2019 MEDICARE ADVANTAGE RATE PREVIEW

Transcription

1 HEALTHCARE SERVICES Managed Care Market Overweight 2019 MEDICARE ADVANTAGE RATE PREVIEW 2019 Rate Environment Sets up Positively for MCOs 2019 Advance Notice Expected Imminently Part 2 of the 2019 Medicare Advantage Advance Notice will be published no later than Wednesday 1/31/18 after market. Recall that Part 1 was released on 12/27/17 (more below). Based on known rate components and including certain items CMS hasn t typically embedded in its impact tables such as phasing in encounter data we est. plan reimbursement should increase by ~3.1% ex-hif. Final rates are expected on 4/2/18 and we note that rates have historically been more likely to improve than deteriorate vs. the Advance Notice Rate Environment Strong and Should Ease Competitive Concerns. A solid initial rate increase coupled with the recent suspension of the HIF in 2019 adding a 2% tailwind to plans in terms of lower costs, we expect a solid outlook for both senior benefits and plan economics. Recall for 2018, while rates were benign they were not strong and coupled with HIF return left plans in a tough spot with the key being plans did not want to CUT benefits to seniors given fears of increased attrition/senior shopping. Should 2019 rates shape up as expected look for plans to have flexibility to improve benefits and make conservative assumptions that should cushion returns. Company Price Rtg Aetna Inc(AET) $ PP Anthem Inc(ANTM) $ OP Centene Corp(CNC) $ PP CIGNA Corporation(CI) $ OP Humana Inc(HUM) $ OP Molina Healthcare, Inc.(MOH) UnitedHealth Group Inc(UNH) $92.49 OP $ OP WellCare Health Plans, Inc.(WCG) $ PP Source: FactSet/Wolfe Research OP=Outperform, PP=Peer Perform, UP=Underperform, NR=Not Rated November Preview of Cost Trend Based on the 11/29/17 Early Preview CMS expects 2019 Fee-For-Service United States Per Capita Cost (FFS USPCC) costs to increase 4.3% vs. the previous 2018 est. This is the starting point for Med Adv reimbursement changes. December Advance Notice Part 1 Here CMS proposed a new risk adjustment model (est. modest positive of 25-30bps) but also to resume the phase in of encounter data (est. modestly negative impact, 35-40bps). Star Ratings We est industry reimbursement will decrease by 10bps due to Star Ratings changes in 2019, with the impact varying meaningfully by company. We est a negative 170bps impact for CNC, a negative 60bps for CNC and a positive 70bps impact to WCG with others relatively unchanged. Fee-For-Service Normalization - A normalization factor is used by CMS to reflect increasing coding intensity by providers in FFS. This was a 60/40/190bps headwind to rates in 16 thru 18, and while we assume a 100bps headwind for 2019 this is fairly meaningful unknown/swing factor. Justin Lake, CFA (646) jlake@wolferesearch.com Stephen Baxter, CFA (646) sbaxter@wolferesearch.com Andrew Mok, CFA, CPA (646) amok@wolferesearch.com DO NOT FORWARD DO NOT DISTRIBUTE DOCUMENT CAN ONLY BE PRINTED TWICE This report is limited solely for the use of clients of Wolfe Research. Please refer to the DISCLOSURE SECTION located at the end of this report for Analyst Certifications and Other Disclosures. For Important Disclosures, please go to or write to us at Wolfe Research, LLC, 420 Lexington Avenue, Suite 648, New York, NY WolfeResearch.com Page 1 of 10

2 Expectation for Med Adv Reimbursement / Competition in 2019 Based on CMS s early preview of 2019 growth rates and other known/likely components of reimbursement we estimate plans will see reimbursement increase by 3.1% on average, with significant plan-by-plan variation due to factors such as beneficiary premium changes, risk score changes, star bonus changes and change in competitive bidding. A solid initial rate increase coupled with the recent suspension of the HIF in 2019 adding a 2% tailwind to plans in terms of lower costs, we expect a solid outlook for both senior benefits and plan economics. Recall for 2018, while rates were benign they were not strong and coupled with HIF return left plans in a tough spot with the key being plans did not want to CUT benefits to seniors given fears of increased attrition/senior shopping. Should 2019 rates shape up as expected look for plans to have flexibility to improve benefits and make conservative assumptions that should cushion returns. We note that early enrollment data indicates growth in general and our coverage universe is off to a strong start in As we ve previously written, the 2018 open enrollment season was the most competitive in recent history with a full roster of healthy MCOs under our coverage, many of which were targeting industry growth or better and stable benefits, despite the return of the HIF. Exhibit 2: Wolfe Research Estimate of 2019 Medicare Advantage Reimbursement Component WR Estimate, Before Advance Notice 2019 Trend Estimate 4.65% Based on early preview of 2019 growth rates released on 11/29/17 Prior Year Trend Revisions -0.36% Based on early preview of 2019 growth rates released on 11/29/17 Preliminary Trend 4.29% Star Bonus Changes (0.12%) Plan Reimbursement 4.17% FFS Normalization (1.0%) New Risk Adjustment Model 0.28% Encounter Data System Phase-In (0.38%) Recalibration 0.0% FFS Rebasing 0.0% Risk Coding Adjustment 0.0% Comment We estimate that ~700k fewer enrollees to be in bonus-eligible plans before offsets from contract consolidation. 3.5% of Med Adv enrollees losing a 5% bonus payment would decrease industry reimbursement by 12bps before expected offsets from plan contract consolidation to higher Star rated contracts. A normalization factor is used by CMS to reset the average risk score in fee-for-service. Normalization has been a 60/40/190bps headwind to rates in 2016/2017/2018 respectively, so we assume a 100bps headwind here for The 21st Century Cures Act required changes to the risk adjustment model. In late December CMS released Part 1 of the Advance Notice CMS proposed introducing a new version of the CMS-HCC risk adjustment model that adds mental health, substance abuse disorder and chronic kidney disease conditions and adjusts for the # of conditions a beneficiary has. CMS proposed the Payment Condition Count model and also evaluated an alternative All Condition Count model. CMS would phase in the new model, applying a 25% weight to the new model and 75% weight to the model used for 2018, implying a 28bps (110bps x 25%) benefit to rates in 2019 under the Payment Condition Count model. In Part 1 of the Advance Notice CMS proposed resuming the phase-in of encounter data for calculating risk scores. With the % of risk score data coming from encounter data proposed to increase from 15% to 25% for 2019, we estimate a 35-40bps headwind (10% of 375bps at the midpoint of Oliver Wyman s estimate). CMS has previously recalibrated risk scores, which has lowered reimbursement for the HCC (health condition) codes that plans have been most successful at documenting. We think the transition to encounter data makes this type of negative adjustment unlikely in 2019 and assume no impact. CMS recalculation of FFS costs by county, which has impact on benchmark rates in multiple ways including FFS cost quartile assignment. This rebasing is not required annually but impacted rates positively by 30 bps in We assume no impact in As required by the ACA, CMS began applying minimum incremental risk coding adjustments in Beyond 2018 incremental risk coding adjustments are not required although we note CMS has authority to make coding adjustments it deems necessary. Net Plan Reimbursement 3.1% Compare to CMS Advance Notice although we note our estimate doesn't assume a benefit from coding Industry Tax 2.0% Under current law HIF is suspended for We estimate that the HIF expense is equivalent to 2% of premiums in Net Plan Reimbursement Pre-Tax 5.1% Plan-Specific Factors Beneficiary Premium Changes Change In Average Risk Score Star Bonus Changes Change In Competitive Bidding Recapture Source: CMS, Wolfe Research Comment Plan-specific Plan-specific, typically positive as plans improve coding Plan and contract-specific Plan-specific, should be slightly negative with rates above medical trend WolfeResearch.com Page 2 of 10

3 Company Specific Exposure to Medicare Advantage Exhibit 1: Exposure to Medicare Advantage, Wolfe Research Estimates Company Members Revenue NOPAT Margin EPS EPS % Members Revenue NOPAT Margin EPS EPS % AET 1,477 $16,013 $ % $ % 1,746 $19,121 $ % $ % ANTM 647 $8,493 $ % $0.80 7% 882 $11,059 $ % $ % CI 433 $5,504 $ % $0.40 4% 446 $5,686 $ % $0.46 4% HUM 3,305 $37,916 $ % $ % 3,530 $40,962 $ % $ % UNH 4,425 $44,087 $1, % $ % 4,912 $50,329 $1, % $ % WCG 502 $5,336 $95 1.8% $ % 532 $6,246 $ % $ % Source: Wolfe Research 2018 Final Rule, Comparison of CMS Fact Sheet vs. Wolfe Research Rate Build-Up We note that CMS s calculation of expected change in revenue includes a large benefit from coding trend that we don t include in our rate build-up. CMS also has not yet estimated the impact of phasing in encounter data but the industry has consistently viewed it as a negative for reimbursement (more below). Exhibit 2: 2018 Final Rule, CMS Fact Sheet vs. Wolfe Research Build-Up Final Rule per CMS Comment Effective Growth Rate 2.70% Rebasing/Re-Pricing 0.30% Change In Star Ratings -0.40% Coding Intensity Adjustment -0.25% Normalization -1.90% Expected Average Change In Revenue 0.45% Coding Trend 2.50% While typically positive we don't believe our companies are improving coding to this degree Expected Average Change In Revenue, With Coding Trend 2.95% Wolfe Research Comment Effective Growth Rate 2.70% Rebasing/Re-Pricing 0.30% Change In Star Ratings -0.40% Coding Intensity Adjustment -0.25% Normalization -1.90% Encounter Data System Phase-In 0.38% Not estimated by CMS, reversed part of phase-in Expected Average Change In Revenue 0.83% HIF Resumption -2.00% Net Plan Reimbursement Pre-Tax -1.18% Doesn't reflect any benefit from coding trend Source: Wolfe Research November Early Preview of 2019 FFS Cost Growth Based on the 11/29/17 Early Preview CMS expects 2019 Fee-For-Service United States Per Capita Cost (FFS USPCC) costs to increase 4.3% vs. the previous 2018 est. This consists of a negative 40bps adjustment to 2018 FFS USPCC costs and an estimate of 4.7% cost growth in 2019 off of this revised baseline. This is the starting point for Med Adv reimbursement changes. In Exhibit 1 we show the historical progression of FFS USPCC cost trend from Early Preview to Advance Notice to Final rule. WolfeResearch.com Page 3 of 10

4 For 2018 CMS previewed FFS USPCC growth of 3.4%, which decreased to 2.3% in the Advance Notice but then increased mostly to 2.8% in the Final Rule. For 2017, CMS previewed FFS USPCC growth of 3.1%. This decreased slightly to 3.0% when revised in the Advance Notice but returned to 3.1% in the Final Rule. In 2016 FFS USPCC was previewed at 2.0% and decreased to 1.7% in the Advance Notice. In the Final Rule FFS USPCC was revised to 4.2% primarily due to prior period costs being revised upwards (1.9% for prior period, 0.6% for y/y growth in 2016 and 0.1% for impact of then-pending SGR fix). Exhibit 3: FFS USPCC Growth Rate Projections FFS USPCC Growth Rates Assumed Trend from PY NA 1.95% 2.80% 3.41% 2.18% 3.94% 3.39% 4.86% Early Preview NA NA NA NA 2.02% 3.10% 2.31% 4.29% Advance Notice NA 2.60% (2.10%) (1.65%) 1.47% 3.06% 2.79% Final 0.22% 3.29% 3.53% (3.30%) 4.08% 3.12% 2.73% Note: Source: Wolfe Research Part 1 of Advance Notice Released in December In late December CMS released part 1 of the Medicare Advantage Advance Notice (fact sheet, Advance Notice). Typically the entire Advance Notice is published in early February but the 21st Century Cures Act required changes to the risk adjustment model and a 60 day comment period for these changes vs. the normal 30 day comment period, requiring a 2-part release. CMS is proposing to introduce a new risk adjustment model (modest positive) but also to resume the phase in of encounter data (modest negative). New Risk Adjustment Model Introduced CMS proposes introducing a new version of the CMS-HCC risk adjustment model that adds mental health, substance abuse disorder and chronic kidney disease conditions and adjusts for the # of conditions a beneficiary has. CMS proposed the Payment Condition Count model and also evaluated an alternative All Condition Count model. The Payment Condition Count model only considers the conditions that are included in the payment model and would increase risk scores / reimbursement by 110bps when fully phased in. CMS included a plan-level impact chart (not labeled to allow specific company calculations) that shows a consistently positive impact with low variation. The All Condition Count also considers conditions that are not included in the payment model and would decrease risk scores by 28bps. The plan-level impact chart shows significantly more variability. CMS would phase in the new model, applying a 25% weight to the new model and 75% weight to the model used for 2018, implying a 28bps (110bps x 25%) benefit to rates in 2019 under the Payment Condition Count model. Resumption of Encounter Data Phase-In CMS proposes resuming the phase-in of encounter data for calculating risk scores. With the % of risk score data coming from encounter data proposed to increase from 15% to 25% for 2019, we estimate a 35-40bps headwind (10% of 375bps at the midpoint of Oliver Wyman s estimate discussed below) to plan reimbursement. To implement the phase-in of the new risk adjustment model discussed above in conjunction with this change, CMS would use solely encounter data in the new risk adjustment model. WolfeResearch.com Page 4 of 10

5 Thus far CMS has not estimated the impact of phasing in encounter data but the industry has consistently viewed it as a negative for reimbursement. The 2017 Advance Notice initially proposed moving from 10% encounter data to 50%, which the consulting firm Oliver Wyman estimated would decrease plan reimbursement by 0.0%- 3.0%. This implied the full phase-in of encounter data would be a 0.0%-7.5% headwind to plan reimbursement. This is relatively consistent with a study by Milliman which found a 4% difference in revenue between the two systems after analyzing a sample of 900,000 members in 154 plans. We note that the Government Accountability Office (GAO) released a report in early 2017 that concluded CMS hasn t made sufficient progress implementing EDS and validating the accuracy and completeness of encounter data. The GAO recommends that the data is validated before using it to determine payments to plans. AHIP has also previously discussed complications with EDS implementation and cited ongoing systems issues that prevented the system rom capturing the full stream of diagnoses. AHIP is also concerned that the filtering logic that establishes rules for converting encounter data into diagnoses (and to risk scores) will result in a reduced number of diagnoses recognized by CMS. Star Ratings Changes We estimate industry reimbursement will decrease by 10bps due to Star Ratings changes in 2019, with the impact varying meaningfully by company. We estimate a negative 170bps impact for CNC (50% decline x 5% bonus x 2/3 to account for CMS rebate), a negative 60bps for CNC and a positive 70bps impact to WCG with others relatively unchanged. Med Adv s star rating system aims to reward clinical quality, member satisfaction and service as well as regulatory compliance. In addition to being a marketing tool for members, ratings have significant financial implications. Plans rated 4 stars or better (maximum rating is 5 stars) receive a 5% boost to county benchmarks, while plans with less than 4 stars receive no boost. In addition, each plans rebate % is determined by the ratings (50% for 3 and below, 65% for 3.5 & 4.0 and 70% for 4.5 and above). WolfeResearch.com Page 5 of 10

6 Exhibit 4: Current and Historical Stars Membership AET Star Ratings * 2019* 2019 Change 4+ Star Enrollment 32, , , ,962 1,267,341 1,336,246 1,352,706 1,278,048 (74,658) Total Enrollment 441, , , ,597 1,108,765 1,257,859 1,387,883 1,495,980 1,495,980 1,495, Star Ratings % 7.3% 0.0% 0.2% 1.5% 20.4% 75.8% 91.3% 89.3% 90.4% 85.4% (5.0%) ANTM Star Ratings * 2019* 2019 Change 4+ Star Enrollment , , , , ,275 (30,904) Total Enrollment , , , , , Star Ratings % 9.9% 21.4% 24.9% 67.3% 62.8% (4.5%) CNC Star Ratings * 2019* 2019 Change 4+ Star Enrollment , , ,253 52,272 (145,981) Total Enrollment 2,189 3,534 4,267 5,629 6,596 29, , , , , Star Ratings % 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 72.1% 66.5% 67.6% 17.8% (49.8%) CI Star Ratings * 2019* 2019 Change 4+ Star Enrollment 36,702 36,211 76,985 38,220 36,795 94, , , , ,661 (78,731) Total Enrollment 36,702 36, , , , , , , , , Star Ratings % 100.0% 100.0% 18.9% 8.6% 8.3% 18.9% 54.3% 70.0% 59.3% 41.1% (18.2%) HUM Star Ratings * 2019* 2019 Change 4+ Star Enrollment 87, ,867 64, ,144 1,410,122 2,353,195 3,053,505 2,696,295 2,436,234 2,451,645 15,411 Total Enrollment 1,315,081 1,715,125 2,283,292 2,441,008 2,834,519 3,196,483 3,203,128 3,304,400 3,304,400 3,304, Star Ratings % 6.7% 6.2% 2.8% 20.9% 49.7% 73.6% 95.3% 81.6% 73.7% 74.2% 0.5% UNH Star Ratings * 2019* 2019 Change 4+ Star Enrollment 424,148 99,954 13, , ,027 1,339,324 2,205,801 3,799,308 4,079,530 3,739,538 (339,992) Total Enrollment 2,039,708 2,259,858 2,616,614 3,115,071 3,182,452 3,456,969 3,921,479 4,812,986 4,812,986 4,812, Star Ratings % 20.8% 4.4% 0.5% 5.8% 19.7% 38.7% 56.2% 78.9% 84.8% 77.7% (7.1%) WCG Star Ratings * 2019* 2019 Change 4+ Star Enrollment , ,622 90, , ,139 Total Enrollment 115, , , , , , , , , , Star Ratings % 0.0% 0.0% 6.7% 0.0% 0.0% 0.0% 0.0% 23.7% 18.4% 39.0% 20.6% Historical enrollment figures are based on June enrollment of that year. *Based on September 2017 Enrollment Figures and 2018 contract crosswalk file Source: CMS, Wolfe Research FFS Normalization A normalization factor is used by CMS to reset the average risk score in fee-for-service. Normalization has been a 60/40/190bps headwind to rates in 2016/2017/2018 respectively, so we assume a 100bps headwind here for Health Insurer Fee Suspended for 2019 Under a recently passed government funding bill the Health Insurer Fee (HIF) would be suspended in Industry collections are scheduled to be $14.3B in 2018 and would have risen by the rate of premium growth in 2019 and beyond absent any suspension. We estimate that the suspension of the industry fee would increase pretax reimbursement to plans by 2.0% in 2019, a potentially significant tailwind. WolfeResearch.com Page 6 of 10

7 Exhibit 5: Health Insurer Fee by Year (before HIF suspensions) Note: 2017 and 2019 fee ultimately suspended Source: Milliman, Wolfe Research Looking Back at Rates After several years of negative Med Adv reimbursement updates as ACA cuts and other programmatic changes were implemented we ve seen three consecutive years of positive updates and based on known rate components we expect this trend will continue in Exhibit 6: Review of Est. Med Adv Reimbursement, Note: 2011 not shown given that rates were frozen that plan year Source: CMS, Wolfe Research Final Final Final Final Final Final Dec Preview Advance Final Dec Preview Advance Final Dec Preview Advance Final Total Trend 4.2% 0.8% -0.2% 2.8% 3.0% -3.4% 2.0% 1.7% 4.2% 3.1% 3.0% 3.1% 2.3% 2.8% 2.7% IME Cuts (0.5%) (0.9%) (0.3%) (0.3%) (0.1%) Budget Neutrality Adjustment (0.8%) (0.9%) (0.1%) Final Rate Trend 3.4% (0.6% ) (1.2% ) 2.5% 2.7% (3.5% ) 1.7% 4.2% 3.0% 3.1% 2.8% 2.7% ACA Cuts (2.5%) (3.2%) (1.9%) (1.9%) (0.8%) (0.8%) (0.8%) (0.8%) Star Bonus & Benchmark Cap 3.5% 0.5% 0.5% (2.2%) 0.5% 0.5% 0.1% 0.1% (0.4%) (0.40%) Plan Reimbursement 3.4% (0.6% ) (0.2% ) (0.2% ) 1.3% (7.6% ) 1.4% 3.9% 2.3% 2.4% 2.4% 2.3% Rebasing 0.0% 0.3% Recalibration (1.9%) 1.1% (1.7%) (1.7%) Risk Coding Adjustment (3.4%) (1.5%) (0.25%) (0.25%) (0.25%) (0.25%) (0.25%) (0.25%) (0.25%) County Quartile Rebasing (0.3%) FFS Normalization 4.3% (0.4%) (0.4%) (0.1%) (0.6%) (1.9%) (1.9%) Risk Model Revision (0.6%) (0.6%) EGWP Bidding Change Phase-In (0.4%) (0.2%) 0.0% 0.0% Encounter Data System Phase-In (0.38%) (0.38%) (1.50%) (0.56%) 0.00% 0.38% Net Plan Reimbursement 3.4% (4.0% ) (0.2% ) (0.2% ) (2.1% ) (2.45% ) (1.3% ) 0.9% (0.6% ) 0.2% 0.25% 0.83% Industry Tax (1.3%) (0.2%) (0.2%) (0.2%) 1.7% 1.7% (2.0%) (2.0%) Net Plan Reimbursement Pre-Tax 3.4% (4.0% ) (0.2% ) (0.2% ) (3.4% ) (2.7% ) (1.5% ) 0.7% 1.2% 1.9% (1.8% ) (1.2% ) Other Items Things to Consider Recalibration CMS has previously recalibrated risk scores, which has lowered reimbursement for the HCC (health condition) codes that plans have been most successful at documenting. We think the transition to encounter data makes this type of negative adjustment unlikely in 2019 and assume no impact. WolfeResearch.com Page 7 of 10

8 FFS County Rebasing and County Quartile Assignment CMS will typically recalculate FFS county costs which serve as benchmarks for reimbursement, a process called rebasing. These costs can move higher or lower depending on underlying FFS spending in a geographic area. Once CMS rebases the costs of each county then CMS will re-assign counties into quartiles by costs (highest to lowest) and at this point benchmarks are set by law depending on quartile. For background, Med Adv benchmarks are set at 115% of FFS costs in the 25% of counties with the lowest FFS costs and set at 95% of FFS costs in the 25% of counties with the highest FFS costs. The 25% of counties with the second lowest quartile of FFS costs are set at 100% of FFS, and the second highest are set at 107.5%. This rebasing is not required annually- CMS last made this adjustment in 2016 and the impact on industry reimbursement was -0.3%, although it can introduce significant volatility in the underlying counties that change quartiles. We assume no impact to 2019 from county rebasing. EGWP Bidding Change Phase-In Paused During 2018 CMS began phasing in changes to the employer group Med Adv plan bidding (EGWP, also referred to as Group Med Adv) in CMS and MedPAC found that because Group Med Adv was sold from MCO to employer group rather than selected by individuals that there was less of an incentive to bid below the benchmark in order to offer attractive extra benefits and reduce costs for the federal government. CMS decided to address this by migrating Group Med Adv to the average bid-benchmark ratio found in Individual Med Adv. AHIP estimated a 2.5% total cut for Group Med Adv plans. In the 2017 Final Rule CMS elected to phase in the changes over a two year period. With the 2018 Final Rule CMS elected to freeze the phase in, which meant there wasn t an incremental headwind from this provision. If CMS resumes the phase in 2019, we estimate a 25bps headwind to industry wide reimbursement (1/2 of 2.5% cut, Group Med Adv 20% of total Med Adv). Moving Past Reimbursement Cuts Required by ACA Affordable Care Act Cuts Ended in was the first time in six years the industry doesn t face a headwind from the phase in of the new Med Adv reimbursement system under the ACA that moved the industry to fee-for-service parity. The new system was fully implemented in 2017, as plans faced a modest headwind from comparisons to 2016 when counties under a 6-year transition period were still paid 1/6 under the previous reimbursement system. Incremental Minimum Risk Coding Adjustments Not Required Post 2018 The American Taxpayer s Relief Act legislated minimum coding intensity adjustments through The minimum coding intensity adjustment required for 2018 is 5.91%, which was an incremental 25bps vs. the minimum required adjustment in place for While CMS has authority to make coding adjustments we note that nothing appears to be required by law in WolfeResearch.com Page 8 of 10

9 DISCLOSURE SECTION Analyst Certification: The analyst of Wolfe Research, LLC primarily responsible for this research report whose name appears first on the front page of this research report hereby certifies that (i) the recommendations and opinions expressed in this research report accurately reflect the research analysts personal views about the subject securities or issuers and (ii) no part of the research analysts compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this report. Other Disclosures: Wolfe Research, LLC Fundamental Stock Ratings Key: Outperform (OP): Peer Perform (PP): Underperform (UP): The security is projected to outperform analyst's industry coverage universe over the next 12 months. The security is projected to perform approximately in line with analyst's industry coverage universe over the next 12 months. The security is projected to underperform analyst's industry coverage universe over the next 12 months. Wolfe Research, LLC uses a relative rating system using terms such as Outperform, Peer Perform and Underperform (see definitions above). Please carefully read the definitions of all ratings used in Wolfe Research, LLC research. In addition, since Wolfe Research, LLC research contains more complete information concerning the analyst s views, please carefully read Wolfe Research, LLC research in its entirety and not infer the contents from the ratings alone. In all cases, ratings (or research) should not be used or relied upon as investment advice and any investment decisions should be based upon individual circumstances and other considerations. Wolfe Research, LLC Sector Weighting System: Market Overweight (MO): Market Weight (MW): Market Underweight (MU): Expect the industry to outperform the primary market index for the region (S&P 500 in the U.S.) by at least 10% over the next 12 months. Expect the industry to perform approximately in line with the primary market index for the region (S&P 500 in the U.S.) over the next 12 months. Expect the industry to underperform the primary market index for the region (S&P 500 in the U.S.) by at least 10% over the next 12 months. Wolfe Research, LLC Distribution of Fundamental Stock Ratings (As of December 31, 2017): Outperform: 38% 2% Investment Banking Clients Peer Perform: 52% 2% Investment Banking Clients Underperform: 10% 0% Investment Banking Clients Wolfe Research, LLC does not assign ratings of Buy, Hold or Sell to the stocks it covers. Outperform, Peer Perform and Underperform are not the respective equivalents of Buy, Hold and Sell but represent relative weightings as defined above. To satisfy regulatory requirements, Outperform has been designated to correspond with Buy, Peer Perform has been designated to correspond with Hold and Underperform has been designated to correspond with Sell. Wolfe Research Securities and Wolfe Research, LLC have adopted the use of Wolfe Research as brand names. Wolfe Research Securities, a member of FINRA ( is the broker-dealer affiliate of Wolfe Research, LLC and is responsible for the contents of this material. Any analysts publishing these reports are dually employed by Wolfe Research, LLC and Wolfe Research Securities. The content of this report is to be used solely for informational purposes and should not be regarded as an offer, or a solicitation of an offer, to buy or sell a security, financial instrument or service discussed herein. Opinions in this communication constitute the current judgment of the author as of the date and time of this report and are subject to change without notice. Information herein is believed to be reliable but Wolfe Research and its affiliates, including but not limited to Wolfe Research Securities, makes no representation that it is complete or accurate. The information provided in this communication is not designed to replace a recipient's own decision-making processes for assessing a proposed transaction or investment involving a financial instrument discussed herein. Recipients are encouraged to seek financial advice from their financial advisor regarding the appropriateness of investing in a security or financial instrument referred to in this report and should understand that statements regarding the future performance of the financial instruments or the securities referenced herein may not be realized. Past performance is not indicative of future results. This report is not intended for distribution to, or use by, any person or entity in any location where such distribution or use would be contrary to applicable law, or which would subject Wolfe Research, LLC or any affiliate to any registration requirement within such location. For additional important disclosures, please see WolfeResearch.com Page 9 of 10

10 The views expressed in Wolfe Research, LLC research reports with regards to sectors and/or specific companies may from time to time be inconsistent with the views implied by inclusion of those sectors and companies in other Wolfe Research, LLC analysts research reports and modeling screens. Wolfe Research communicates with clients across a variety of mediums of the clients choosing including s, voice blasts and electronic publication to our proprietary website. Copyright Wolfe Research, LLC All rights reserved. All material presented in this document, unless specifically indicated otherwise, is under copyright to Wolfe Research, LLC. None of the material, nor its content, nor any copy of it, may be altered in any way, or transmitted to or distributed to any other party, without the prior express written permission of Wolfe Research, LLC. This report is limited for the sole use of clients of Wolfe Research. Authorized users have received an encryption decoder which legislates and monitors the access to Wolfe Research, LLC content. Any distribution of the content produced by Wolfe Research, LLC will violate the understanding of the terms of our relationship. WolfeResearch.com Page 10 of 10