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TWST: Carl, looking at managed care, what are the hot issues at this point that
investors are concerned about?
Mr. McDonald: I think the major issue that investors are focused on these days
is the underwriting cycle, specifically, the direction of underwriting margins
for the group. We've had four years of companies raising prices by more than
cost trends have increased, driving margin expansion. This year, we've started
to see a few cracks. There hasn't been a significant earnings miss among the big
commercial carriers, but plans are no longer experiencing a uniform improvement
in margins, and in some cases, plans are even reporting gross margin
deterioration, owing to aggressive pricing from a few not-for-profit
competitors. This is the largest concern on the minds of investors.
The second big issue is expectations, in the sense that after five consecutive
years of major earnings growth for the industry, the market has come to expect
that kind of growth every year. For instance, the market is already assuming
that earnings can grow another 15% in 2007. I think that most would agree that a
15% earnings growth rate next year is not unreasonable. The questions are: Where
do we get the upside from? What is the catalyst that gets the group working
again?
The third issue that I would highlight is a near-term concern, which is the
political environment. The mid-term congressional elections are coming up this
November, and there is a very real possibility that the Democrats will take the
House. The group has benefited from what is probably one of the most benign
political environments we've seen in some time, and adding the Democrats to the
mix could result in some short-term volatility, particularly for the Medicare-
focused names. TWST: Beth, what are the hot issues at this point?
Ms. Senko: I'd echo exactly what Carl said, but in a slightly different format.
For me, the real issue here is that consensus growth rates of 15% over a five-
year period are too high for this sector. I think that as we start to get into
the 2007, 2008, and 2009 period, we really are looking at something much closer
to 10%. That is driven partially by the underwriting margins, but it's really
more that there just isn't sufficient enrollment to go around. Of the 207
million people who aren't enrolled with a publicly traded HMO, we estimate that
only about 42 million are addressable over the next five years. That may force
that underwriting cycle to change.
Tickers included in this excerpt: AET, AGP, CI, HUM, UNH, WLP
For more information call (212) 952 7400. The
Wall Street Transcript does not endorse any of the comments made by interviewees, and does
not make stock recommendations.
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