aceventura3

I have never seriously looked at health insurance company financial's because I never perceived the industry as an attractive place to invest money. But given the recent comments about the insurance industry I decided to start to look at a few companies in the industry to see what I find.

This morning I looked at Cigna, their primary business is health care insurance. I took a look at historical stock quotes. Yesterday the stock price closed at $29.41. On 9/9/1999 the stock price was $27.83. The stock traded in the $50 range in 2007. In 1989 the stock traded in the range of about $5 per share (adjusted). Between 1995 and 2001 the stock had its biggest run going from about $10 per share to over $50 per share. another run was from 2003 to 2007 where the price went from about $12 to $50+. If timed properly an investor could have made an impressive return or could have lost a significant amount of money. The pattern for Cigna was not much different than the general market. There is nothing in the share price that would indicate anything unusual.

I looked at the company's most recent 10K annual SEC filing, here is a link:

EDGAR Pro

The company's profit margin is about 3.2%. Nothing excessive.

I looked specifically at their health care segment. They had $13.336 billion in revenue. They had $ 12.320 billion in benefits and expenses paid. a breakdown showed the following:

Medical claims expense $ 7.252 in billions
Other benefit expenses $.193
Mail order pharmacy cost of goods sold $.961
Other operating expenses $3.914

The profit before taxes was $1.016 billion. they paid $.352 billion in taxes, leaving a net profit of $.664 billion or a profit margin of 5%.

Medical claims expense and the cost of pharmacy are payments that directly benefit the insured (hospital, tests, doctors, drugs, medical equipment, etc.) this was 67% of the total benefits and expenses paid, and 62% of total revenue.

Other operating expenses would include things like employee costs, rent, utilities, equipment and generally those things every business needs to operate. The government's primary argument with the public option is that they could operate in this area at a significantly lower cost. And, then we are to believe that a company like Cigna could match the government to be competitive, and given that we have to believe that the management at Cigna would have ignored creating shareholder value not cutting those costs and increasing profit margins. The argument by Obama makes no sense to me, does it make sense to any of you and if so how?

__________________
"Democracy is two wolves and a sheep voting on lunch."
"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
"If you live among wolves you have to act like one."
"A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."

rahl

It makes no sense to me at all. Per your research a profit margin of 5% will become a considerable net loss if companies are forced to accept pre-ex's, cap out of pocket maximums, andd remove lifetime benefit limits. The only way they will be able to stay in business is to raise premiums to compensate. IMO this plan is meant to completely fase out insurance companies all together and move toward a single payor system in the near future.

__________________
"Your life is Yours alone...Rise up and live it"

flstf

I'm not sure where Cigna would cut costs to compete with a not-for-profit alternative but the board must be pleased with the current management and existing profit margin. The CEO made $30.16 million last year and $120.51 million over the last 5 years.

I continue to believe that cutting insurance costs helps but is not the primary problem as long as the out of control health care provider costs which they insure continue to rise faster than people's incomes.

#53 H Edward Hanway - Forbes.com

The_Jazz

You are missing something very important here - IBNR.

Incurred
But
Not
Reported

That's going to be 10-15% of their expenses and it's a number that may or may not ever be realized.

Insurance company balance sheets are notoriously tricky to read. I submit that, unless you're an accountant with a strong insurance background or an accuary, that you aren't going to make sense of them, at least for this discussion.

__________________
"They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." - B. Franklin
"There ought to be limits to freedom." - George W. Bush
"We have met the enemy and he is us." - Pogo

aceventura3

$24 mil a year average ain't bad. With the start of football season as a comparison, I live in the Charlotte area so its constantly being discussed, Julius Pepper a DE is being paid $16.7 mil or over a mil per game.

Carolina Panthers, Julius Peppers fail to agree on long-term deal before deadline

So on one hand we have a guy who has been with a company 30+ years, a company with a $8.5 billion market cap, $19 billion in revenues, 30,000+ employees, and we have a D-end who may get 10 sacks and sign a few autographs. Give or take a few mil, I am betting Cigna shareholders are getting a better deal. Oh, and Hanway's stock in the company (he owns .37% of it or assuming a market cap of $8 billion - $31,450,000 got a nice 50% haircut last year.) means he has skin in the game.

{added}

I love this, please stop me!

Scoop: Simon Cowell's salary dwarfs Paula Abdul's - The Scoop- msnbc.com



{added}

Please...need help...please stop me.

Top-Earning Dead Celebrities - Forbes.com



---------- Post added at 06:55 PM ---------- Previous post was at 06:32 PM ----------

Whew! I am o.k. now. An insurance company with a 125 year history of actual results can get IBNR pretty close to accurate. Inflating the number would affect earnings and shareholders would not like that. Reporting the number too low will incur the wrath of regulators. Alos, if the number is too high or too low it impacts premiums. If premiums are to low, they will lose money, too high and they lose market share. So, within a reasonable range they need to be as accurate as possible to keep everyone happy.

__________________
"Democracy is two wolves and a sheep voting on lunch."
"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
"If you live among wolves you have to act like one."
"A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."

The_Jazz

Ask CNA, Reliance or Kemper how that worked for them. Hint: Reliance and Kemper are out of business (the Kemper today was spun off years ago) and CNA had a multi-billion dollar bailout from the Loews.

Also ask CIGNA how the IBNR for their P&C business that they sold to Travelers (assets only, BTW) is doing 10 years after the transaction and still before the books are closed on it. Hint: 145% loss ratio.

Ace, you're just not qualified to make sense of these numbers and you plain old don't know what you're talking about. I work in the industry and look at these numbers fairly often and I'm not qualifed either. You're WAY out of your depth, and it's glaringly apparent that you're making assumptions that are based in ignorance. If you want to have this argument about the government option, I'm happy to do so, but assuming that ANY insurance company has a handle on IBNR losses is assine, especially when I had the COO of Markel tell me 5 hours ago that it's impossible to do. The context was health care reform and the insurance industry.

Yes, I spoke to Paul Springman this morning. I've known him for years.

__________________
"They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." - B. Franklin
"There ought to be limits to freedom." - George W. Bush
"We have met the enemy and he is us." - Pogo

aceventura3

Are you suggesting IBNR was the root of the problem? I am betting, and I can do the research specific to these companies, it was related to actual losses, underwriting, and investment results.

Oh, the first personal attack.

what assumption have I made that is way out of my depth?

You assume you know my background and professional experience? what does that say about you?

There is a science to it, it is not a guessing game. Those companies that fail suffer consequences - that is what I stated.

He should be fired.

Is he willing to publicly say that his business is a guessing game and that he does not have a handle on it? Is that what you heard him say?

{added}

Here is a challenge for you. Have him read what I wrote and ask him to comment.

{added}

Here is another challenge for you. If he gave me his loss results over the past 10 years or more and a current distribution of his existing book of business, I'll calculate his IBNR and be pretty close to what it will actually prove to be.

__________________
"Democracy is two wolves and a sheep voting on lunch."
"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
"If you live among wolves you have to act like one."
"A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."

flstf

Maybe it's like Babe Ruth said when told he was asking for more money than the President of the United States makes, "I know, but I had a better year than Hoover".

I don't think a comparison of insurance executive compensation with sports and celebrity superstars would be helpful in explaining how they can best compete with non-profits.

The_Jazz

www.markelcorp.com

It's a publicly traded company. All the information will be right there. Knock yourself out.

That's not what I heard him say at all. What I did hear him say is that most insurance companies look at underwriting result on a quartly basis and do their planning on that basis. Because IBNR is such a huge percentage of that result (a minimum of 10%), it skews their results in the long term and makes things that are not actually profitable look like good ideas on the short run. Markel takes a very long-term approach on their books of business and doesn't jump in and out of things. They plan on a 3, 5 and 10 year cycle since it takes 10 years for most IBNR to be realized.

The fact that you don't realize that IBNR is directly related to actual losses basically proves my point. It stands - again - for losses Incurred But Not Reported. They are losses that the company is ASSUMING are out there. It's a plain old guess. It cannot, by any stretch of the imagination, be anything but a guess since it's, by definition, an unknown. I have no idea what you mean by "underwriting" unless it's the cost of underwriting, in which case you might as well throw in claims handling expense, too, since that's going to be a bigger line item anyway. Maybe you're talking about poor underwriting decisions, which again proves my point that you don't know what you're talking about since we're talking about losses and those poor underwriting decisions are going to be directly related to those losses.

And poor investment returns rarely take down insurance companies.

Ace, I don't have to assume that you're not qualified to have this kind of discussion, nor do I need to know your background. It's glaringly obvious that you don't know the first thing about how to read an insurance company's balance sheet since you are very obviously unfamiliar with the terms used on those sheets.

__________________
"They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." - B. Franklin
"There ought to be limits to freedom." - George W. Bush
"We have met the enemy and he is us." - Pogo

dippin

profit is the wrong variable to focus on. Overhead expenses is the problem, and overhead expenditures are substantially higher in the current American system than in any other system in the world that we have data on.

aceventura3

I think the compensation issue gets raised as a "red herring". There are base salary amounts and benefits which get charged as a clear and understandable expense to operating earnings compared to equity compensation (stock options, grants, purchases at or below market prices, etc.) which could dilute shareholder's equity. The first creates a fair comparison to non-profits the second does not and it is not clear on how to expense those. Generally, I agree there are some problems with executives receiving equity based compensation but I think the problems are small when considering an executive with 30+ years with a company and when the company has equity based compensation for most if not all employees. In the case of companies like Microsoft even some secretaries retired as multi-millionaires.

---------- Post added at 08:52 PM ---------- Previous post was at 08:41 PM ----------

Re-read what I wrote.

An insurance company does reserve for IBNR. IBNR is an expense item for them.

Here is a link to some simplified info on insurance accounting for those interested.

http://www.casact.org/library/studyn..._Final2007.pdf


Actuaries would not agree with you.

I don't know what more to say.

---------- Post added at 08:56 PM ---------- Previous post was at 08:52 PM ----------

Gee, re-read what I wrote. The primary focus of looking at the 10K was on "overhead".

__________________
"Democracy is two wolves and a sheep voting on lunch."
"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
"If you live among wolves you have to act like one."
"A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."

The_Jazz

Sure about that? Because they actually do agree with me. Actuaries are the first in line to point out under-reserving as well objecting to the early release of IBNR reserves. It's an industry-wide practice that has directly led to the downfall of at least a dozen carriers during my career. Larger than expected actual losses from IBNR reserves in - specifically - California residential construction and Workers Compensation nationally forced the Loews to inject an additional $1.1B in their own personal capital into CNA in 2005 (I think that was the year). CNA, at the time, had been in business roughly 110 years.

Kemper was specifically taken down by unexpectedly large IBNR claims in 2002, mainly because of the IBNR from the mid-90's. Reliance was around for 175 years but got taken down by - dundunDUN - under-reserved IBNR claims for Workers Compensation.

Ace, let me know if you need me to find you this documenation. It's all readily available.

You don't know what more to say because you've obviously reached the depths of your knowledge. None of this has been a personal attack. A personal attack would be "ace, you're a big stupidhead" when obviously you're not. You're just ignorant of many of the details of the topic at hand, which isn't an insult. It just means that you don't know what you're talking about.

__________________
"They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." - B. Franklin
"There ought to be limits to freedom." - George W. Bush
"We have met the enemy and he is us." - Pogo

dippin

Gee, I re-read what you wrote, and it contains no comparison to other systems that actually have lower overhead costs.

And even then your argument is circular. "If they could operate at a lower cost they would" isn't really a valid argument.

Jinn

I love how internet experts with access to Google start to think they're on-par with actual experts.

I'm not sure this is worth your time, Jazz. It's patently clear from both the language and style that one person in this conversation has a specific personal understanding of the numbers involved here and one does not.

__________________
"I'm typing on a computer of science, which is being sent by science wires to a little science server where you can access it. I'm not typing on a computer of philosophy or religion or whatever other thing you think can be used to understand the universe because they're a poor substitute in the role of understanding the universe which exists independent from ourselves." - Willravel

aceventura3

That IBNR is a guess?

In many cases executives don't always follow the recommendations of their actuaries.

I worked for a WC carrier in California during the "crisis", the under reserving issue was more a problem with cash flow underwriting that lead to reserving issues. In addition their were some major regulatory changes that caught many off guard. Most of the problems were with actual reported losses where costs got out of control as opposed to unreported losses that were later reported.

Like I said there is a science to it. If a company gets it wrong there are consequences. and, like I wrote there are different motivators that in the end balance each other out, if a company takes a short-term view and under reports IBNR or reserves to show profits, their financial strength suffers and they will run into regulatory and pricing issues.

Ace, let me know if you need me to find you this documenation. It's all readily available.

That is not it at all.

---------- Post added at 10:41 PM ---------- Previous post was at 10:30 PM ----------

Just as a simplistic illustration, Cigna has about 300,000 employees, and they have other operating expense (overhead) of about $3.9 billion - that means their overhead expense is about $130,466 per employee. So that includes salary, benefits, supplies, space, etc. everything needed to serve their customers per employee. Let's assume government can do it for half of that or $65,233 per employee. How does the government do that trick????

Do they use low wage employees, reducing professionalism and hurting service?
Do they rent cheap office space?
Do they buy pens at volume discounts?

Or, is the thought that government can pull that trick off bullshit?

Assume the government can do it. How is Cigna going to compete. Are they going to fire highly paid employees? Are they going to be able to match the fact that the government pays no income tax? Are they going to go from being profitable to losing money? How long will that last? Will they cut services? will they go out of business?

What??? Think it through for me, and give me your conclusion of what happens with the public option.

__________________
"Democracy is two wolves and a sheep voting on lunch."
"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
"If you live among wolves you have to act like one."
"A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."

dippin

We are not talking about some hypothetical world where overhead costs "could" be lower. We are talking about an actual world where everyone else's overhead costs ARE lower. Even the private insurers in other nations do not come close to the 31% average of American companies.

The four main components of overhead in American companies are marketing, underwriting, corporate services and dealing with claim eligibility in a system with so many different plans and options. A simple payer system has lower overhead in all these areas. Since that is not in the cards for the US, a public option can significantly improve on costs at least as related to marketing and corporate services.

And all of this without even touching on the issue of whether you are actually reading the reports right, as Jazz seems a lot more qualified to do that than I am.

The_Jazz

Yes, ace. Because any good actuary will tell you that IBNR is, at the root, a "best guess". It is impossible to accurately predict, as seen with the California regulatory changes for WC in the late 90's.

I don't know what you did for the WC carrier, but clearly it wasn't anything that dealt with the issue at had. It is impossible to predict IBNR losses prior to the close of the period in question because you do not know the number and types of accounts in question, nor do you know the premium dollars generated. Budgets are rarely accurate. "Cash flow underwriting" is an irrelevant issue because the premium dollars are already booked and earning income when reserves are set. That is simply a poor underwriting decision. The IBNR problems in California weren't with individual claims that weren't reported (you should know full well that once the books close on a policy year for WC, the claims shut off within 60 days), they were with new treatments and payments that had to be made as dictated by state law.
And like I said, you don't have the training necessary to understand the intricacies of an insurance carrier balance sheet, specifically the IBNR line item to know what it means and whether or not it's hiding past sins or is a current issue. I'm not claiming that ability either, but I do fully recognize the complexity of the issue and am trying, most likely in vain, to get you to realize that you don't either.

__________________
"They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." - B. Franklin
"There ought to be limits to freedom." - George W. Bush
"We have met the enemy and he is us." - Pogo

Willravel

More than one of every five requests for medical claims for insured patients, even when recommended by a patient's physician, are rejected by California's largest private insurers, amounting to very real death panels in practice daily in the nation's biggest state, according to data released today by the California Nurses Association/National Nurses Organizing Committee.
I hope I'm not that 1 in 5 the next time I need heart surgery, especially if it's an emergency (which is a real possibility).

The_Jazz

That's an excellent point, Will. "Death committees" are very much alive and well and doing a brisk business. Why, just the other day, they denied a liver transplant to a teenaged girl in Texas, who subsequently died.

__________________
"They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." - B. Franklin
"There ought to be limits to freedom." - George W. Bush
"We have met the enemy and he is us." - Pogo

Willravel

I can forgive turning down a few cases here and there, perhaps over things like elective surgery or so experimental that they were a danger to the patient, but turning down cases recommended by doctors and at that high a frequency really makes me question whether or not the industry—at least here in California—can handle the responsibility of providing the service.

Jazz, if (and this is of course a massive if) the US were to ever become single-payer, would you be willing to shift over to doing administrative work in the public medical service?

Rekna

If the word guess is rubbing you the wrong way call it an estimate or a forecast which is just a fancy way of saying an educated guess (which is much different from a wild-ass guess).

flstf

Will, I read the Reuters article and the examples they gave seem to be almost criminal in nature. What is really going on here? I wonder what percent of the 31.2 million claims rejected are medically justified. Is it the insurance companies position that doctors ordering these procedures are making wrong diagnosis and/or wrong recommendations for treatment? Surely they are not denying valid claims just to improve the bottom line. Wouldn't lawyers have a field day with these cases?

Willravel

Of course they do. Can you imagine how profits would soar if you deny particularly expensive claims? Pacificare denies 39.6% of all claims. There's no way that 2/5ths of all claims made are simply medically unsound.

You don't go into business to help people, you go into business to make money. That's what businesses do. If you can make a ton of money by helping people, great, but that's pretty rare.
Medical insurance companies employ lawyers, too, and they're likely very good at ensuring that the language denying the claim is air tight. "That wasn't covered" or "the procedure is investigational" are incredibly difficult to demonstrate as fraudulent in court.

rahl

Being in the industry I have to take slight offense to the assumption that these claims were denied for illegal means. there is no proof that this is the case. You are inferring something without any proof, this is something that you jump all over conservatives for,(birthers, death panels etc) without substantial proof this is irresponsible on your part to make the claim.

__________________
"Your life is Yours alone...Rise up and live it"

Willravel

I never claimed anything was illegal (nice strawman). It's not illegal to deny a valid claim because validity is a matter of opinion. What is fact, something no one can hope to deny, is that medical insurance companies deny claims that are backed up by doctor recommendations, putting a bureaucrat between you and your doctor. What is fact is a 40% denial rate. What is fact is that medical insurance companies are for-profit businesses, and publicly traded insurance companies have a responsibility to stockholders. What is fact is some people are denied care despite the fact that the care would save their lives.

Edit: and speaking as a victim of the greed of the insurance companies—I pay about $8000 a year for my insurance because I have a "preexisting condition"—I take offense to the uninformed defenders of the industry.

The_Jazz

1) I do casualty insurance, not health insurance, so the impact on my career wouldn't be immediate. It would definitely happen, but it would take a few years. Most of my business is construction related anyway, which means that injuries to individuals that require medical care are rare. Most of the claims I see are for property damage.
2) I'm primarily a negotiator/salesman, more than anything else, and I imagine I would be spectacularly bad at administrative work.
3) Even in a single payer world, there is still the need for folks like me, as demonstrated by the fact that London is the largest insurance market in the world and has a single payer system. I'd probably just change my focus.

__________________
"They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." - B. Franklin
"There ought to be limits to freedom." - George W. Bush
"We have met the enemy and he is us." - Pogo

rahl

Without seeing the claim form and the denial letter, your in no position to assume anything about these claims. If a procedure isn't explicitly covered in your policy your insurance company will most likely deny it, not matter what the doctor recomendation would be. A govn't run plan will do the same thing

__________________
"Your life is Yours alone...Rise up and live it"

Tully Mars

Not to change the entire track of the discussion but I'm confused by some points being made. One day I turn on the news and I hear the US can not have a public option because the government is incapable of doing anything well, certainly not within budget. The next day I hear the same group of people complaining that the public option would work so well no insurance company could possibly compete. Then you have the complete BS of "death panels" et el.

Seems like throwing crap at a wall and hoping something sticks to me.

__________________
I used to drink to drown my sorrows, but the damned things have learned how to swim- Frida Kahlo

Vice President Starkizzer Fan Club

Willravel

We don't need to see that. As I said, the insurance company is denying claims backed by doctors. That's it, that's the ballgame. There's no defense of that at all.

rahl

Again, without the claim form and denial letter theres no way to determine why the claim was cancelled. Speculation isn't proof of anything.

__________________
"Your life is Yours alone...Rise up and live it"

Willravel

It's not speculation at all.

Patient and doctor agree on treatment, insurance company says no regardless.

ratbastid

A friend of mine had an emergency appendectomy a week or two ago. Laparoscopy being what it is, he was up and going--slowly, but going--by the end of the day. Amazing.

His insurance company is covering the surgery.... But not the anesthesia. I guess their preference would have been that he bite on a stick.

Discuss.

Willravel

I prefer biting down on leather as it has a lower chance of damaging my teeth. I wouldn't want to have to see if anesthesia is covered by my dental insurance.

rahl

Patients and doctors can agree all they want, it the claim form is filled out incorrectly...nopayment.

__________________
"Your life is Yours alone...Rise up and live it"

Willravel

That doesn't tell you there's a problem with the system? If a doctor can't fill out the proper paperwork to help to heal or even save the life of a patient... what's the benefit of having the insurance company? And are you really suggesting that 1/5 cases in California are turned down due to clerical error? If that's true, there is a systemic clerical error problem that's costing lives. If it's not true, the insurance companies are turning down people even though everything is in order.

It's lose/lose.

rahl

I agree. though not about them turning down for no reason. And that may be one issue that needs addressed in the reform bill, a better billing system. Do away with the coding, and implement something more universal and easier to understand.

__________________
"Your life is Yours alone...Rise up and live it"

Willravel

So you're in favor of a more universal system? Good to read.

Charlatan

This is one of the reason why the Canadian system is good. The only one deciding who gets what procedure is the doctors. There are no insurance types dictating what can or cannot be done.

__________________
"My hands are on fire. Hands are on fire. Ain't got no more time for all you charlatans and liars."
- Old Man Luedecke

Willravel

aceventura3

You have a right to assume what you want about my "training", but I will simply say that IBNR is not a difficult or obscure concept, nor does it only apply to insurance. As you know IBNR is "incurred but not reported". To illustrate how simple the concept is and how it can be estimated accurately I offer this example. Let's say I have lived in my home for 10 years. I keep track of my natural gas bill and I have 10 years of data. I also track the general weather conditions, cooking and laundry (my uses of gas). I know that my gas bill over the ten years in the month of September ranges from $20 to $35. The highest bill ever was once in a January when there were record low temperatures and that bill was $125. The lowest bill amounts are in the summer months and range from $10 to $15. I am now more than half way through September and the weather has been normal (the biggest factor affecting the cost variance) and my other uses (cooking, heating, laundry has been normal). I have incurred gas expenses that have not been reported. I can tell you almost to the dollar what the incurred but not reported gas costs are through today. It would not be a guess. It is not a "best guess". It would be a calculated number.

If you are suggesting that there are insurance companies that "guess" thier IBNR and have gone out of business because their "guess" was wrong - I accept that. I would also add that may be the reason they went out of business. If you know actuaries who call what they do making "best guesses", I don't know what to say to that - but the irony is that even when I go to Vagas and play craps or blackjack I don't make guesses - I know the odds of each bet and make informed choices.

__________________
"Democracy is two wolves and a sheep voting on lunch."
"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
"If you live among wolves you have to act like one."
"A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."