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Capital and surplus for the top 25 U.S. health writers -- comprised mainly of nonprofit Blue Cross Blue Shield companies -- declined 11.6% to $46.1 billion at year-end 2008, an A.M. Best Statistical Study shows. For the total U.S. health and health maintenance organization industry, capital and surplus dropped 7.6% to $95.5 billion.
The study was based only on data from companies that file a National Association of Insurance Commissioners' health annual statement, which is filed with state regulators, said Richard F. Kirk, senior business information analyst with A.M. Best. Many large health writers also write life insurance and may file on a legal reserve (life) statement, he said. These companies weren't included in the study.
Capital and surplus can be described as the difference between total admitted assets and total liabilities.
2008 "was not a kind year for the nonprofits," driven by a huge drop in investment income and stock-market write-downs, according to a research report in April by Oppenheimer & Co. "With capital at the Blues having fallen to levels last seen in 2003/2004, pricing has firmed, creating a floor on pricing in many markets for the publicly traded commercial plans," wrote equity analysts Carl McDonald and James Naklicki, in the report.
There is "ample evidence" that the Blues are raising prices by more in 2009, they wrote. As nonprofits, the Blues have no ability to sell stock, and with little access to debt markets, "it leaves operations as the only way to improve capital."
Most nonprofits operate on smaller margins than publicly traded companies, and so saw higher net losses last year given the economic downturn, said LuAnne Farrah, president of Mark Farrah Associates. "These entities tend to have a higher percentage of risk-based business so they experienced higher underwriting losses."
Generally, nonprofit plans have more conservative investment practices than for-profit companies, which have more aggressive investing practices, said Jordan Battani, a researcher of the payer segment of health care with CSC, a health care information technology company.
However, some conservative investment strategies may have been more heavily skewed toward real estate, "which took a beating last year," Farrah said.
One of the few companies in the top 25 to show a nice gain was Health Net of California.
The No. 13-ranked Health Net posted a 21.7% gain to $1.13 billion. In a statement to BestWeek, Joseph Capezza, chief financial officer of parent company, the publicly traded Health Net Inc. (NYSE: HNT), said Health Net of California's stockholders' equity increased as a result of its positive 2008 operating results combined with contributions from the parent company "to improve its competitive capital position."
Blue Cross of California, Excellus Health Plan Inc., a Blue Cross Blue Shield company in New York state; and Pennsylvania-based Independence Blue Cross were the top three decliners in capital and surplus in the top 25, the study showed.
No. 12-ranked Blue Cross of California, a unit of publicly traded WellPoint Inc. (NYSE: WLP), saw the biggest decline -- at 34% -- to $1.2 billion. Attempts to speak to WellPoint weren't successful.
Excellus, ranked 17th, posted the second-biggest drop -- at 27.7% -- to $857.9 million, the study showed.
Phil Puchalski, a spokesman for Excellus BlueCross BlueShield, said soon after the company filed its annual statement with New York state, it made a correction that was included in the final audited financial statements for 2008. The company's audited "total reserves and unassigned funds," or total capital and surplus on a statutory basis, were $971.8 million in 2008, he said. As a result, the capital and surplus actually declined 18%, he said.
The company is seeing some recovery this year, similar to most health plans, Puchalski said.
No.14-ranked Independence Blue Cross posted the third-biggest decline -- at 25.7% -- to $1.1 billion.
However, Liz Williams, a spokeswoman for Independence, said surplus declined to $1.3 billion in 2008 from $1.7 billion in 2007, citing information from the company's annual report.
In Pennsylvania, insurance companies are required to use a statutory accounting method and for most other purposes, they use generally accepted accounting principles, she said. The company's annual report figures are GAAP and the A.M. Best figures are statutory, Williams said.
The decline resulted from the downturn in the financial markets and its impact on the company's investment portfolio, she said. Independence "remains a financially stable company," and the current level of surplus still places the company in the "efficient" surplus range, as defined by the Pennsylvania Insurance Department, Williams said.
Kelly Miller, director of external affairs for the Blue Cross and Blue Shield Association, said the association believes it's appropriate for the 39 independent Blue Cross and Blue Shield companies "to hold a level of capital significantly beyond what might otherwise be expected to provide the greatest possible assurance that policyholders' benefit claims will be paid."
The association requires its licensees to maintain capital levels significantly above the minimum required by most states' insurance regulators, she said.
(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)
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