Dec 17

Closing Out the Year

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This will be my last blog for 2009 and with that I would like to leave the year with some thoughts for 2010.

Many folks are still struggling following the economic recession of the past couple of years.  We can imagine that things will continue on a rough path through 2010 and sometime thereafter.  With that, now may be a good time to give consideration to things we can do differently to weather the storm or help others who may need a little hand or advise.

  1. Look at ways to reduce credit card charges.  I recently received my American Express bill containing my annual membership fee for $450.  With one phone call, they offered to reduce it by $300.  Call your credit card company to see if there are options to reduce or eliminate the fee through other programs.  You may also be able to use reward points to pay every day charges.
  2. Contact your mortgage company regarding any eligibility you may have for federal promoted programs that could reduce your monthly payment.  We have been contacted by our mortgage company and advised that our loan qualifies under one of the programs and we should be able to refinance with a significant reduction to our monthly payment.  Note that closing costs usually apply so their will be some upfront cash outlay.  But if you are going to be in your home for more than 12 months, these upfront costs should pay for themselves in reduced payments.
  3. Evaluate your monthly telephone charges.  Many of us spend significant amounts each month on landline, long-distance, mobile and efax.  Contact your service providers to see if you are under a program that provides the best value for your needs and usage habits.  You may also consider whether you still need some of these services.
  4. Review your insurance coverage with your agent.  Make sure that your coverage, deductibles and insured amounts are appropriate in the current times.
  5. Look at your diet.  We switched our dogs to a “raw diet” this year feeding them fresh meats and vegetables.  We have been surprised about how inexpensive fresh fruits and vegetables are compared to the processed foods in the supermarket.  Better food and less money sounds like a winning combination.

About this time each year, my wife and I take time to think about what we have to be thankful for and to plan for the next year.  Not that we will be successful in achieving each of the opportunities we consider, but we will have given ourselves a chance by exercising a little plan and forethought.

Finally, we are each aware of someone who will have a difficult time this holiday season.  Also be mindful that as hard times have come upon our neighbor there are also domesticated pets who may find their family unable to properly care for and feed them over the coming months.  There are a number of animal charities, including pet food banks, that also need your help in meeting these community needs.  Help them as you can.

With all the best wishes for the holidays!

BA

Dec 10

The Rising Cost of Health Insurance – First Hand Experience

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Every year about this time the folks at Anthem Blue Cross and Blue Shield send a little notice regarding rate changes on our health insurance.  And each year it goes up – typically in the neighborhood of 10%.  Well, gone are the days of modest increases.  This year’s “rate action” is in excess of 33%!  The notice indicates that “While we strive to keep costs as low as possible it is necessary to adjust our health care coverage rates to cover the escalating cost of health care.”

I called the number given in the notice and received a pre-recorded message.  The message tries to pawn this off to rising health care costs – “we understand and strongly share our members’ concerns with the rising cost of health care services….”.  When I spoke to a representative, I was advised that the average increase in my category of insurance was 27.9%.

Blue Cross and Blue Shield in Colorado is operated by Wellpoint Inc. (NYSE: WLP) under a licensing agreement.  As of September 30, they have about $50 billion of assets and $23 billion of equity.  Their stock currently trades at around $55/share giving the company a current market value of about $26 billion.

In their SEC filings, Wellpoint highlights their benefit expense ratio (benefit expenses/premiums).  They note that “benefit expense primarily includes costs of care for health services consumed by our members, such as outpatient care, inpatient hospital care, professional services (primarily physician care) and pharmacy benefit costs.”

In 2007 their benefit expense ratio was 82.4%, 83.6% in 2008, and 81.9% for the nine months ended September 30, 2009.  To an investor, this would seem to be reasonably managed through setting premium levels and managing the benefits paid for members.  (I have noted before that insurance companies are investment companies and members are their burden not their customer.)  Members and regulators should pay attention to how they manage this in 2010 with such significant premium increases.

What is telling is the performance of its investments.  In 2007, they reported net gains of about $1 billion, in 2008 this swung to a loss of $400 million, and through September 30 of this year it has swung back to $600 million of profit.  Are members (as opposed to shareholders) being asked to underwrite poor investment performance?

Since the end of 2008, Wellpoint has seen its membership drop from 35 million to about 34 million as the recession continues to impact small business, employment and the general affordability of health insurance.  Surely premium increases such as those proposed for 2010 will further drive membership down.  In other words, I don’t plan to invest in their stock to try to hedge against their rising premiums.

It must be obvious that these increases are not economically sustainable in the long (or even near) term.  It certainly causes many questions in my mind.

  • Do they think this may be the last big increase before Obamacare?
  • Do they think changes to be introduced by Congress will blow health care costs through the roof?
  • Is the Colorado regulator asleep at the switch?
  • Given a certain lack of competition, do the insurance companies hold state regulators hostage?
  • Over the past few years, Wellpoint has had share repurchase plan in place keeping return on equity in excess of 10%.  How does this relate to the regulators’ views on capital and liquidity requirements and the establishment of member premiums?
  • Can this be a harbinger for states to support insurance companies to cross state lines to better aggregate the risks of individual members, better spread insurance risk and control member premiums?

This is not just a Colorado issue with Wellpoint.  The insurance regulator and attorney general of the state of Maine are fighting Wellpoint over a proposed 18.5% increase to individual members for 2010.

On December 8, P&G announced that Wellpoint CEO Angela Braly will be joining their board touting her leadership in the health sector.  Interesting that Wellpoint did not have an announcement highlighting the benefits for it and its members. (Note: In all fairness, although her 2008 compensation is critically reported at $9.8 million, more than 1/2 of this is associated with stock options that have zero intrinsic value, i.e. underwater.  Most of these have exercise prices well in excess of $60/share.)

I don’t know the answers, but want to better understand where this is headed.  In contacting the Colorado insurance regulator, I understand that the Department of Regulatory Agencies (DORA) has an open policy on reviewing “non-confidential” regulatory filings.  On December 18 I have an appointment with them to “see what I can see”.

I don’t know what can be accomplished, but hope to peel some of the skin off the onion.

BA

Dec 03

A Bad Movie Coming Soon to an Afghan Theater (not) Near You

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Tuesday night, President Obama laid out his objective and agenda for sending 30,000 more US troops to Afghanistan to wage a war against terrorism – the mission of which is “disrupting, dismantling, and defeating al Qaeda and its extremist allies”.  This strategy seems headed towards a bad ending both politically for Mr. Obama and financially for all U.S. citizens – not to mention an increased loss of life.

Although the territory occupied by Afghanistan has been inhabited for thousands of years, its more modern history starts from 300 BC and the days of Alexander the Great.  The territory served as a crossroads for many cultures as a passage way between the Indian Subcontinent and Ancient Greece and Europe.  Fast forward to the 19th century and we see Afghanistan wedged in between expanding Russian and British empires. The place has a history of differing cultures, differing tribes and serious troubles.

Through various dynasties, the 13th century Mongul Invasion (Genghis Khan), the Anglo – Afghan Wars of the 19th century, and the Soviet Invasion of 1979, the place has been wrecked with havoc and turmoil.  For good measure they have had a few high-profile assassinations along the way.

We have now been in Afghanistan for over eight years in our war against terrorism.  In October 2001, we took swift action in response to the 9/11 attacks – not in a war against Afghanistan but in a war against factions.  Over those eight years, it seems that history is repeating itself.  Why would we add 30,000 troops to this effort?  Why are we not supporting a NATO operation as opposed to the other way around?  Europe’s contribution to this effort is minor compared to their proximity to the problem.  Maybe they recognize something we don’t.

Over the years the Greeks, the Monguls, the Brits, and the Russians have all thrown in the towel.  The 1st Anglo – Afghan War is noted for the massacre of Major-General Elphinstone’s army (3,600 military men and 12,000 civilians) where only one person is believed to have escaped.  It served as an exclamation point on Afghan defiance to foreign influence.

Where does it go from here?  Well, it seems that the Administration is committed. Only Congress could deter the escalation by putting restrictions on spending which seems reasonably unlikely.  Most republicans (except this one) are reasonably happy and have been served up a premature exit date that will undoubtedly be used as a cornerstone to make Mr. Obama a 1-term president come 2012.

Ok so $30 billion (the incremental cost for our 30,000 troops) isn’t that much money.  But when do we start to be fiscally prudent?  Couldn’t we do more with our existing troops deployed and $30 billion closer to home to make the US more secure?

At the end of the day, I hope we manage the loss of life of US soldiers.  I think this can be achieved.  Unfortunately this is the only sustainable achievement I see on the horizon.  And at $30 billion, it will be at quite a cost.

BA

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