • Unidentified

  • You're welcome.

  • Operator

  • Our next question comes from Charles Brady.

  • Please go ahead with your question.

  • Charles Brady

  • Thanks.

  • Last follow-up, just in terms of getting your thoughts on the med loss ratio.

  • And I think you mentioned the new business being renewed at about a 85 percent med loss ratio.

  • And that's above where we're seeing some of the others in other markets.

  • I'm just curious of two things.

  • One is are there any idiosyncrasies of your market that would make you believe the 85 percent range for med loss ratio is a reasonable long term target, even if that's above other markets in the country?

  • And then secondly, what is your goal for long term pricing with respect to the med loss ratio?

  • Would you expect in the next two to three years to see that change very much from where it is right now?

  • Unidentified

  • You know, the 85 percent target did relatively higher than some of our cohort outside of Wisconsin, but very consistent with med loss ratios on insured business that you see in Wisconsin.

  • Remember when we compete with provider-owned HMOs those HMOs tend to operate an 88 percent medical loss ratio in our state.

  • And so, even targeting an 85 percent medical loss ratio in that competitive environment is aggressive.

  • And also, in our insured business, Charles, there is a blending of our insured individual franchise, which operates at a lower med loss ratio with our group business that operates at a relatively higher med loss ratio.

  • Charles Brady

  • So, modeling it out over the next two to three years, would you expect 85 to be a reasonable target for that book of business?

  • And on an overall basis, would it be around the same range also?

  • Unidentified

  • I think it -- I think that is a fair target.

  • I don't think that we're going to be able to improve on that, certainly not dramatically.

  • I think that we expect to see growth in both our individual and our group programs.

  • But given our emphasis on agent sales, I think you'll see faster growth in our group business, which is going to -- will force the medical care ratio up rather than down.

  • And so, all of the work we're doing in underwriting is to balance that.

  • Charles Brady

  • Terrific.

  • Thanks.

  • Operator

  • Once again, ladies and gentlemen, if there are any additional questions, please press star followed by the one at this time.

  • As a reminder, if you are using speaker equipment you will need to lift the handset before pressing the numbers.

  • One moment, please, for our next question.

  • At this time, there are no additional questions.

  • Please continue.

  • Unidentified

  • Thank you, everybody, for joining us.

  • And we look forward to seeing you at our annual investor day in midtown Manhattan on June 17th.

  • And details will be coming out very shortly.

  • Thank you again.

  • Operator

  • Thank you.

  • Ladies and gentlemen, this concludes today's Cobalt Corporation first quarter earnings conference.

  • If you would like to listen to a replay of today's conference, please dial 303-590-3000, followed by access number 532915.

  • Once again, if you would like to listen to a replay of today's conference, please dial 303-590-3000, followed by access number 532915.

  • We thank you for participating.

  • You may now disconnect.