Helical Portfolio Update – Thoughts on Insurers
I just can’t seem to get health insurers correct. So I’ve sold them off until I can get a better grasp on the landscape. First let me give the portfolio numbers from the close of last month, then try to get my disjointed thoughts on health insurers down in one place.
The Helical Portfolio (a real Roth IRA) is now 19 months old. It did not have a good July, dropping 5% from $70,029.77 to $66,531.21 (counting unreconciled trades of 7/31). This is not the 6% level that would guide to a review, but enough that I decided to put even more into cash. As I write, the portfolio has recovered to ~$67K.. Cash on 8/1 was $29,643.01 and 44.5% of the portfolio. That level is higher than I would like, but I will try to be patient. To date, the Helical Portfolio has risen with a CAGR from its introduction in 12/31/2010 of 19.5% and the IRR has been 13.5%. Year to date the portfolio is up 18.2% counting the added cash, and 9.3% not counting it. As previously noted, I added $5,000 4/10/2012 though it has not been deployed to date. It is always nice to add cash (helps the CAGR anyway, not so much the IRR when it does not get invested).
As earnings season progressed through July, I sold off my holdings in MAKO, which I noted with this post, and also on 7/31 my positions with the health insurers United Health and Wellpoint, some of which were established as recently as 6/29. Truth be told, I’d like to be invested in both, as I think there is value in the insurers and that MAKO could have a good long run as it continues to penetrate the market. But …right now I’m not. As I noted with MAKO, I need to see a few things before I will again commit to an investment there. As the Helical Port is a concentrated sector limited portfolio, I’m not investing with a buy and hold attitude. I’d like to think I’m buy-to-hold, and recognize that by being active I bring into play a plethora of behavioral factors that conspire to work against me, but I have made the choice with this portfolio to invest with a dollop of a trader’s mindset.
As for the health insurers (Health Care Plans), let me start with my historical mindset. After the 2008 election of President Obama, it was clear there would be health care legislation, but the form remained unclear. In the time leading up to the formation of the Affordable Care Act (ACA – with the ironic tag Obamacare ), the consideration (followed by feared domination) of a public (government) option had the for profit health insurance companies selling off. Even prior to the passage of the ACA through Congress in 3/2010, once it was clear that it would support the private insurance industry, the insurers began to recover and go on a nice run. See this linked chart of industry gorilla United Health.
I was skeptical and stayed out of the industry. . I had mentally told myself to not consider this sector until 2013. The provisions that would benefit insurers, particularly the expansion of the insured base, were not going to be in place until 2014, and provisions that could stress their bottom line, such as having to accept prior conditions and not being able to cap policies, were more immediate. I failed to appreciate the extent of the sell-off that was purely based on uncertainty, and so I missed the bulk of the run of 2010 to today.
But, I dipped my toes in August of 2011 buying $2275 worth of UNH. I noted at the time I was chasing past performance i.e. I was second guessing my original intent to wait --- and still am. This low confidence position was sold after only a month (for a loss of ~ $50). I noted . “I also let UNH go to increase cash. UNH was bought on the hope that they would reestablish their upward trend as health reform gets closer to implementation, and the business environment further clarifies. I still want to get an insurer in the port (WellPoint may be a better choice than UNH), but am in no hurry and prefer the ~20% cash position I now have, as I lack macro confidence.” [Folks, this is largely why I blog this port, a commitment device that provides access to my own thoughts at the time].
Continuing to be fickle with my attitude toward insurers, I bought in again in December of 2011, this time with WellPoint instead of UNH. It was a larger investment than with UNH, as $6425.59 was put into play. Why?
“I always felt that I wanted to own a healthcare provider, particularly a larger more established one, as the mandate for health insurance got closer. In the interim, I thought these companies would struggle with the removal of the payment caps and inability to deny on pre-existing conditions. I didn't give the management enough credit apparently, and this concern was widespread enough that the companies were overly cheap. Companies [I meant the stocks] like WLP and UNH had a very strong early 2011, but the later half of the year gave another opportunity to get in. WellPoint isn't priced for any growth, with forward P/Es in the single digits, but the larger more established firms should be best positioned for the difficult task of competing on exchanges.”
Hmmm… still chasing the past gains. True, I consider insurance a key part of a healthcare portfolio. But I should note that if I am giving ‘management’ some consideration, WellPoint should not have been my choice. I did believe that the opportunity exchanges presented was/is there, but more on that later.
I pared my position in Wellpoint in April of this year. It had solid gains (up nearly 14% in under 4 months, and I wanted to lock some of these gains in, as I was still macro uncomfortable with 2012 in general (and still am). I blogged more extensively on the decision, which was to sell 60 of my 100 shares. This was the one thing I did right regarding my investment in health insurers.
At the end of June, the ACA passed muster (mostly) with the Supreme Court, and I felt the remaining indecision was mostly in the past. There is still political risk, but not risk that should disfavor insurers in my opinion. Insurers sold off. Full repeal would have favored them, but the loss of the mandate (which held) was more the real concern in my opinion. So I considered this an opportunity and bought both more WellPoint (40sh for $2642.20) and again some UNH (50 sh for ($3018.50), on the idea that this was a spastic market over reaction. The market held its opinion, and both continued to sell down.
So … what to do? More research.
[Aside: Now I know for most investors, research involves doing some intrinsic value calculation. That is fine, but I prefer relative value considerations and framing of / trying to appreciate the market. I am an investor in and not ‘the company’ itself. Therefore, ‘intrinsic’ value has limited meaning to me. It can help evaluate corporate decisions, such as share buybacks, but otherwise fails to capture the perspective / goals of the individual investor. I consider it perfectly reasonable that the same company would have a different value to different investors with different goals / agendas. Plus, I consider growth ‘estimations’, which are the basis of value calculations, to be akin to illusion (I can’t make them well, and I don’t believe you or analysts can either).]
Relative value is a preferred starting point, and I like to first compare a company to its own history such as here for WellPoint. But the market for these companies has clearly changed, and historical perspective may be useful, but limited.
I do like to frame i.e. gain perspective on the healthcare market by reading a lot. I particularly like the free (with registration) market commentaries that PWC puts out. So first I considered their piece on Implications of the US Supreme Court ruling on healthcare. It notes in regard to insurers that there is a huge opportunity in individual policies over the coming years, enabled by the exchanges that will be set up. “By 2021, the individual and small business exchange market is projected to grow to about $190 billion in premiums and $96 billion in subsidies and premium credits.” An earlier report noted this would be a $60B opportunity right out of the gate in 2014. Also there is concern that insurers may not be able to pass on costs like they could in the past. “With the ACA upheld, health plans must be prepared to justify increases in premiums.”
I am a bit contrarian on this last point, which many cited with the sell off of insurers following the SCOTUS ruling. The ACA mandates medical loss ratios (MLR) i.e. how much of premiums must go to outlays for services. To me, these ratios also are enablers of price increases in the future i.e. the argument for such increases will be a relatively straightforward one once the ratio compresses beyond the mandate. But … the MLR is also a short term issue, as in August (now) rebates must be sent by companies that have not met these ratios. Some companies will struggle to meet the MLRs. Health insurance is different from other types of insurance (P&C) in particular in how administratively demanding it is. Operational excellence will be critical to success for many of the large insurers.
I also listened to a couple of PWC sponsored round table discussions on the ACA following the ruling. In one, I had the opportunity to ask the question about lessons from the exchange established in MA*. The answer was initially that there will be different needs in different states (PWC is selling advisement after all), but I got an Easter egg when another of the speakers noted that one lesson was that the small local ‘narrow networks’ seemed to be the dominant players on the MA exchange. So, perhaps I am wrong in favoring the large players in the insurance space. The ‘Narrow Network’ providers may be the opportunity I seek. Some commentary is here and here. We complain a lot (or are told that we do?) about loss of choice in health insurance, but the reality is that the vast majority of Americans are well served by limited local services and are not likely to venture far outside them anyway. The large insurers may have grown to provide an umbrella of coverage that is too large and cumbersome for most individual buyers to consider necessary.
So, I sold (at a substantial loss) all my UNH and Wellpoint on 7/31. I lost 14% (~$430) in UNH is one short month, and over $900 with Wellpoint (from the buys of 6/292012 and 12/15/2011). I am back to waiting on insurers. I won’t be buying until after next quarter, when I hear more about rebates issues (in guidance now to be sure) and maybe not until 2013 as originally intended. I am also unsure that may prior consideration of going with the large firms was the correct strategy (I need to research Health Net more for one). Being impulsive (including with this sale) has not served me well.
Will a Gieco / Progressive type model come in to disrupt the space once the exchanges are in place? Will we move over time from an employer provided based insurance model to an employer reimbursed one (I think so)? And if so will exchanges and lower cost plans dominate all the more? I want to have a position in this space, but I am not sure I want it yet, or what form it should be in (half large major, half speculative disruptive small cap?). So I’m in cash until I can figure it out more. I haven’t been able to get this space right to date and that is an argument for not trading it like I have been. Thanks for being a sound board. Opinions are always welcome.
* P.S. – I would recommend everyone go to the MA health exchange and act as though you are considering buying insurance. All states will have these soon, but MA has been up for a few years now. Buy as though you were buying for yourself / family. Buy as though it was your business and you were providing for employees. In general, play with the site. Do you know how much you or your employer pays now? Is the plan you have one that you would chose if buying for yourself? I think we will all need to get familiar with this very complex purchasing decision. I guarantee the process will be eye opening.