banc of america securities health care conference may 21, 2004 the four seasons hotel, las vegas...
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Banc of America Securities Health Care ConferenceMay 21, 2004The Four Seasons Hotel, Las Vegas
PacifiCare Health SystemsPacifiCare Health SystemsHoward G. PhanstielHoward G. PhanstielChairman & CEOChairman & CEO
The statements made during this presentation that are not The statements made during this presentation that are not historical facts are forward-looking statements within the historical facts are forward-looking statements within the meaning of the Federal securities laws, and may involve a meaning of the Federal securities laws, and may involve a number of risks and uncertainties. Factors that could cause number of risks and uncertainties. Factors that could cause actual results to differ materially from expectations include, but actual results to differ materially from expectations include, but are not limited to, the risks discussed in the company's most are not limited to, the risks discussed in the company's most recent filings with the SEC, including the Form 10Q filed as of recent filings with the SEC, including the Form 10Q filed as of March 31, 2004, and the Form10K filed as of December 31, March 31, 2004, and the Form10K filed as of December 31, 2003. 2003.
Cautionary StatementCautionary Statement
• Medicare Supplement• PBM• Behavioral Health
2004 Market Expansion
Continued Market Expansion
2003 Health Plan + Specialty Companies
2003 Specialty Companies only
2004 Planned Specialty Company Expansion
A Fortune 200 company with 2004 goals of:
• $12 billion in revenue• 2.3 million commercial lives• 735K Medicare+Choice HMO lives• 11.8 million specialty lives
Largest purchaser of health care services in the Western U.S.Largest purchaser of health care services in the Western U.S.
Earnings Growth
Net Income
$19
$139
$243
$0
$100
$200
$300
$400
2001 2002* 2003 2004 est. 2005 est.
* * Excluding effect of the adoption of FAS 142 relating to the amortization of goodwill Excluding effect of the adoption of FAS 142 relating to the amortization of goodwill
$296-$306$296-$306
$350-$360$350-$360
Free Cash Flow Growth
$90
$257
$154
$50
$150
$250
$350
2001 2002* 2003 2004 est.
Millio
ns
• Free cash flow is defined as net income plus depreciation and amortization, less capital expenditures
• Best measure of resources available at Parent to pay down debt, build statutory capital, pursue opportunistic acquisitions
$270-$280$270-$280
* * Excludes cumulative effect of adoption of FAS 142 related to amortization of Excludes cumulative effect of adoption of FAS 142 related to amortization of
goodwillgoodwill
Excess Statutory Capital
$218
$276
$375
$609
$100
$200
$300
$400
$500
$600
2000 2001 2002 2003
mil
lio
ns
At least 300% RBC in each core HMO stateAt least 300% RBC in each core HMO state
Balance Sheet Strength
• Higher credit ratings Higher credit ratings
• 100 bp reduction in bank term loan interest rate100 bp reduction in bank term loan interest rate
• $175 million reduction in debt in connection with Q403 $175 million reduction in debt in connection with Q403 clawbackclawback
• Debt-to-capital ratio at 3/31/04 = 24% vs 39% at Debt-to-capital ratio at 3/31/04 = 24% vs 39% at 12/31/02 12/31/02
2004 Guidance
2003 2004Operating Revenue Down 1.3% Up 14%-14.5%
MLR Consolidated 84.0% 84.5%-85.5%Commercial (Private) 84.0% 83.0%-84.0%Senior (Private) 63.4% 68.5%-69.5%Senior (Government) 84.2% 86.5%-87.5%
Operating MarginCommercial 15.30% 15.5%-16.0%Senior 15.80% 13.0%-13.5%Specialty & Other 48.80% 48.5%-49.5%
EBITDA $557M $575-$585M
Free Cash Flow $257 $270-$280M
Cash Flow from Ops. $414 $630-$650M
SG&A ratio 13.3% 12.5%-13%
Net Income $243M $296-$306MEPS* $2.84 $3.07-$3.17WANS** 80M 96.6M
* 2003 adjusted for 2-for-1 stock split paid 1/20/04.
2003 excludes debt redemption costs & favorable PPAs for '02 & prior.
Year-over-year
= = 33%33%Pro Forma Pro Forma Net IncomeNet Income
GrowthGrowth
First Quarter 2004 Trends
• Net income up 45% from Q103, ex Q102 favorable reserve developmentNet income up 45% from Q103, ex Q102 favorable reserve development
• Commercial business Commercial business • Membership up 35K (2%) sequentiallyMembership up 35K (2%) sequentially; ; 3rd consecutive quarter of 3rd consecutive quarter of
commercial membership growthcommercial membership growth• CA membership up 6.5% year-over-year CA membership up 6.5% year-over-year • MLR down 130 basis points year-over-year MLR down 130 basis points year-over-year • Gross margin up 21% year-over-yearGross margin up 21% year-over-year• Retention >90%Retention >90%
• Medicare+Choice businessMedicare+Choice business• First sequential M+C membership growth in 3 yearsFirst sequential M+C membership growth in 3 years• M+C MLR up 160 bp year-over-year, in line w/ guidanceM+C MLR up 160 bp year-over-year, in line w/ guidance
• SG&A up 30 bp year-over-yearSG&A up 30 bp year-over-year
2004 Membership & Pricing Trends
• Expect 5%-6% commercial membership increase in 2004 Expect 5%-6% commercial membership increase in 2004
• Commercial premiums up 11%, over cost trends of 9.5% Commercial premiums up 11%, over cost trends of 9.5%
(after benefit adjustment)(after benefit adjustment)
• premiums up 12% excluding FEHP account, with a 9% premiums up 12% excluding FEHP account, with a 9%
benefit buydownbenefit buydown
2005 Guidance
• 18% net income growth from 200418% net income growth from 2004• $350-$360 million in net income$350-$360 million in net income
• Estimated weighted average shares outstanding = Estimated weighted average shares outstanding = 97.5 million97.5 million
• Grow Commercial Business Through Consumer-Aligned Health Plans
• Introduced more than 20 new products/services over last 2 years, including PPO products and Self-Directed Health Plans
• Re-entered individual & small group markets w/ significant success
• Continuing our successful advertising/branding campaign
• Maintaining focus on superior member satisfaction & customer service
• Build Senior Solutions Products/ Distribution
• Medicare+Choice: evolve to managed growth & avoid “benefit wars”
• Medicare Supplement- expansion of broker network
• Disease Mgmt. for fee-for-service beneficiaries- government’s PPO alternative
• Expand PBM & Behavioral Membership
• Leverage core competencies to generate unaffiliated membership growth
• Superior business model as option to independent PBMs
• Small acquisitions to strengthen product offerings
Strategy for Profit Growth