(In Millions, Except Per Share Data or As Otherwise Stated Herein)
References to the terms "we", "our" or "us" used throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations, or
MD&A, refer to WellPoint, Inc., an Indiana corporation, and unless the context
otherwise requires, its direct and indirect subsidiaries.
This MD&A should be read in conjunction with our audited consolidated financial
statements as of and for the year ended December 31, 2012, included in this Form
10-K.
Overview
We currently manage our operations through three reportable segments:
Commercial, Consumer, and Other. We regularly evaluate the appropriateness of
our reportable segments, particularly in light of organizational changes, merger
and acquisition activity and changing laws and regulations. Therefore, these
reportable segments may change in the future.
Our Commercial and Consumer segments both offer a diversified mix of managed
care products, including preferred provider organizations, or PPOs; health
maintenance organizations, or HMOs; traditional indemnity benefits and
point-of-service plans, or POS plans; and a variety of hybrid benefit plans
including consumer-driven health plans, or CDHPs, hospital only and limited
benefit products.
Our Commercial segment includes Local Group (including UniCare), National
Accounts and certain other ancillary business operations (dental, vision, life
and disability and workers' compensation). Business units in the Commercial
segment offer fully-insured products and provide a broad array of managed care
services to self-funded customers, including claims processing, underwriting,
stop loss insurance, actuarial services, provider network access, medical cost
management, disease management, wellness programs and other administrative
services. Our Commercial segment also includes the operations of our 1-800
CONTACTS, Inc., or 1-800 CONTACTS, business, which was acquired on June 20, 2012
and whose results of operations have been included in our consolidated financial
statements for the period following the acquisition date.
Our Consumer segment includes Senior, State-Sponsored and Individual businesses.
Senior business includes services such as Medicare Advantage (including private
fee-for-service plans and special needs plans), Medicare Part D, and Medicare
Supplement, while State-Sponsored business includes our managed care
alternatives through publicly funded health care programs, including Medicaid,
state Children's Health Insurance Programs, or CHIP, and Medicaid expansion
programs (including those programs managed by AMERIGROUP Corporation, or
Amerigroup, which was acquired on December 24, 2012 and whose results of
operations have been included in our consolidated financial statements for the
period following the acquisition date). Individual business includes individual
customers under age 65 and their covered dependents.
Our Other segment includes the Comprehensive Health Solutions business unit, or
CHS, that brings together our resources focused on optimizing the quality of
health care, the clinical consumer experience and cost of care management. CHS
includes provider relations, care and disease management, employee assistance
programs, including behavioral health, radiology benefit management and
analytics-driven, evidence-based personal health care guidance. Our Other
segment also contains results from our Federal Government Solutions, or FGS,
business. FGS business includes services to the Federal Government in connection
with the Federal Employee Program, or FEP, and National Government Services,
Inc., or NGS, which acts as a Medicare contractor in several regions across the
nation. The Other segment also includes other businesses that do not meet the
quantitative thresholds for an operating segment as defined in Financial
Accounting Standards Board, or FASB, guidance for disclosures about segments of
an enterprise and related information, as well as intersegment sales and expense
eliminations and corporate expenses not allocated to the other reportable
segments.
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Our operating revenue consists of premiums, administrative fees and other
revenue. Premium revenue comes from fully-insured contracts where we indemnify
our policyholders against costs for covered health and life benefits.
Administrative fees come from contracts where our customers are self-insured, or
where the fee is based on either processing of transactions or a percent of
network discount savings realized. Additionally, we earn administrative fee
revenues from our Medicare processing business and from other health-related
businesses including disease management programs. Other revenue primarily
includes ocular product sales by 1-800 CONTACTS.
Our 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. All
four components are affected both by unit costs and utilization rates. Unit
costs include the cost of outpatient medical procedures per visit, inpatient
hospital care per admission, physician fees per office visit and prescription
drug prices. Utilization rates represent the volume of consumption of health
services and typically vary with the age and health status of our members and
their social and lifestyle choices, along with clinical protocols and medical
practice patterns in each of our markets. A portion of benefit expense
recognized in each reporting period consists of actuarial estimates of claims
incurred but not yet paid by us. Any changes in these estimates are recorded in
the period the need for such an adjustment arises. While we offer a diversified
mix of managed care products, including PPO, HMO, POS and CDHP products, our
aggregate cost of care can fluctuate based on a change in the overall mix of
these products.
We classify certain claims-related costs as benefit expense to reflect costs
incurred for our members' traditional medical care, as well as those expenses
which improve our members' health and medical outcomes. These claims-related
costs may be comprised of expenses incurred for: (i) medical management,
including case and utilization management; (ii) health and wellness, including
disease management services for such things as diabetes, high-risk pregnancies,
congestive heart failure and asthma management and wellness initiatives like
weight-loss programs and smoking cessation treatments; and (iii) clinical health
policy. These types of claims-related costs are designed to ultimately lower our
members' cost of care.
Our selling expense consists of external broker commission expenses, and
generally varies with premium or membership volume. Our general and
administrative expense consists of fixed and variable costs. Examples of fixed
costs are depreciation, amortization and certain facilities expenses. Other
costs are variable or discretionary in nature. Certain variable costs, such as
premium taxes, vary directly with premium volume. Other variable costs, such as
salaries and benefits, do not vary directly with changes in premium, but are
more aligned with changes in membership. The acquisition or loss of a
significant block of business would likely impact staffing levels, and thus
associate compensation expense. Examples of discretionary costs include
professional and consulting expenses and advertising. Other factors can impact
our administrative cost structure, including systems efficiencies, inflation and
changes in productivity.
Our results of operations depend in large part on our ability to accurately
predict and effectively manage health care costs through effective contracting
with providers of care to our members and our medical management and health and
wellness programs. Several economic factors related to health care costs, such
as regulatory mandates of coverage as well as direct-to-consumer advertising by
providers and pharmaceutical companies, have a direct impact on the volume of
care consumed by our members. The potential effect of escalating health care
costs, any changes in our ability to negotiate competitive rates with our
providers and any regulatory or market driven restrictions on our ability to
obtain adequate premium rates to offset overall inflation in health care costs,
including increases in unit costs and utilization resulting from the aging of
the population and other demographics, as well as advances in medical
technology, may impose further risks to our ability to profitably underwrite our
business, and may have a material impact on our results of operations.
Our future results of operations will also be impacted by certain external
forces and resulting changes in our business model and strategy. In 2010, the
U.S. Congress passed and the President signed into law the Patient Protection
and Affordable Care Act, or ACA, as well as the Health Care and Education
Reconciliation Act of 2010, or HCERA, or collectively, Health Care Reform, which
represents significant changes to the U.S. health
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care system. The legislation is far-reaching and is intended to expand access to
health insurance coverage over time by increasing the eligibility thresholds for
most state Medicaid programs and providing certain other individuals and small
businesses with tax credits to subsidize a portion of the cost of health
insurance coverage. The legislation includes a requirement that most individuals
obtain health insurance coverage beginning in 2014 and also a requirement that
certain large employers offer coverage to their employees or pay a financial
penalty. In addition, the new laws include certain new taxes and fees, including
an excise tax on high premium insurance policies (which becomes effective in
2017), limitations on the amount of compensation that is tax deductible and new
fees on companies in our industry, some of which will not be deductible for
income tax purposes.
The legislation also imposes new regulations on the health insurance sector,
including, but not limited to, guaranteed coverage requirements, prohibitions on
some annual and all lifetime limits on amounts paid on behalf of or to our
members, increased restrictions on rescinding coverage, establishment of minimum
medical loss ratio requirements, a requirement to cover preventive services on a
first dollar basis, the establishment of state insurance exchanges and essential
benefit packages and greater limitations on how we price certain of our
products. The legislation also reduces the reimbursement levels for health plans
participating in the Medicare Advantage program over time.
As a result of Health Care Reform, the Department of Health and Human Services,
or HHS, issued medical loss ratio, or MLR, regulations that require us to meet
minimum MLR thresholds for large group, small group and individual lines of
business. For purposes of determining MLR rebates, HHS has defined the types of
costs that should be included in the MLR rebate calculation. This definition
varied from our prior classification under GAAP. Where appropriate, we have
adopted this revised classification effective January 1, 2011 to further align
our GAAP basis benefit expense to that used in the calculation for determining
MLR rebates under HHS guidance. Prior period amounts were not reclassified due
to immateriality.
However, certain components of the MLR calculation as defined by HHS cannot be
classified consistently under GAAP. While considered benefit expense or a
reduction of premium revenue by HHS, certain of these costs are classified as
other types of expense, such as income tax expense or selling, general and
administrative expense, in our GAAP basis financial statements. Accordingly, the
benefit expense ratio determined using our consolidated GAAP operating results
is not comparable to the MLR calculated under HHS regulations.
These and other provisions of Health Care Reform are likely to have significant
effects on our future operations, which, in turn, could impact the value of our
business model and results of operations, including potential impairments of our
goodwill and other intangible assets. We will continue to evaluate the impact of
Health Care Reform as additional guidance is made available. For additional
discussion regarding Health Care Reform, see Part I, Item 1
"Business-Regulation" and Part I, Item 1A "Risk Factors" in this Form 10-K.
In addition, federal and state regulatory agencies may further restrict our
ability to obtain new product approvals, implement changes in premium rates or
impose additional restrictions, under new or existing laws that could adversely
affect our business, cash flows, financial condition and results of operations.
In addition to external forces discussed in the preceding paragraphs, our
results of operations are impacted by levels and mix of membership. In recent
years, we experienced membership declines due to unfavorable economic conditions
driving increased unemployment. We expect unemployment levels will remain
relatively high throughout 2013, which will likely impact our ability to
maintain current membership levels. In addition, we believe the self-insured
portion of our group membership base will continue to increase as a percentage
of total group membership. These membership trends could have a material adverse
effect on our future results of operations. Also see Part I, Item 1A "Risk
Factors" in this Form 10-K.
The National Organization of Life & Health Insurance Guaranty Associations, or
NOLHGA, is a voluntary association consisting of the state life and health
insurance guaranty organizations located throughout the U.S. State life and
health insurance guaranty associations, working together with NOLHGA, provide a
safety net for
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their state's policyholders, ensuring that they continue to receive coverage
even if their insurer is declared insolvent. We are aware that the Pennsylvania
Insurance Commissioner, or Insurance Commissioner, has placed Penn Treaty
Network America Insurance Company and its subsidiary American Network Insurance
Company, or collectively Penn Treaty, in rehabilitation, an intermediate action
before insolvency. The state court denied the Insurance Commissioner's petition
for the liquidation of Penn Treaty and ordered the Commissioner to file an
updated plan of rehabilitation. The Insurance Commissioner has filed a Notice of
Appeal asking the Pennsylvania Supreme Court to reverse the order denying the
liquidation petition. In the event rehabilitation of Penn Treaty is unsuccessful
and Penn Treaty is declared insolvent and placed in liquidation, we and other
insurers may be required to pay a portion of their policyholder claims through
state guaranty association assessments in future periods. Given the uncertainty
around whether Penn Treaty will ultimately be declared insolvent and, if so, the
amount of the insolvency, the amount and timing of any associated future
guaranty fund assessments and the availability and amount of any potential
premium tax and other offsets, we currently cannot estimate our net exposure, if
any, to this potential insolvency. We will continue to monitor the situation and
may record a liability and expense in future reporting periods, which could be
material to our cash flows and results of operations.
Executive Summary
We are one of the largest health benefits companies in terms of medical
membership in the United States, serving 36.1 medical members through our
affiliated health plans and a total of 66.5 individuals through all subsidiaries
as of December 31, 2012. We are an independent licensee of the Blue Cross and
Blue Shield Association, or BCBSA, an association of independent health benefit
plans. We serve our members as the Blue Cross licensee for California and as the
Blue Cross and Blue Shield, or BCBS, licensee for: Colorado, Connecticut,
Georgia, Indiana, Kentucky, Maine, Missouri (excluding 30 counties in the Kansas
City area), Nevada, New Hampshire, New York (as BCBS in 10 New York City
metropolitan and surrounding counties, and as Blue Cross or BCBS in selected
upstate counties only), Ohio, Virginia (excluding the Northern Virginia suburbs
of Washington, D.C.), and Wisconsin. In a majority of these service areas we do
business as Anthem Blue Cross, Anthem Blue Cross and Blue Shield, Blue Cross and
Blue Shield of Georgia, Empire Blue Cross Blue Shield, or Empire Blue Cross (in
our New York service areas). We conduct business as Amerigroup in Texas,
Florida, Georgia, Maryland, Tennessee, New Jersey, New York, Nevada, Ohio, New
Mexico, Louisiana and Washington, and beginning January 1, 2013Amerigroup
conducts business in Kansas. We also serve customers throughout the country as
UniCare and in certain California, Arizona, Nevada, New York and Virginia
markets through our CareMore Health Group, Inc., or CareMore, subsidiary. We are
licensed to conduct insurance operations in all 50 states through our
subsidiaries. We also sell contact lenses, eyeglasses and other ocular products
through our 1-800 CONTACTS business.
Operating revenue for the year ended December 31, 2012 was $60,728.5, an
increase of $863.3, or 1.4%, from the year ended December 31, 2011, primarily
reflecting higher premium revenue in our Consumer segment, partially offset by
lower premium revenue in our Commercial segment. The higher premium revenue in
our Consumer segment primarily resulted from membership growth in our Senior
Medicare Advantage business and growth in our State-Sponsored business,
primarily in the California market, as well as revenue from Amerigroup's
operations during the post-acquisition period. The premium revenue decrease in
our Commercial segment was driven primarily by fully-insured membership declines
in our Local Group business resulting from strategic product portfolio changes
in certain markets, competitive pressure in certain markets and unfavorable
economic conditions, partially offset by premium rate increases in our Local
Group business designed to cover overall cost trends.
Net income for the year ended December 31, 2012 was $2,655.5, an increase of
$8.8, or 0.3%, from the year ended December 31, 2011. The increase in net income
was primarily driven by the favorable income tax expense impact from a tax
settlement with the Internal Revenue Service, or IRS, and improved operating
results in our Commercial segment, partially offset by lower operating results
in our Consumer and Other segments.
Our fully-diluted earnings per share, or EPS, for the year ended December 31,
2012 was $8.18, an increase of $0.93, or 12.8%, from the year ended December 31,
2011. Our fully-diluted shares for the year ended
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December 31, 2012 were 324.8, a decrease of 40.3, or 11.0%, compared to the year
ended December 31, 2011. The increase in EPS resulted primarily from the lower
number of shares outstanding in 2012 due to share buyback activity under our
share repurchase program and, to a lesser extent, the increase in net income
described above.
Our results of operations discussed throughout this MD&A are determined in
accordance with U.S. generally accepted accounting principles, or GAAP. We also
calculate adjusted net income, adjusted EPS and operating gain, which are
non-GAAP measures, to further aid investors in understanding and analyzing our
core operating results and comparing them among periods. Adjusted net income and
adjusted EPS exclude realized gains and losses on investments,
other-than-temporary losses on investments recognized in income, impairment of
other intangible assets and certain other items, if applicable, that we do not
consider a part of our core operating results. Operating gain is calculated as
total operating revenue less benefit expense, selling, general and
administrative expense and cost of products. We use these measures as a basis
for evaluating segment performance, allocating resources, setting incentive
compensation targets and forecasting future operating periods. This information
is not intended to be considered in isolation or as a substitute for income
before income tax expense, net income or diluted EPS prepared in accordance with
GAAP, and may not be comparable to similarly titled measures reported by other
companies. For additional details on operating gain, see our "Reportable
Segments Results of Operations" discussion included in this MD&A.
The table below reconciles net income and EPS calculated in accordance with GAAP
to adjusted net income and adjusted EPS for the years ended December 31, 2012
and 2011.
Years Ended
December 31
2012 2011 Change % Change
Net income $ 2,655.5 $ 2,646.7 $ 8.8 0.3 %
Less:
Net realized gains on investments 334.9 235.1
99.8
Other-than-temporary impairment losses
on investments (37.8 ) (93.3 )
55.5
Litigation related costs (24.0 ) - (24.0 )
Acquisition and integration related
costs (106.4 ) - (106.4 )
Income tax settlements 140.1 - 140.1
Tax effect of adjustments (107.4 ) (49.6 ) (57.8 )
Adjusted net income $ 2,456.1 $ 2,554.5 $ (98.4 ) (3.9 )%
EPS $ 8.18 $ 7.25 $ 0.93 12.8 %
Less:
Net realized gains on investments 1.03 0.64
0.39
Other-than-temporary impairment losses
on investments (0.11 ) (0.26 )
0.15
Litigation related costs (0.07 ) - (0.07 )
Acquisition and integration related
costs (0.33 ) - (0.33 )
Income tax settlements 0.43 - 0.43
Tax effect of adjustments (0.33 ) (0.13 ) (0.20 )
Adjusted EPS $ 7.56 $ 7.00 $ 0.56 8.0 %
Operating cash flow for the year ended December 31, 2012 was $2,744.6, or 1.0
times net income. Operating cash flow for the year ended December 31, 2011 was
$3,374.4, or 1.3 times net income. The decrease in operating cash flow from 2011
of $629.8 was driven primarily by payments related to the run-out of medical
claims for former members, net cash outflows by our Amerigroup subsidiary during
the post-acquisition period (including claims payments, change-in-control
payments and payments for transaction costs), increased litigation settlement
payments and the addition of required minimum MLR rebate payments in 2012 (which
were established as liabilities during the year ended December 31, 2011).
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We intend to expand through a combination of organic growth, strategic
acquisitions and efficient use of capital in both existing and new markets. Our
growth strategy is designed to enable us to take advantage of additional
economies of scale as well as providing us access to new and evolving
technologies and products. In addition, we believe geographic and product
diversity reduces our exposure to local or regional regulatory, economic and
competitive pressures and provides us with increased opportunities for growth.
While we have achieved strong growth as a result of strategic mergers and
acquisitions, we have also achieved organic growth in our existing markets over
time by providing excellent service, offering competitively priced products and
effectively capitalizing on the brand strength of the Blue Cross and Blue Shield
names and marks.
Significant Transactions
The more significant transactions that have occurred over the last three years
that have impacted or will impact our capital structure or that have or will
influence how we conduct our business operations include:
• Acquisition of Amerigroup and the related debt issuance (2012)
• Acquisition of 1-800 CONTACTS (2012)
• Use of Capital-Board of Directors declaration of dividends on common stock
(2012 and 2011) and authorization for repurchases of our common stock (2012
and prior)
• Acquisition of CareMore (2011)
For additional information regarding these transactions, see Note 3, "Business
Combinations," and Note 15, "Capital Stock," to our audited consolidated
financial statements as of and for the year ended December 31, 2012, included in
this Form 10-K.
Membership
Our medical membership includes seven different customer types: Local Group,
Individual, National Accounts, BlueCard ® , Senior, State-Sponsored and FEP.
BCBS-branded business generally refers to members in our service areas licensed
by the BCBSA. Non-BCBS-branded business includes Amerigroup and CareMore members
as well as UniCare members predominantly outside of our BCBSA service areas.
• Local Group consists of those employer customers with less than 5% of
eligible employees located outside of the headquarter state, as well as
customers with more than 5% of eligible employees located outside of the
headquarter state with up to 5,000 eligible employees. In addition, Local
Group includes UniCare local group members. These groups are generally sold
through brokers or consultants working with industry specialists from our
in-house sales force. Local Group insurance premiums may be based on claims
incurred by the group or sold on a self-insured basis. The customer's
buying decision is typically based upon the size and breadth of our
networks, customer service, the quality of our medical management services,
the administrative cost included in our quoted price, our financial
stability, reputation and our ability to effectively service large complex
accounts. Local Group accounted for 40.5%, 44.4% and 45.7% of our medical
members at December 31, 2012, 2011 and 2010, respectively.
• National Accounts generally consist of multi-state employer groups primarily headquartered in a WellPoint service area with at least 5% of the
eligible employees located outside of the headquarter state and with more
than 5,000 eligible employees. Some exceptions are allowed based on broker
relationships. Service area is defined as the geographic area in which we
are licensed to sell BCBS products. National Accounts are generally sold
through independent brokers or consultants retained by the customer working
with our in-house sales force. We have a significant advantage when
competing for very large National Accounts due to the size and breadth of
our networks and our ability to access the national provider networks of
BCBS companies and take advantage of their provider discounts in their
local markets. National Accounts represented 19.4%, 21.6% and 21.1% of our
medical members at December 31, 2012, 2011 and 2010, respectively.
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• BlueCard® host customers represent enrollees of Blue Cross and/or Blue
Shield plans not owned by WellPoint who receive health care services in our
BCBSA licensed markets. BlueCard® membership consists of estimated host
members using the national BlueCard® program. Host members are generally
members who reside in or travel to a state in which a WellPoint subsidiary
is the Blue Cross and/or Blue Shield licensee and who are covered under an
employer-sponsored health plan issued by a non-WellPoint controlled BCBSA
licensee (i.e., the "home plan"). We perform certain administrative
functions for BlueCard® members, for which we receive administrative fees
from the BlueCard® members' home plans. Other administrative functions,
including maintenance of enrollment information and customer service, are
performed by the home plan. Host members are computed using, among other
things, the average number of BlueCard® claims received per month.
BlueCard® host membership accounted for 13.9%, 14.4% and 14.1% of our
medical members at December 31, 2012, 2011 and 2010, respectively.
• Individual consists of individual customers under age 65 (including
UniCare) and their covered dependents. Individual policies are generally
sold through independent agents and brokers, our in-house sales force or
via the Internet. Individual business is sold on a fully-insured basis and
is usually medically underwritten at the point of initial issuance.
Individual customers are generally more sensitive to product pricing and,
to a lesser extent, the configuration of the network, and the efficiency of
administration. Account turnover is generally higher with Individual as
compared to Local Groups. Individual business accounted for 5.1%, 5.4% and
5.7% of our medical members at December 31, 2012, 2011 and 2010,
respectively.
• Senior customers are Medicare-eligible individual members age 65 and over
who have enrolled in Medicare Advantage, a managed care alternative for the
Medicare program, who have purchased Medicare Supplement benefit coverage,
some disabled under 65, or all ages with End Stage Renal Disease. Medicare
Supplement policies are sold to Medicare recipients as supplements to the
benefits they receive from the Medicare program. Rates are filed with and
in some cases approved by state insurance departments. Most of the premium
for Medicare Advantage is paid directly by the Federal government on behalf
of the participant who may also be charged a small premium. Medicare
Supplement and Medicare Advantage products are marketed in the same manner,
primarily through independent agents and brokers. Senior business accounted
for 4.3%, 4.3% and 3.8% of our medical members at December 31, 2012, 2011
and 2010, respectively.
• State-Sponsored membership represents eligible members who receive health
care benefits through publicly funded health care programs, including
Medicaid, CHIP and Medicaid expansion programs. Total State-Sponsored
program business accounted for 12.6%, 5.5% and 5.3% of our medical members
at December 31, 2012, 2011 and 2010, respectively.
• FEP members consist of United States government employees and their dependents within our geographic markets through our participation in the
national contract between the BCBSA and the U.S. Office of Personnel
Management. FEP business accounted for 4.2%, 4.4% and 4.3% of our medical
members at December 31, 2012, 2011 and 2010, respectively.
In addition to reporting our medical membership by customer type, we report by
funding arrangement according to the level of risk that we assume in the product
contract. Our two principal funding arrangement categories are fully-insured and
self-funded. Fully-insured products are products in which we indemnify our
policyholders against costs for health benefits. Self-funded products are
offered to customers, generally larger employers, who elect to retain most or
all of the financial risk associated with their employees' health care costs.
Some self-funded customers choose to purchase stop-loss coverage to limit their
retained risk.
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The following table presents our medical membership by customer type, funding
arrangement and reportable segment as of December 31, 2012, 2011 and 2010. Also
included below is other membership by product. The medical membership and other
membership presented are unaudited and in certain instances include estimates of
the number of members represented by each contract at the end of the period.
December 31 2012 vs. 2011 2011 vs. 2010
2012 2011 2010 Change % Change Change % Change
(In thousands)
Medical Membership
Customer Type
Local Group 14,634 15,212 15,216 (578 ) (3.8 ) (4 ) -
National:
National Accounts 6,999 7,401 7,029 (402 ) (5.4 ) 372 5.3
BlueCard® 5,016 4,935 4,711 81 1.6 224 4.8
Total National 12,015 12,336 11,740 (321 ) (2.6 ) 596 5.1
Individual 1,855 1,846 1,905 9 0.5 (59 ) (3.1 )
Senior 1,545 1,471 1,259 74 5.0 212 16.8
State-Sponsored 4,561 1,867 1,756 2,694 144.3 111 6.3
FEP 1,520 1,519 1,447 1 0.1 72 5.0
Total Medical Membership by
Customer Type 36,130 34,251 33,323 1,879 5.5 928 2.8
Funding Arrangement
Self-Funded 20,176 20,506 19,590 (330 ) (1.6 ) 916 4.7
Fully-Insured 15,954 13,745 13,733 2,209 16.1 12 0.1
Total Medical Membership by
Funding Arrangement 36,130 34,251 33,323 1,879 5.5 928 2.8
Reportable Segment
Commercial 26,649 27,548 26,959 (899 ) (3.3 ) 589 2.2
Consumer 7,961 5,184 4,917 2,777 53.6 267 5.4
Other 1,520 1,519 1,447 1 0.1 72 5.0
Total Medical Membership by
Reportable Segment 36,130 34,251 33,323 1,879 5.5 928 2.8
Other Membership & Customers
Behavioral Health Members 24,156 25,135 23,963 (979 ) (3.9 ) 1,172
4.9
Life and Disability Members 4,838 5,012 5,201 (174 ) (3.5 ) (189 ) (3.6 )
Dental Members
3,827 4,046 4,007 (219 ) (5.4 ) 39 1.0
Dental Administration Members 4,103 4,162 4,272 (59 ) (1.4 ) (110 ) (2.6 )
Vision Members
4,519 3,783 3,508 736 19.5 275 7.8
Medicare Advantage Part D
Members 622 575 434 47 8.2 141 32.5
Medicare Part D Standalone
Members 574 667 814 (93 ) (13.9 ) (147 ) (18.1 )
Retail Vision Customers 3,130 - - 3,130 - - -
December 31, 2012 Compared to December 31, 2011
Medical Membership (in thousands)
During the year ended December 31, 2012, total medical membership increased
1,879, or 5.5%, primarily due to State-Sponsored membership acquired with the
acquisition of Amerigroup and growth in our Senior membership, partially offset
by decreases in our Local Group and National Accounts membership.
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Self-funded medical membership decreased 330, or 1.6%, primarily due to pricing
increases in our National Accounts business.
Fully-insured membership increased 2,209, or 16.1%, primarily due to
State-Sponsored membership acquired with the acquisition of Amerigroup and
growth in our Senior membership, partially offset by membership losses in
certain Local Group markets resulting primarily from strategic product portfolio
changes and heightened competition.
Local Group membership decreased 578, or 3.8%, primarily due to increased
competition, strategic product portfolio changes in the New York market and
network rental markets and negative in-group change.
Individual membership increased 9, or 0.5%, primarily due to an overall improved
competitive position in our California market.
National Accounts membership decreased 402, or 5.4%, primarily driven by pricing
increases in our self-funded National Accounts business and negative in-group
change.
BlueCard ® membership increased 81, or 1.6%, primarily due to favorable net
sales and in-group change at other BCBSA plans whose members reside in or travel
to our licensed areas.
Senior membership increased 74, or 5.0%, primarily due to strong sales during
the open enrollment period resulting from our geographic expansion into several
new counties, partially offset by the withdrawal of the California Regional PPO
Medicare Advantage product.
State-Sponsored membership increased 2,694, or 144.3%, primarily due to 2,662
members acquired with the acquisition of Amerigroup and growth in Wisconsin,
California and Kansas, partially offset by exiting selected markets.
FEP membership increased 1, or 0.1%, primarily due to favorable in-group change.
Other Membership & Customers (in thousands)
Our Other products are often ancillary to our health business, and can therefore
be impacted by corresponding changes in our medical membership.
Behavioral health membership decreased 979, or 3.9%, primarily due to the
overall declines in our fully-insured medical membership and negative in-group
change.
Life and disability membership decreased 174, or 3.5%, primarily due to the
overall declines in our Commercial fully-insured medical membership and negative
in-group change. Life and disability products are generally offered as part of
Commercial medical fully-insured membership sales.
Dental membership decreased 219, or 5.4%, primarily due to the lapse of a large
dental contract, partially offset by the launch of new dental products in 2012.
Dental administration membership decreased 59, or 1.4%, primarily due to the
lapse of a large contract pursuant to which we provided dental administrative
services.
Vision membership increased 736, or 19.5%, primarily due to strong sales and
positive in-group change in our National Accounts, Local Group and Senior
businesses.
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Medicare Advantage Part D membership increased 47, or 8.2%, primarily due to
strong sales during the open enrollment period resulting from our geographic
expansion into several new counties, partially offset by our withdrawal of the
California Regional PPO Medicare Advantage product.
Medicare Part D standalone membership decreased 93, or 13.9%, primarily due to
competitive pressure in certain markets.
Retail vision customers increased 3,130 due to our acquisition of 1-800
CONTACTS.
December 31, 2011 Compared to December 31, 2010
Medical Membership (in thousands)
During the year ended December 31, 2011, total medical membership increased 928,
or 2.8%, primarily due to increases in our National Accounts and BlueCard®
membership, and to a lesser degree, increases in our Senior, State-Sponsored and
FEP membership. In addition, a portion of the increase was attributable to new
federal regulations associated with Health Care Reform requiring coverage of
dependents up to age 26. These increases were partially offset by declines in
our Individual and Local Group businesses.
Self-funded medical membership increased 916, or 4.7%, primarily due to
increases in self-funded National Account and Local Group membership resulting
from additional sales and conversions from fully-insured to self-funded
arrangements, partially offset by declines in self-funded non-BCBSA-branded
business.
Fully-insured membership increased 12, or 0.1%, primarily due to Senior Medicare
Advantage, FEP and State-Sponsored membership increases, partially offset by
conversions from fully-insured to self-funded arrangements and declines in
Individual, National and Local Group fully-insured membership.
Local Group membership decreased 4, or less than 1.0%, primarily due to
membership declines in our non-BCBSA-branded membership, nearly offset by
increases in BCBSA-branded membership due to new sales.
National Accounts membership increased 372, or 5.3%, primarily driven by
additional sales reflective of our extensive and cost-effective provider
networks and a broad and innovative product portfolio. In addition, the new
federal regulations requiring coverage of dependents up to age 26 also
contributed to the increase.
BlueCard® membership increased 224, or 4.8%, primarily due to increased
utilization by other BCBSA licensee members who reside in or travel to our
licensed areas.
Individual membership decreased 59, or 3.1%, primarily due to a decline in
BCBSA-branded business resulting from competitive pressures and delayed product
approvals for new Health Care Reform compliant products in California.
Senior membership increased 212, or 16.8%, primarily due to increases in our
Medicare Advantage plans, including additional Medicare Advantage membership
resulting from our acquisition of CareMore, and to a lesser extent, increases in
our Medicare Supplement membership.
State-Sponsored membership increased 111, or 6.3%, primarily due to growth in
Indiana, South Carolina, Kansas and California.
FEP membership increased 72, or 5.0%, primarily due to new federal regulations
requiring coverage of dependents up to age 26.
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Other Membership & Customers (in thousands)
Our Other products are often ancillary to our health business, and can therefore
be impacted by corresponding changes in our medical membership.
Behavioral health membership increased 1,172, or 4.9%, primarily due to new
sales to several major accounts in our National Accounts business, increased
Medicare Advantage and State-Sponsored medical membership and a change in
methodology of how we report certain portions of the behavioral health
membership.
Life and disability membership decreased 189, or 3.6%, primarily due to lapses
in our National Accounts business. Life and disability products are generally
offered as a part of Commercial medical fully-insured membership sales.
Dental membership increased 39, or 1.0%, primarily due to new sales resulting
from the introduction of new product offerings and, to a lesser extent, our
acquisition of a dental benefits plan in December 2011.
Dental administration membership decreased 110, or 2.6%, primarily due to the
termination of a contract in the North Carolina market.
Vision membership increased 275, or 7.8%, primarily due to strong sales and
market penetration of our Blue View vision product within the Local Group
markets and embedding of vision benefits in certain of our Consumer products,
partially offset by lapses.
Medicare Advantage Part D membership increased 141, or 32.5%, primarily due to
new membership associated with the increase in our Medicare Advantage medical
membership, including additional Medicare Advantage medical membership resulting
from our acquisition of CareMore.
Medicare Part D standalone membership decreased 147, or 18.1%, primarily due to
lapses in Low Income Subsidy, or LIS, membership in 2011. LIS is a Medicare Part
D program that provides additional premium and cost-sharing assistance to
qualifying Medicare beneficiaries with low incomes and/or limited resources.
Cost of Care
The following discussion summarizes our aggregate underlying cost of care trends
for the year ended December 31, 2012 for our Local Group fully-insured business
only.
Our cost of care trends are calculated by comparing the year-over-year change in
average per member per month claim costs, including member co-payments and
deductibles. While our cost of care trend varies by geographic location, based
on underlying medical cost trends, we estimate that our aggregate cost of care
trend was near the low end of 7.0% plus or minus 50 basis points for the full
year of 2012.
Overall, our medical cost trend is driven by unit cost. Inpatient hospital trend
was in the mid-to-high single digit range and was primarily related to increases
in the average cost per admission. While provider rate increases are a primary
driver of unit cost trends, we continually negotiate with hospitals to manage
these cost trends. We remain committed to optimizing our reimbursement rates and
strategies to help address the cost pressures faced by employers and consumers.
Both inpatient admission counts per thousand members and inpatient day counts
per thousand members were only slightly higher than the prior year. The average
length of stay was relatively the same as the prior year. In addition to our
recontracting efforts, a number of clinical management initiatives are in place
to help mitigate the inpatient trend. Focused review efforts continue in key
areas, including inpatient behavioral health stays and spinal surgery cases,
among others. Additionally, we continue to refine our programs related to
readmission management, focused utilization management at high cost facilities
and post-discharge follow-up care.
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Outpatient trend was in the high single digit range and was 70% unit cost
related and 30% utilization related. Outpatient costs are a collection of
different types of expenses, such as outpatient facilities, labs, x-rays,
emergency room, occupational therapy and physical therapy. Per visit costs are
still the largest contributor to overall outpatient trend, influenced largely by
price increases within certain provider contracts. Outpatient utilization
(visits per thousand members) was higher than the prior year. We continue to
work with vendors and providers to help optimize site of service decisions,
including in key areas such as emergency room, lab, radiology, sleep studies and
surgery settings. As an example, we executed on our American Imaging
Management's Sleep Management Program in the fourth quarter of 2012 in certain
of our central and western states, as well as in Georgia, and in the first
quarter of 2013 in New York and the other northeastern states. The program
aligns the diagnosis and treatment of sleep apnea with clinical guidelines based
on widely accepted medical literature, while at the same time enhancing member
access to high value providers and ensuring treatment compliance for the
continuing payment for equipment rental and ongoing supplies. Programs like
this, along with continued expansion and optimization of our utilization
management programs, are acting to moderate trend.
Physician services trend was in the mid single digit range and was 75% unit cost
related and 25% utilization related. Increases in the physician care category
were partially driven by contracting changes. We continue to collaborate with
physicians to improve quality of care through pay-for-performance programs and
bundled payment initiatives. Additionally, we continue to enhance our ability to
detect and deter fraud and abuse, reducing waste in the system.
Pharmacy trend was in the mid single digit range and was driven primarily by
unit cost (cost per prescription). Continued inflation in the average wholesale
price of drugs applied upward pressure to the overall cost per prescription as
did the increasing cost of specialty drugs. The increase in cost per
prescription measures continued to be mitigated by improvements in our generic
usage rates and benefit plan design changes. We are continuously evaluating our
drug formulary to ensure the most effective pharmaceutical therapies are
available to our members.
In response to cost trends, we continue to pursue contracting and plan design
changes, promote and implement performance-based contracts that reward clinical
outcomes and quality, and expand our radiology management, disease management
and advanced care management programs. We are taking a leadership role in the
area of payment reform as evidenced by the introduction of the Patient Centered
Primary Care program. By establishing the primary care doctor as central to the
coordination of a patient's health care needs, the initiative builds on the
success of current patient-centered medical home programs in helping to improve
patient care while lowering costs. Additionally, our value-based contracting
initiative continues to underscore our commitment to partnering with providers
to improve quality and lower cost.
As evidenced by our expansion of CareMore into select New York and Virginia
markets, we remain committed to providing access-based health care products and
services that are simple to use and that customers can trust. CareMore's mission
is to improve the overall lives and wellbeing of seniors by providing
innovative, focused health care approaches to the complex problems of aging,
while protecting the financial resources of seniors and the Medicare Program.
CareMore's model is focused on disease management programs that provide Medicare
members with a hands-on approach to care coordination and intensive treatment of
chronic conditions.
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Consolidated Results of Operations
Our consolidated summarized results of operations for the years ended
December 31, 2012, 2011 and 2010 are discussed in the following section.
Change
Years Ended December 31 2012 vs. 2011 2011 vs. 2010
2012 2011 2010 $ % $ %
Total operating revenue $ 60,728.5 $ 59,865.2 $ 57,740.5 $ 863.3 1.4 $ 2,124.7 3.7
Net investment income 686.1 703.7 803.3 (17.6 ) (2.5 ) (99.6 ) (12.4 )
Net realized gains on investments 334.9
235.1 194.1 99.8 42.5 41.0 21.1
Other-than-temporary impairment
losses on investments (37.8 ) (93.3 ) (39.4 ) (55.5 ) (59.5 ) 53.9 136.8
Total revenues 61,711.7 60,710.7 58,698.5 1,001.0 1.6 2,012.2 3.4
Benefit expense 48,213.6 47,647.5 44,930.4 566.1 1.2 2,717.1 6.0
Selling, general and
administrative expense 8,738.3 8,435.6 8,732.6 302.7 3.6 (297.0 ) (3.4 )
Cost of products 137.4 - - 137.4 - - -
Other expense1 756.9 669.7 681.7 87.2 13.0 (12.0 ) (1.8 )
Total expenses 57,846.2 56,752.8 54,344.7 1,093.4 1.9 2,408.1 4.4
Income before income tax expense 3,865.5 3,957.9 4,353.8 (92.4 ) (2.3 ) (395.9 ) (9.1 )
Income tax expense 1,210.0 1,311.2 1,466.7 (101.2 ) (7.7 ) (155.5 ) (10.6 )
Net income $ 2,655.5 $ 2,646.7 $ 2,887.1 $ 8.8 0.3 $ (240.4 ) (8.3 )
Average diluted shares
outstanding 324.8 365.1
415.8 (40.3 ) (11.0 ) (50.7 ) (12.2 )
Diluted net income per share $ 8.18$ 7.25$ 6.94$ 0.93 12.8 $ 0.31
4.5
Benefit expense ratio2 85.3 % 85.1 % 83.2 % 20bp 3 190bp 3
Selling, general and
administrative expense ratio4 14.4 % 14.1 % 15.1 % 30bp 3 (100)bp 3
Income before income taxes as a
percentage of total revenue 6.3 % 6.5 % 7.4 % (20)bp 3 (90)bp 3
Net income as a percentage of
total revenue 4.3 % 4.4 % 4.9 % (10)bp 3 (50)bp 3
Certain of the following definitions are also applicable to all other results of
operations tables in this discussion:
1 Includes interest expense, amortization of other intangible assets and
impairment of other intangible assets
2 Benefit expense ratio = Benefit expense ÷ Premiums. Premiums for the years
ended December 31, 2012, 2011 and 2010 were $56,496.7, $55,969.6 and
$53,973.6, respectively, and are included in Total operating revenue
presented above.
3 bp = basis point; one hundred basis points = 1%
4 Selling, general and administrative expense ratio = Selling, general and
administrative expense ÷ Total operating revenue
Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011
Total operating revenue increased $863.3, or 1.4%, to $60,728.5 in 2012,
resulting primarily from higher premium revenue and, to a lesser extent,
increased other revenue and administrative fees. The higher premium revenue was
due primarily to membership growth in our Senior Medicare Advantage business,
including CareMore, and growth in our State-Sponsored business, primarily in the
California market, as well as revenue
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from Amerigroup's operations during the post-acquisition period. In addition,
premium rate increases in our Local Group and Individual businesses designed to
cover overall cost trends and increased reimbursement in our FEP business
contributed to the increased premium revenue. These increases were partially
offset by fully-insured membership declines in our Local Group business
resulting from strategic product portfolio changes in certain states,
competitive pressure in certain markets and unfavorable economic conditions. The
increase in other revenue resulted primarily from ocular product sales by our
1-800 CONTACTS business during the post-acquisition period. Administrative fees
increased primarily as a result of pricing increases for self-funded members in
our National Accounts and Local Group businesses, partially offset by membership
declines in our self-funded National Accounts business.
Net investment income decreased $17.6, or 2.5%, to $686.1 in 2012, primarily due
to lower investment yields, partially offset by higher average cash and
investment balances resulting from debt issuances in 2012, including the debt
issuance related to our acquisition of Amerigroup.
Net realized gains on investments, net of other-than-temporary impairment
losses, increased $155.3, or 110%, to $297.1 in 2012, primarily due to increased
gains on sales of fixed maturity securities and, to a lesser extent, decreased
other-than-temporary impairment losses on equity securities as a result of
improved market conditions.
Benefit expense increased $566.1, or 1.2%, to $48,213.6 in 2012, primarily due
to increases in our Senior and State-Sponsored businesses, partially offset by
decreases in our Local Group business. The increase in our Senior business was
driven primarily by membership growth in our Medicare Advantage business,
including CareMore, while the increase in our State-Sponsored business was
driven by both increased benefit cost trends and membership growth, including
membership acquired with the acquisition of Amerigroup. These increases were
partially offset by the fully-insured membership declines in our Local Group
business as described above, as well as favorable prior year reserve development
in 2012 compared to modest reserve strengthening in 2011.
Our benefit expense ratio increased 20 basis points to 85.3% in 2012, primarily
due to higher medical costs in our State-Sponsored business, primarily in
California. The benefit expense ratio increase was partially offset by
improvements in our Local Group and Senior businesses and the favorable prior
year reserve development.
Selling, general and administrative expense increased $302.7, or 3.6%, to
$8,738.3 in 2012, primarily due to additional selling, general and
administrative expense related to CareMore, acquisition and integration related
expenses associated with Amerigroup and 1-800 CONTACTS, and the impairment of
certain software assets, partially offset by lower employee incentive
compensation costs.
Our selling, general and administrative expense ratio increased 30 basis points
to 14.4% in 2012, primarily due to the increased selling, general and
administrative expense discussed in the preceding paragraph, partially offset by
increased operating revenue.
Cost of products totaled $137.4 in 2012 and represents the costs of ocular
products sold by 1-800 CONTACTS during the post-acquisition period.
Other expense increased $87.2, or 13.0%, to $756.9 in 2012, primarily due to
increased interest expense resulting from higher outstanding debt balances and
financing costs associated with our acquisition of Amerigroup.
Income tax expense decreased $101.2, or 7.7%, to $1,210.0 in 2012, primarily due
to a lower effective tax rate in 2012 and, to a lesser extent, lower income
before income tax expense. The effective tax rates in 2012 and 2011 were 31.3%
and 33.1%, respectively. The effective tax rate decreased primarily due to the
impact from the 2012 settlement with the IRS of items related to not-for-profit
conversions and corporate reorganizations in prior years, as well as issues
related to certain of our acquired companies incurred prior to our acquisition
of those
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companies. This was partially offset by increases due to the impact of non-tax
deductible litigation settlement expenses and an increase in our state deferred
tax asset valuation allowance attributable to uncertainty associated with
certain state net operating loss carryforwards.
Our net income as a percentage of total revenue decreased 10 basis points to
4.3% in 2012 as compared to 2011 as a result of all factors discussed above.
Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010
Total operating revenue increased $2,124.7, or 3.7%, to $59,865.2 in 2011,
primarily due to premium rate increases in our Local Group and Individual
businesses designed to cover cost trends, increased fully-insured membership in
our Senior Medicare Advantage business and increased reimbursement in the FEP
business. These increases were partially offset by fully-insured membership
declines in our Local Group and National Accounts businesses resulting from the
unfavorable economic conditions and the conversions of two large accounts from
fully-insured to self-funded status in 2010. Administrative fees also increased
due to higher self-funded membership in our Local Group and National Accounts
businesses, including the impact of conversions from fully-insured to
self-funded membership.
Net investment income decreased $99.6, or 12.4%, to $703.7 in 2011, primarily
due to lower yields on investment balances and a decline in dividend income from
a cost method investment.
Benefit expense increased $2,717.1, or 6.0%, to $47,647.5 in 2011, primarily due
to higher medical costs in our Local Group business, higher Senior Medicare
Advantage membership, adverse selection in certain Medicare Advantage products
and increased membership in the FEP business. In addition, an estimated $247.0
of higher than anticipated favorable prior year reserve development and an
estimated $67.7 of lower targeted margin for adverse deviation were recognized
as reductions of benefit expense during 2010 with no comparable amounts
recognized in 2011. The increases in benefit expense in 2011 were partially
offset by fully-insured membership declines in our Local Group and National
Accounts businesses and the conversions of two large accounts from fully-insured
to self-funded status in 2010.
Our benefit expense ratio increased 190 basis points to 85.1% in 2011, primarily
due to higher medical costs in our Senior, Local Group and State-Sponsored
businesses, the reduced amount of favorable prior year reserve development
between the two periods and the impact of minimum medical loss ratio
requirements in 2011.
Selling, general and administrative expense decreased $297.0, or 3.4%, to
$8,435.6 in 2011, primarily due to lower incentive compensation costs, cost
reductions associated with our ongoing efficiency initiatives and the
non-recurrence of asset impairments, partially offset by increased premium tax
expense, selling, general and administrative expenses associated with our
CareMore subsidiary and increased advertising expenses.
Our selling, general and administrative expense ratio decreased 100 basis points
to 14.1% in 2011, primarily due to increased operating revenue and reduced
selling, general and administrative expenses.
Other expenses decreased $12.0, or 1.8%, to $669.7 in 2011, reflecting the
non-recurrence of an impairment of other intangible assets and reduced
amortization of certain other intangible assets acquired in prior years,
partially offset by increased interest expense due to higher average outstanding
debt balances.
Income tax expense decreased $155.5, or 10.6%, to $1,311.2 in 2011, primarily
due to lower income before income tax expense. The effective tax rates in 2011
and 2010 were 33.1% and 33.7%, respectively. The effective tax rate decreased
primarily due to prior tax year federal and state audit settlements during 2011.
Net income as a percentage of total revenue decreased 50 basis points to 4.4% in
2011 as compared to 2010 as a result of all factors discussed above.
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Reportable Segments Results of Operations
We use operating gain to evaluate the performance of our reportable segments,
which currently are Commercial, Consumer and Other. Operating gain is calculated
as total operating revenue less benefit expense, selling, general and
administrative expense and cost of products. It does not include net investment
income, net realized gains/losses on investments, other-than-temporary
impairment losses recognized in income, interest expense, amortization of other
intangible assets, impairment of other intangible assets or income taxes, as
these items are managed in a corporate shared service environment and are not
the responsibility of operating segment management. For additional information,
including a reconciliation of consolidated operating gain to income before
income taxes, see Note 20, "Segment Information," to our audited consolidated
financial statements as of and for the year ended December 31, 2012 included in
this Form 10-K. The discussion of segment results for the years ended
December 31, 2012, 2011 and 2010 presented below are based on operating gain, as
described above, and operating margin, which is calculated as operating gain
divided by operating revenue. Our definitions of operating gain and operating
margin may not be comparable to similarly titled measures reported by other
companies.
Our Commercial, Consumer, and Other segments' summarized results of operations
for the years ended December 31, 2012, 2011 and 2010 are as follows:
Change
Years Ended December 31 2012 vs. 2011 2011 vs. 2010
2012 2011 2010 $ % $ %
Commercial
Operating revenue $ 33,553.5 $ 34,498.0 $ 34,559.3 $ (944.5 ) (2.7 ) $ (61.3 ) (0.2 )
Operating gain 3,199.7 3,090.5 3,085.7 109.2 3.5 4.8 0.2
Operating margin 9.5 % 9.0 % 8.9 % NA 1 50 bp NA 1 10 bp
Consumer
Operating revenue $ 19,427.7 $ 17,784.9 $ 16,092.6 $ 1,642.8 9.2 $ 1,692.3 10.5
Operating gain 440.2 623.1 1,000.6 (182.9 ) (29.4 ) (377.5 ) (37.7 )
Operating margin 2.3 % 3.5 % 6.2 % NA 1 (120 )bp NA 1 (270 )bp
Other
Operating revenue $ 7,747.3 $ 7,582.3 $ 7,088.6 $ 165.0 2.2 $ 493.7 7.0
Operating (loss) gain (0.7 ) 68.5 (8.8 ) (69.2 ) (101.0 ) 77.3 878.4
1 Not applicable
Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011
Commercial
Operating revenue decreased $944.5, or 2.7%, to $33,553.5 in 2012, primarily due
to fully-insured membership declines in our Local Group business resulting from
strategic product portfolio changes in certain states, competitive pressure in
certain markets and unfavorable economic conditions, partially offset by premium
rate increases in our Local Group business designed to cover overall cost
trends. Partially offsetting the decline in premium revenue was an increase in
other revenue in our ancillary businesses resulting primarily from ocular
product sales by 1-800 CONTACTS during the post-acquisition period and increased
administrative fees resulting from pricing increases for self-funded members in
our National Accounts and Local Group businesses.
Operating gain increased $109.2, or 3.5%, to $3,199.7 in 2012, primarily due to
an improved benefit expense ratio for our Local Group business, including the
impact of favorable prior year reserve development in 2012 compared to modest
reserve strengthening in 2011, as well as increased operating results in our
ancillary businesses, including ocular product sales by 1-800 CONTACTS during
the post-acquisition period. These
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increases were partially offset by declines in our Local Group business due to
fully-insured membership losses as a result of strategic product portfolio
changes in certain markets, competitive pressure in certain markets and
unfavorable economic conditions.
The operating margin in 2012 was 9.5%, a 50 basis point increase from 2011,
primarily due to the factors discussed in the preceding two paragraphs.
Consumer
Operating revenue increased $1,642.8, or 9.2%, to $19,427.7 in 2012, primarily
due to membership growth in our Medicare Advantage business, including CareMore,
and, to a lesser extent, growth in our State-Sponsored business resulting from
retroactive premium rate increases in the California market as well as premium
revenue from Amerigroup's operations during the post-acquisition period.
Operating gain decreased $182.9, or 29.4%, to $440.2 in 2012, primarily due to
declines in our State-Sponsored and Individual businesses due to higher benefit
cost trends and increased general and administrative expense resulting from
transaction expenses associated with the Amerigroup acquisition and
restructuring activities.
The operating margin in 2012 was 2.3%, a 120 basis point decrease from 2011,
primarily due to the factors discussed in the preceding two paragraphs.
Other
Operating revenue increased $165.0, or 2.2%, to $7,747.3 in 2012, primarily due
to growth in our FEP business resulting from premium rate increases designed to
cover overall cost trends during 2012.
Operating gain decreased $69.2 to an operating loss of $0.7 in 2012, primarily
due to increased unallocated general and administrative expense, including
expenses related to restructuring activities, transaction expenses associated
with the Amerigroup acquisition and litigation settlement expenses.
Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010
Commercial
Operating revenue decreased $61.3, or 0.2%, to $34,498.0 in 2011, primarily due
to fully-insured membership declines in our Local Group and National Accounts
businesses resulting from unfavorable economic conditions and the conversion of
two large accounts from fully-insured to self-funded status. The decreases in
premiums were partially offset by premium rate increases in our Local Group
business designed to cover cost trends and increased administrative fees due to
higher self-funded membership in our Local Group and National Accounts
businesses.
Operating gain increased $4.8, or 0.2%, to $3,090.5 in 2011, primarily due to
improved results in our National Accounts business and lower selling, general
and administrative expenses. These increases were partially offset by an
estimated $180.0 of operating gain recognized in the Commercial segment during
2010 as a result of higher than anticipated favorable prior year reserve
development and lower targeted margin for adverse deviation with no comparable
amounts recognized in 2011 and the impact of minimum medical loss ratio
requirements on 2011 operating gain.
The operating margin in 2011 was 9.0%, a 10 basis point increase over 2010,
primarily due to the factors discussed in the preceding two paragraphs.
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Consumer
Operating revenue increased $1,692.3, or 10.5%, to $17,784.9 in 2011, primarily
due to increases in our Senior and State-Sponsored businesses. The increase in
Senior revenue was primarily due to increased Medicare Advantage membership,
including increased membership resulting from our acquisition of CareMore, while
the increase in State-Sponsored revenue reflected both increased pricing and
membership.
Operating gain decreased $377.5, or 37.7%, to $623.1 in 2011, primarily due to
lower operating gain in our Senior Medicare Advantage business. This decline was
a result of higher medical costs in 2011 due to increased membership and adverse
selection in certain of our Medicare Advantage products. We have refined our
Medicare Advantage product strategy and service areas for 2012. The higher than
expected medical costs in 2011 were partially offset by higher than anticipated
risk score revenue as a result of an improved risk score estimation process and
lower selling, general and administrative expenses. In addition, an estimated
$135.0 of operating gain was recognized in the Consumer segment during 2010 as a
result of higher than anticipated favorable prior year reserve development and
lower targeted margin for adverse deviation with no comparable amounts
recognized in 2011.
The operating margin in 2011 was 3.5%, a 270 basis point decrease from 2010,
primarily due to the factors discussed in the preceding two paragraphs.
Other
Operating revenue increased $493.7, or 7.0%, to $7,582.3 in 2011, primarily due
to growth in the FEP business as FEP membership increased 5.0% during 2011.
Operating gain increased $77.3 to $68.5 in 2011, primarily due to growth in the
FEP business and lower selling, general and administrative expenses.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with GAAP.
Application of GAAP requires management to make estimates and assumptions that
affect the amounts reported in our consolidated financial statements and
accompanying notes and within this MD&A. We consider our most important
accounting policies that require significant estimates and management judgment
to be those policies with respect to liabilities for medical claims payable,
income taxes, goodwill and other intangible assets, investments and retirement
benefits, which are discussed below. Our other significant accounting policies
are summarized in Note 2, "Basis of Presentation and Significant Accounting
Policies," to our audited consolidated financial statements as of and for the
year ended December 31, 2012, included in this Form 10-K.
We continually evaluate the accounting policies and estimates used to prepare
the consolidated financial statements. In general, our estimates are based on
historical experience, evaluation of current trends, information from third
party professionals and various other assumptions that we believe to be
reasonable under the known facts and circumstances.
Medical Claims Payable
The most subjective accounting estimate in our consolidated financial statements
is our liability for medical claims payable. At December 31, 2012, this
liability was $6,174.5 and represented 17.6% of our total consolidated
liabilities. We record this liability and the corresponding benefit expense for
incurred but not paid claims including the estimated costs of processing such
claims. Incurred but not paid claims include (1) an estimate for claims that are
incurred but not reported, as well as claims reported to us but not yet
processed through our systems, which approximated 95.5%, or $5,897.9, of our
total medical claims liability as of
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December 31, 2012; and (2) claims reported to us and processed through our
systems but not yet paid, which approximated 4.5%, or $276.6, of the total
medical claims payable as of December 31, 2012. The level of claims payable
processed through our systems but not yet paid may fluctuate from one period end
to the next, from 1% to 5% of our total medical claims liability, due to timing
of when claim payments are made.
Liabilities for both claims incurred but not reported and reported but not yet
processed through our systems are determined in aggregate, employing actuarial
methods that are commonly used by health insurance actuaries and meet Actuarial
Standards of Practice. Actuarial Standards of Practice require that the claim
liabilities be appropriate under moderately adverse circumstances. We determine
the amount of the liability for incurred but not paid claims by following a
detailed actuarial process that entails using both historical claim payment
patterns as well as emerging medical cost trends to project our best estimate of
claim liabilities. Under this process, historical paid claims data is formatted
into "claim triangles," which compare claim incurred dates to the dates of claim
payments. This information is analyzed to create "completion factors" that
represent the average percentage of total incurred claims that have been paid
through a given date after being incurred. Completion factors are applied to
claims paid through the period end date to estimate the ultimate claim expense
incurred for the period. Actuarial estimates of incurred but not paid claim
liabilities are then determined by subtracting the actual paid claims from the
estimate of the ultimate incurred claims.
For the most recent incurred months (typically the most recent two months), the
percentage of claims paid for claims incurred in those months is generally low.
This makes the completion factor methodology less reliable for such months.
Therefore, incurred claims for recent months are not projected from historical
completion and payment patterns; rather they are projected by estimating the
claims expense for those months based on recent claims expense levels and health
care trend levels, or "trend factors."
Because the reserve methodology is based upon historical information, it must be
adjusted for known or suspected operational and environmental changes. These
adjustments are made by our actuaries based on their knowledge and their
estimate of emerging impacts to benefit costs and payment speed. Circumstances
to be considered in developing our best estimate of reserves include changes in
utilization levels, unit costs, mix of business, benefit plan designs, provider
reimbursement levels, processing system conversions and changes, claim inventory
levels, claim processing patterns, claim submission patterns and operational
changes resulting from business combinations. A comparison of prior period
liabilities to re-estimated claim liabilities based on subsequent claims
development is also considered in making the liability determination. In our
comparison of prior year, the methods and assumptions are not changed as
reserves are recalculated; rather the availability of additional paid claims
information drives our changes in the re-estimate of the unpaid claim liability.
To the extent appropriate, changes in such development are recorded as a change
to current period benefit expense.
We regularly review and set assumptions regarding cost trends and utilization
when initially establishing claim liabilities. We continually monitor and adjust
the claims liability and benefit expense based on subsequent paid claims
activity. If it is determined that our assumptions regarding cost trends and
utilization are significantly different than actual results, our income
statement and financial position could be impacted in future periods.
Adjustments of prior year estimates may result in additional benefit expense or
a reduction of benefit expense in the period an adjustment is made. Further, due
to the considerable variability of health care costs, adjustments to claim
liabilities occur each period and are sometimes significant as compared to the
net income recorded in that period. Prior period development is recognized
immediately upon the actuary's judgment that a portion of the prior period
liability is no longer needed or that an additional liability should have been
accrued. That determination is made when sufficient information is available to
ascertain that the re-estimate of the liability is reasonable.
While there are many factors that are used as a part of the estimation of our
medical claims payable liability, the two key assumptions having the most
significant impact on our incurred but not paid claims liability as of
December 31, 2012 were the completion and trend factors. As discussed above,
these two key assumptions can be influenced by other operational variables
including system changes, provider submission patterns and business
combinations.
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There is variation in the reasonable choice of completion factors by duration
for durations of three months through twelve months where the completion factors
have the most significant impact. As previously discussed, completion factors
tend to be less reliable for the most recent months and therefore are not
specifically utilized for months one and two. In our analysis for the claim
liabilities at December 31, 2012, the variability in months three to five was
estimated to be between 40 and 90 basis points, while months six through twelve
have much lower variability ranging from 0 to 30 basis points.
The difference in completion factor assumptions, assuming moderately adverse
experience, results in variability of 2%, or approximately $143.0, in the
December 31, 2012 incurred but not paid claims liability, depending on the
completion factors chosen. It is important to note that the completion factor
methodology inherently assumes that historical completion rates will be
reflective of the current period. However, it is possible that the actual
completion rates for the current period will develop differently from historical
patterns and therefore could fall outside the possible variations described
herein.
The other major assumption used in the establishment of the December 31, 2012
incurred but not paid claim liability was the trend factors. In our analysis for
the period ended December 31, 2012, there was a 300 basis point differential in
the high and low trend factors assuming moderately adverse experience. This
range of trend factors would imply variability of 4%, or approximately $276.0,
in the incurred but not paid claims liability, depending upon the trend factors
used. Because historical trend factors are often not representative of current
claim trends, the trend experience for the most recent six to nine months, plus
knowledge of recent events likely affecting current trends, have been taken into
consideration in establishing the incurred but not paid claims liability at
December 31, 2012.
See Note 12, "Medical Claims Payable," to our audited consolidated financial
statements as of and for the year ended December 31, 2012 included in this Form
10-K, for a reconciliation of the beginning and ending balance for medical
claims payable for the years ended December 31, 2012, 2011 and 2010. Components
of the total incurred claims for each year include amounts accrued for current
year estimated claims expense as well as adjustments to prior year estimated
accruals. In Note 12, "Medical Claims Payable," the line labeled "Net incurred
medical claims: Prior years redundancies" accounts for those adjustments made to
prior year estimates. The impact of any reduction of "Net incurred medical
claims: Prior years redundancies" may be offset as we establish the estimate of
"Net incurred medical claims: Current year." Our reserving practice is to
consistently recognize the actuarial best estimate of our ultimate liability for
our claims. When we recognize a release of the redundancy, we disclose the
amount that is not in the ordinary course of business, if material. Further,
while we believe we have consistently applied our methodology in determining our
best estimate for unpaid claims liability at each reporting date, starting in
2010 we began using a lower level of targeted margin for adverse deviation,
which resulted in a benefit to 2010 income before taxes of $67.7.
The ratio of current year medical claims paid as a percent of current year net
medical claims incurred was 89.1% for 2012, 88.8% for 2011 and 89.6% for 2010.
The increase in 2012 reflects acceleration in processing claims that occurred in
2012 due to higher levels of automatic claims adjudication and faster claims
payment. The decline in 2011 reflects the impact of processing a claims
inventory backlog that accumulated at the end of 2010.
We calculate the percentage of prior years' redundancies in the current period
as a percent of prior years' net incurred claims payable less prior years'
redundancies in the current period in order to demonstrate the development of
the prior years' reserves. This metric was 10.4% for the year ended December 31,
2012. This metric was 4.5% for the year ended December 31, 2011 and 15.3% for
the year ended December 31, 2010. The years ended December 31, 2012 and 2011
reflect a lower level of targeted reserve for adverse deviation and a resultant
lower level of prior years' redundancies than the year ended December 31, 2010.
We calculate the percentage of prior years' redundancies in the current period
as a percent of prior years' net incurred medical claims to indicate the
percentage of redundancy included in the preceding year calculation of current
year net incurred medical claims. We believe this calculation measure indicates
the reasonableness of
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our prior year estimate of incurred medical claims and the consistency in our
methodology. For the year ended December 31, 2012, this metric was 1.1%, which
was calculated using the redundancy of $513.6. This metric was 0.5% for 2011 and
1.5% for 2010.
The following table shows the variance between total net incurred medical claims
as reported in Note 12, "Medical Claims Payable," to our audited consolidated
financial statements as of and for the year ended December 31, 2012 included in
this Form 10-K, for each of 2011 and 2010 and the incurred claims for such years
had it been determined retrospectively (computed as the difference between "net
incurred medical claims - current year" for the year shown and "net incurred
medical claims - prior years redundancies" for the immediately following year):
Years Ended December 31
2011 2010
Total net incurred medical claims, as reported $ 47,071.9 $ 44,359.1
Retrospective basis, as described above 46,768.0 44,867.4
Variance $ 303.9 $ (508.3 )
Variance to total net incurred medical claims, as
reported 0.6 % (1.1 )%
Given that our business is primarily short tailed (which means that medical
claims are generally paid within twelve months of the member receiving service
from the provider), the variance to total net incurred medical claims, as
reported above, is used to assess the reasonableness of our estimate of ultimate
incurred medical claims for a given calendar year with the benefit of one year
of experience. We expect that substantially all of the development of the 2012
estimate of medical claims payable will be known during 2013.
The 2011 variance to total net incurred medical claims, as reported of 0.6% was
smaller in absolute value than the 2010 percentage of (1.1)%. The 2011 variance
was driven by the higher level of prior year redundancies in 2012 associated
with 2011 claim payments.
Income Taxes
We account for income taxes in accordance with FASB guidance, which requires,
among other things, the separate recognition of deferred tax assets and deferred
tax liabilities. Such deferred tax assets and deferred tax liabilities represent
the tax effect of temporary differences between financial reporting and tax
reporting measured at tax rates enacted at the time the deferred tax asset or
liability is recorded. A valuation allowance must be established for deferred
tax assets if it is "more likely than not" that all or a portion may be
unrealized. Our judgment is required in determining an appropriate valuation
allowance.
At each financial reporting date, we assess the adequacy of the valuation
allowance by evaluating each of our deferred tax assets based on the following:
• the types of temporary differences that created the deferred tax asset;
• the amount of taxes paid in prior periods and available for a carry-back
claim;
• the forecasted future taxable income, and therefore, likely future
deduction of the deferred tax item; and
• any significant other issues impacting the likely realization of the benefit of the temporary differences.
We, like other companies, frequently face challenges from tax authorities
regarding the amount of taxes due. These challenges include questions regarding
the timing and amount of deductions that we have taken on our tax returns. In
evaluating any additional tax liability associated with various positions taken
in our tax return filings, we record additional liabilities for potential
adverse tax outcomes. Based on our evaluation of our tax positions,
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we believe we have appropriately accrued for uncertain tax benefits, as required
by the guidance. To the extent we prevail in matters we have accrued for, our
future effective tax rate would be reduced and net income would increase. If we
are required to pay more than accrued, our future effective tax rate would
increase and net income would decrease. Our effective tax rate and net income in
any given future period could be materially impacted.
In the ordinary course of business, we are regularly audited by federal and
other tax authorities, and from time to time, these audits result in proposed
assessments. We believe our tax positions comply with applicable tax law and we
intend to defend our positions vigorously through the federal, state and local
appeals processes. We believe we have adequately provided for any reasonable
foreseeable outcome related to these matters. Accordingly, although their
ultimate resolution may require additional tax payments, we do not anticipate
any material impact on our results of operations from these matters.
For additional information, see Note 8, "Income Taxes," to our audited
consolidated financial statements as of and for the year ended December 31,
2012, included in this Form 10-K.
Goodwill and Other Intangible Assets
Our consolidated goodwill at December 31, 2012 was $17,510.5 and other
intangible assets were $9,102.8. The sum of goodwill and other intangible assets
represented 45.1% of our total consolidated assets and 111.8% of our
consolidated shareholders' equity at December 31, 2012.
We follow FASB guidance for business combinations and goodwill and other
intangible assets, which specifies the types of acquired intangible assets that
are required to be recognized and reported separately from goodwill. Under the
guidance, goodwill and other intangible assets (with indefinite lives) are not
amortized but are tested for impairment at least annually. Furthermore, goodwill
and other intangible assets are allocated to reporting units for purposes of the
annual impairment test. Our impairment tests require us to make assumptions and
judgments regarding the estimated fair value of our reporting units, which
include goodwill and other intangible assets. In addition, certain other
intangible assets with indefinite lives, such as trademarks, are also tested
separately.
We complete our annual impairment tests of existing goodwill and other
intangible assets with indefinite lives during the fourth quarter of each year.
These tests involve the use of estimates related to the fair value of goodwill
at the reporting unit level and other intangible assets with indefinite lives,
and require a significant degree of management judgment and the use of
subjective assumptions. Certain interim impairment tests are also performed
during interim periods when potential impairment indicators exist or changes in
our business or other triggering events occur.
Fair value is estimated using the income and market approaches for goodwill at
the reporting unit level and the income approach for our indefinite lived
intangible assets. Use of the income and market approaches for our goodwill
impairment test reflects our view that both valuation methodologies provide a
reasonable estimate of fair value. The income approach is developed using
assumptions about future revenue, expenses and net income derived from our
internal planning process. These estimated future cash flows are then
discounted. Our assumed discount rate is based on our industry's
weighted-average cost of capital. Market valuations are based on observed
multiples of certain measures including membership, revenue and EBITDA (earnings
before interest, taxes, depreciation and amortization) and include market
comparisons to publicly traded companies in our industry.
We did not incur any impairment losses as a result of our 2012 annual impairment
tests. However, as a result of certain provisions of Health Care Reform, along
with current economic conditions resulting in high unemployment rates, we have
experienced lower operating margins in certain lines of business. Those margins
could become further compressed if unemployment levels remain high and as the
more significant components of Health Care Reform become effective on January 1,
2014. As a result, the estimated fair values of certain of our
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reporting units with goodwill could fall below their carrying values and we may
be required to record impairment losses in future periods.
While we believe we have appropriately allocated the purchase price of our
acquisitions, this allocation requires many assumptions to be made regarding the
fair value of assets and liabilities acquired. In addition, estimated fair
values developed based on our assumptions and judgments might be significantly
different if other reasonable assumptions and estimates were to be used. If
estimated fair values are less than the carrying values of goodwill and other
intangibles with indefinite lives in future annual impairment tests, or if
significant impairment indicators are noted relative to other intangible assets
subject to amortization, we may be required to record impairment losses against
future income.
For additional information, see Note 10, "Goodwill and Other Intangible Assets,"
to our audited consolidated financial statements as of and for the year ended
December 31, 2012, included in this Form 10-K.
Investments
Current and long-term available-for-sale investment securities were $18,586.9 at
December 31, 2012 and represented 31.5% of our total consolidated assets at
December 31, 2012. We classify fixed maturity and equity securities in our
investment portfolio as "available-for-sale" or "trading" and report those
securities at fair value. Certain fixed maturity securities are available to
support current operations and, accordingly, we classify such investments as
current assets without regard to their contractual maturity. Investments used to
satisfy contractual, regulatory or other requirements are classified as
long-term, without regard to contractual maturity.
We review investment securities to determine if declines in fair value below
cost are other-than-temporary. This review is subjective and requires a high
degree of judgment. We conduct this review on a quarterly basis, using both
qualitative and quantitative factors, to determine whether a decline in value is
other-than-temporary. Such factors considered include the length of time and the
extent to which a security's market value has been less than its cost, the
reasons for the decline in value (i.e., credit event compared to liquidity,
general credit spread widening, currency exchange rate or interest rate
factors), financial condition and near term prospects of the issuer, including
the credit ratings and changes in the credit ratings of the issuer,
recommendations of investment advisors, and forecasts of economic, market or
industry trends. In addition, for equity securities, we determine whether we
have the intent and ability to hold the security for a period of time to allow
for a recovery of its fair value above its carrying amount. If any declines of
equity securities are determined to be other-than-temporary, we charge the
losses to income when that determination is made.
Certain FASB other-than-temporary impairment, or FASB OTTI, guidance applies to
fixed maturity securities and provides guidance on the recognition and
presentation of other-than-temporary impairments. In addition, this FASB OTTI
guidance requires disclosures related to other-than-temporary impairments. If a
fixed maturity security is in an unrealized loss position and we have the intent
to sell the fixed maturity security, or it is more likely than not that we will
have to sell the fixed maturity security before recovery of its amortized cost
basis, the decline in value is deemed to be other-than-temporary and is recorded
to other-than-temporary impairment losses recognized in income in our
consolidated income statements. For impaired fixed maturity securities that we
do not intend to sell or it is more likely than not that we will not have to
sell such securities, but we expect that we will not fully recover the amortized
cost basis, the credit component of the other-than-temporary impairment is
recognized in other-than-temporary impairment losses recognized in income in our
consolidated statements of income and the non-credit component of the
other-than-temporary impairment is recognized in other comprehensive income.
Furthermore, unrealized losses entirely caused by non-credit related factors
related to fixed maturity securities for which we expect to fully recover the
amortized cost basis continue to be recognized in accumulated other
comprehensive income.
The credit component of an other-than-temporary impairment is determined by
comparing the net present value of projected future cash flows with the
amortized cost basis of the fixed maturity security. The net present
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value is calculated by discounting our best estimate of projected future cash
flows at the effective interest rate implicit in the fixed maturity security at
the date of acquisition. For mortgage-backed and asset-backed securities, cash
flow estimates are based on assumptions regarding the underlying collateral
including prepayment speeds, vintage, type of underlying asset, geographic
concentrations, default rates, recoveries and changes in value. For all other
debt securities, cash flow estimates are driven by assumptions regarding
probability of default, including changes in credit ratings, and estimates
regarding timing and amount of recoveries associated with a default.
We have a committee of certain accounting and investment associates and
management that is responsible for managing the impairment review process. The
current economic environment and volatility of securities markets increase the
difficulty of assessing investment impairment and the same influences tend to
increase the risk of potential impairment of these assets.
We believe we have adequately reviewed our investment securities for impairment
and that our investment securities are carried at fair value. However, over
time, the economic and market environment may provide additional insight
regarding the fair value of certain securities, which could change our judgment
regarding impairment. This could result in other-than-temporary impairment
losses on investments being charged against future income. Given the current
market conditions and the significant judgments involved, there is continuing
risk that further declines in fair value may occur and additional, material
other-than-temporary impairment losses on investments may be recorded in future
periods.
In addition to available-for-sale investment securities, we held additional
long-term investments of $1,387.7, or 2.4% of total consolidated assets, at
December 31, 2012. These long-term investments consisted primarily of real
estate, cash surrender value of corporate-owned life insurance policies and
certain other equity method investments. Due to their less liquid nature, these
investments are classified as long-term.
Through our investing activities, we are exposed to financial market risks,
including those resulting from changes in interest rates and changes in equity
market valuations. We manage the market risks through our investment policy,
which establishes credit quality limits and limits on investments in individual
issuers. Ineffective management of these risks could have an impact on our
future earnings and financial position. Our investment portfolio includes fixed
maturity securities with a fair value of $17,344.4 at December 31, 2012. The
weighted-average credit rating of these securities was "A" as of December 31,
2012. Included in this balance are investments in fixed maturity securities of
states, municipalities and political subdivisions and mortgage-backed securities
of $2,029.5 and $16.9, respectively, that are guaranteed by third parties. With
the exception of eleven securities with a fair value of $16.9, these securities
are all investment-grade and carry a weighted-average credit rating of "AA" as
of December 31, 2012 with a guarantee by a third party. The securities are
guaranteed by a number of different guarantors and we do not have any
significant exposure to any single guarantor (neither indirect through the
guarantees, nor direct through investment in the guarantor). Further, due to the
high underlying credit rating of the issuers, the weighted-average credit rating
of these securities without the guarantee was "AA" as of December 31, 2012 for
the securities for which such information is available.
Fair values of available-for-sale fixed maturity and equity securities are based
on quoted market prices, where available. These fair values are obtained
primarily from third party pricing services, which generally use Level I or
Level II inputs for the determination of fair value in accordance with FASB
guidance for fair value measurements and disclosures. We have controls in place
to review the third party pricing services' qualifications and procedures used
to determine fair values. In addition, we periodically review the third party
pricing services' pricing methodologies, data sources and pricing inputs to
ensure the fair values obtained are reasonable.
We obtain only one quoted price for each security from third party pricing
services, which are derived through recently reported trades for identical or
similar securities making adjustments through the reporting date based upon
available market observable information. For securities not actively traded, the
third party pricing services may use quoted market prices of comparable
instruments or discounted cash flow analyses, incorporating inputs that are
currently observable in the markets for similar securities. Inputs that are
often used
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in the valuation methodologies include, but are not limited to, broker quotes,
benchmark yields, credit spreads, default rates and prepayment speeds. As we are
responsible for the determination of fair value, we perform monthly analysis on
the prices received from third parties to determine whether the prices are
reasonable estimates of fair value. Our analysis includes a review of
month-to-month price fluctuations. If unusual fluctuations are noted in this
review, we may obtain additional information from other pricing services to
validate the quoted price. There were no adjustments to quoted market prices
obtained from third party pricing services during the years ended December 31,
2012 and 2011.
In certain circumstances, it may not be possible to derive pricing model inputs
from observable market activity, and therefore, such inputs are estimated
internally. Such securities are designated Level III in accordance with FASB
guidance. Securities designated Level III at December 31, 2012 totaled $155.5
and represented less than 1% of our total assets measured at fair value on a
recurring basis. Our Level III securities primarily consisted of certain inverse
floating rate securities, structured securities, and municipal bonds that were
thinly traded or not traded at all due to concerns in the securities markets and
the resulting lack of liquidity. Consequently, observable inputs were not always
available and the fair values of these securities were estimated using internal
estimates for inputs including, but not limited to, prepayment speeds, credit
spreads, default rates and benchmark yields.
For additional information, see Part II, Item 7A "Quantitative and Qualitative
Disclosures about Market Risk" in this Form 10-K, and Note 2, "Basis of
Presentation and Significant Accounting Policies," Note 5, "Investments," and
Note 7, "Fair Value," to our audited consolidated financial statements as of and
for the year ended December 31, 2012, included in this Form 10-K.
Retirement Benefits
Pension Benefits
We sponsor defined benefit pension plans for some of our employees. These plans
are accounted for in accordance with FASB guidance for retirement benefits,
which requires that amounts recognized in financial statements be determined on
an actuarial basis. As permitted by the guidance, we calculate the value of plan
assets as described below. Further, the difference between our expected rate of
return and the actual performance of plan assets, as well as certain changes in
pension liabilities, are amortized over future periods.
An important factor in determining our pension expense is the assumption for
expected long-term return on plan assets. As of our December 31, 2012
measurement date, we selected a weighted-average long-term rate of return on
plan assets of 7.66%, compared with our prior year assumption of 8.00%. We use a
total portfolio return analysis in the development of our assumption. Factors
such as past market performance, the long-term relationship between fixed
maturity and equity securities, interest rates, inflation and asset allocations
are considered in the assumption. The assumption includes an estimate of the
additional return expected from active management of the investment portfolio.
Peer data and an average of historical returns are also reviewed for
appropriateness of the selected assumption. We believe our assumption of future
returns is reasonable. However, if we lower our expected long-term return on
plan assets, future contributions to the pension plan and pension expense would
likely increase.
This assumed long-term rate of return on assets is applied to a calculated value
of plan assets, which recognizes changes in the fair value of plan assets in a
systematic manner over three years, producing the expected return on plan assets
that is included in the determination of pension expense. The difference between
this expected return and the actual return on plan assets is deferred and
amortized over the average remaining service of the workforce as a component of
pension expense. The net deferral of past asset gains or losses affects the
calculated value of plan assets and, ultimately, future pension expense.
The discount rate reflects the current rate at which the pension liabilities
could be effectively settled at the end of the year based on our most recent
measurement date (December 31, 2012). The selected weighted-average
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discount rate was 3.60%, which was developed using a yield curve approach. Using
yields available on high-quality fixed maturity securities with various maturity
dates, the yield curve approach provides a "customized" rate, which is meant to
match the expected cash flows of our specific benefit plans. The net effect of
changes in the discount rate, as well as the net effect of other changes in
actuarial assumptions and experience, have been deferred and amortized as a
component of pension expense in accordance with the FASB guidance.
In managing the plan assets, our objective is to be a responsible fiduciary
while minimizing financial risk. Plan assets include a diversified mix of
investment grade fixed maturity securities, equity securities and alternative
investments across a range of sectors and levels of capitalization to maximize
the long-term return for a prudent level of risk. In addition to producing a
reasonable return, the investment strategy seeks to minimize the volatility in
our expense and cash flow.
Other Postretirement Benefits
We provide most associates with certain medical, vision and dental benefits upon
retirement. We use various actuarial assumptions, including a discount rate and
the expected trend in health care costs, to estimate the costs and benefit
obligations for our retiree benefits.
At our December 31, 2012 measurement date, the selected discount rate for all
plans was 3.71% (compared to a discount rate of 4.36% at the December 31, 2011
measurement date). We developed this rate using a yield curve approach as
described above.
The assumed health care cost trend rates used to measure the expected cost of
pre-Medicare (those who are not currently eligible for Medicare benefits) other
benefits at our December 31, 2012 measurement date was 8.00% for 2013 with a
gradual decline to 4.50% by the year 2025. The assumed health care cost trend
rates used to measure the expected cost of post-Medicare (those who are
currently eligible for Medicare benefits) other benefits at our December 31,
2012 measurement date was 6.00% for 2013 with a gradual decline to 4.50% by the
year 2021. These estimated trend rates are subject to change in the future. The
health care cost trend rate assumption has a significant effect on the amounts
reported. For example, an increase in the assumed health care cost trend rate of
one percentage point would increase the postretirement benefit obligation as of
December 31, 2012 by $47.1 and would increase service and interest costs by
$2.4. Conversely, a decrease in the assumed health care cost trend rate of one
percentage point would decrease the postretirement benefit obligation by $40.2
as of December 31, 2012 and would decrease service and interest costs by $2.0.
For additional information regarding our retirement benefits, see Note 11,
"Retirement Benefits," to our audited consolidated financial statements as of
and for the year ended December 31, 2012, included in this Form 10-K.
New Accounting Pronouncements
For information regarding new accounting pronouncements that were issued or
became effective during the year ended December 31, 2012 that had, or are
expected to have a material impact on our financial position, results of
operations or financial statement disclosures, see the "New Accounting
Pronouncements" section of Note 2, "Basis of Presentation and Significant
Accounting Policies" to our audited consolidated financial statements included
in Part II, Item 8 of this Form 10-K.
Liquidity and Capital Resources
Introduction
Our cash receipts result primarily from premiums, administrative fees,
investment income, other revenue, proceeds from the sale or maturity of our
investment securities, proceeds from borrowings, and proceeds from exercise of
stock options. Cash disbursements result mainly from claims payments,
administrative expenses,
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taxes, purchases of investment securities, interest expense, payments on
borrowings, acquisitions, repurchases of our common stock, capital expenditures
and the payment of shareholder cash dividends. Cash outflows fluctuate with the
amount and timing of settlement of these transactions. Any future decline in our
profitability would likely have some negative impact on our liquidity.
We manage our cash, investments and capital structure so we are able to meet the
short and long-term obligations of our business while maintaining financial
flexibility and liquidity. We forecast, analyze and monitor our cash flows to
enable investment and financing within the overall constraints of our financial
strategy.
A substantial portion of the assets held by our regulated subsidiaries are in
the form of cash and cash equivalents and investments. After considering
expected cash flows from operating activities, we generally invest cash that
exceeds our near term obligations in longer term marketable fixed maturity
securities to improve our overall investment income returns. Our investment
strategy is to make investments consistent with insurance statutes and other
regulatory requirements, while preserving our asset base. Our investments are
generally available-for-sale to meet liquidity and other needs. Our subsidiaries
pay out excess capital annually in the form of dividends to their respective
parent companies for general corporate use, as permitted by applicable
regulations.
The availability of financing in the form of debt or equity is influenced by
many factors including our profitability, operating cash flows, debt levels,
debt ratings, contractual restrictions, regulatory requirements and market
conditions. The securities and credit markets have in the past experienced
higher than normal volatility, although current market conditions are more
stable. During recent years, the Federal Government and various governmental
agencies have taken a number of steps to restore liquidity in the financial
markets and to help relieve the credit crisis and strengthen the regulation of
the financial services market. In addition, governments around the world have
developed their own plans to provide liquidity and security in the credit
markets and to ensure adequate capital in certain financial institutions.
We have a $2,500.0 commercial paper program. Should commercial paper issuance be
unavailable, we intend to use a combination of cash on hand and/or our $2,000.0
senior revolving credit facility to redeem our commercial paper when it matures.
While there is no assurance in the current economic environment, we believe the
lenders participating in our credit facility will be willing and able to provide
financing in accordance with their legal obligations. In addition to the
$2,000.0 senior revolving credit facility, we estimate that we will receive
approximately $2,284.0 of dividends from our subsidiaries during 2013, which
also provides further operating and financial flexibility.
The table below outlines the cash flows provided by or used in operating,
investing and financing activities for the years ended December 31, 2012, 2011
and 2010:
Years Ended December 31
2012 2011 2010
Cash flows provided by (used in):
Operating activities $ 2,744.6 $ 3,374.4 $ 1,416.7
Investing activities (4,551.6 ) (942.0 ) (1,271.5 )
Financing activities 2,088.9 (2,019.2 ) (3,169.3 )
Effect of foreign exchange rates on cash and
cash equivalents 1.1 (0.4 ) (3.2 )
Increase (decrease) in cash and cash equivalents $ 283.0$ 412.8 $ (3,027.3 )
Liquidity- Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
During the year ended December 31, 2012, net cash flow provided by operating
activities was $2,744.6, compared to $3,374.4 for the year ended December 31,
2011, a decrease of $629.8. This decrease was driven primarily by payments
related to the run-out of medical claims for former members, net operating cash
outflows
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by our Amerigroup subsidiary during the post-acquisition period (including
claims payments, change-in-control payments and payments for transaction costs),
increased litigation settlement payments and the addition of required minimum
medical loss ratio rebate payments in 2012 (which were established as
liabilities during the year ended December 31, 2011).
Net cash flow used in investing activities was $4,551.6 during the year ended
December 31, 2012, compared to $942.0 for the year ended December 31, 2011. The
increase in cash flow used in investing activities of $3,609.6 between the two
periods primarily resulted from an increase in the purchase of subsidiaries,
reflecting the acquisitions of Amerigroup and 1-800 CONTACTS during 2012, and an
increase in purchases of property and equipment, partially offset by changes in
securities lending collateral and an increase in the net proceeds from the sales
of investments.
Net cash flow provided by financing activities was $2,088.9 during the year
ended December 31, 2012, compared to net cash flow used in financing activities
of $2,019.2 for the year ended December 31, 2011. The increase in cash flow
provided by financing activities of $4,108.1 primarily resulted from an increase
in net proceeds from long-term borrowings and a decrease in common stock
repurchases, partially offset by changes in bank overdrafts, changes in
securities lending payable and a decrease in the proceeds from the issuance of
common stock under our employee stock plans.
Liquidity-Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
During the year ended December 31, 2011, net cash flow provided by operating
activities was $3,374.4, compared to $1,416.7 for the year ended December 31,
2010, an increase of $1,957.7. This increase resulted primarily from tax
payments of $1,208.0 to the IRS during 2010 related to the gain we realized on
the 2009 sale of our PBM business.
Net cash flow used in investing activities was $942.0 during the year ended
December 31, 2011, compared to $1,271.5 for the year ended December 31, 2010.
The decrease in cash flow used in investing activities of $329.5 between the two
periods primarily resulted from changes in securities lending collateral and
increases in net proceeds from the sale of investments, partially offset by the
purchase of CareMore and an increase in the net purchases of property and
equipment.
Net cash flow used in financing activities was $2,019.2 during the year ended
December 31, 2011, compared to $3,169.3 for the year ended December 31, 2010.
The decrease in cash flow used in financing activities of $1,150.1 primarily
resulted from decreases in share repurchases, increases in net proceeds from
commercial paper borrowings and changes in bank overdrafts, partially offset by
changes in securities lending payable, cash dividends paid and an increase in
repayments of debt borrowings.
Financial Condition
We maintained a strong financial condition and liquidity position, with
consolidated cash, cash equivalents and investments, including long-term
investments, of $22,474.0 at December 31, 2012. Since December 31, 2011, total
cash, cash equivalents and investments, including long-term investments,
increased by $1,777.5 primarily due to cash generated from operations and
increased debt balances, partially offset by cash used in our acquisitions of
Amerigroup and 1-800 CONTACTS, common stock repurchases, purchases of property
and equipment and cash dividends to shareholders.
Many of our subsidiaries are subject to various government regulations that
restrict the timing and amount of dividends and other distributions that may be
paid to their respective parent companies. In addition, we have agreed to
certain undertakings to regulatory authorities, including the requirement to
maintain certain capital levels in certain of our subsidiaries.
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At December 31, 2012, we held at the parent company $2,029.0 of cash and cash
equivalents and investments, which is available for general corporate use,
including investment in our businesses, acquisitions, potential future share
repurchases and shareholder dividends and debt and interest payments.
We calculate a non-GAAP measure, our consolidated debt-to-capital ratio, which
we believe assists investors and rating agencies in measuring our overall
leverage and additional borrowing capacity. In addition, our bank covenants
indicate a maximum debt-to-capital ratio that we cannot exceed. Our targeted
range of debt-to-capital ratio is 25% to 35%. Our debt-to-capital ratio is
calculated as the sum of debt divided by the sum of debt plus shareholders'
equity. Our debt-to-capital ratio may not be comparable to similarly titled
measures reported by other companies. Our consolidated debt-to-capital ratio was
38.6% and 29.7% as of December 31, 2012 and December 31, 2011, respectively. The
increase in our consolidated debt-to-capital ratio at December 31, 2012 was
primarily due to the increased debt we incurred to finance our acquisition of
Amerigroup. We expect that over time, our consolidated debt-to-capital ratio
will return to be within the targeted range stated above.
Our senior debt is rated "A-" by Standard & Poor's, "BBB+" by Fitch, Inc.,
"Baa2" by Moody's Investor Service, Inc. and "bbb+" by AM Best Company, Inc. We
intend to maintain our senior debt investment grade ratings. A significant
downgrade in our debt ratings could adversely affect our borrowing capacity and
costs.
Future Sources and Uses of Liquidity
We have a shelf registration statement on file with the Securities and Exchange
Commission, or SEC, to register an unlimited amount of any combination of debt
or equity securities in one or more offerings. Specific information regarding
terms and securities being offered will be provided at the time of an offering.
Proceeds from future offerings are expected to be used for general corporate
purposes, including, but not limited to, the repayment of debt, investments in
or extensions of credit to our subsidiaries and the financing of possible
acquisitions or business expansion.
We have a senior credit facility, or the facility, with certain lenders for
general corporate purposes. The facility, as amended, provides credit up to
$2,000.0 and matures on September 29, 2016. The interest rate on the facility is
based on either (i) the LIBOR rate plus a predetermined percentage rate based on
our credit rating at the date of utilization, or (ii) a base rate as defined in
the facility agreement plus a predetermined percentage rate based on our credit
rating at the date of utilization. Our ability to borrow under the facility is
subject to compliance with certain covenants. There were no amounts outstanding
under the facility as of December 31, 2012.
We have an authorized commercial paper program of up to $2,500.0, the proceeds
of which may be used for general corporate purposes. At December 31, 2012 and
2011, $570.9 and $799.8, respectively, were outstanding under our commercial
paper program. Commercial paper borrowings have been classified as long-term
debt at December 31, 2012 and 2011 as our practice and intent is to replace
short-term commercial paper outstanding at expiration with additional short-term
commercial paper for an uninterrupted period extending for more than one year
and we have the ability to redeem our commercial paper with borrowings under the
senior credit facility described above.
We are a member, through certain subsidiaries, of the Federal Home Loan Bank of
Indianapolis and the Federal Home Loan Bank of Cincinnati, collectively, the
FHLBs, and as a member we have the ability to obtain short-term cash advances
subject to certain minimum collateral requirements. At December 31, 2012 and
2011, $250.0 and $100.0, respectively, were outstanding under our short-term
FHLBs borrowings.
As a result of our acquisition of Amerigroup on December 24, 2012, the carrying
amount of $556.9 of Amerigroup's$475.0 of 7.500% senior unsecured notes due
2019 has been included in our consolidated balance sheet as of December 31,
2012. On January 25, 2013 we redeemed the outstanding principal balance of these
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notes, plus applicable premium for early redemption, for cash totaling $555.6.
The weighted-average redemption price of the notes was approximately 117% of the
principal amount outstanding.
On October 9, 2012, we issued $1,500.0 of senior convertible debentures, or the
Debentures. The Debentures are governed by an indenture, or the Indenture, dated
as of October 9, 2012 between us and The Bank of New York Mellon Trust Company,
N.A., as trustee. The Debentures bear interest at a rate of 2.750% per year,
payable semi-annually in arrears in cash on April 15 and October 15 of each
year, and mature on October 15, 2042, unless earlier redeemed, repurchased or
converted. We used approximately $371.0 of the net proceeds from the issuance to
repurchase shares of our common stock concurrently with the offering of the
Debentures, and the balance was used for general corporate purposes, including
but not limited to additional purchases of shares of our common stock pursuant
to our share repurchase program and the repayment of short-term and/or long-term
debt. For additional information related to the Debentures, including the
circumstances under which holders may convert the Debentures, see Note 13,
"Debt" to our audited consolidated financial statements as of and for the year
ended December 31, 2012, included in this Form 10-K.
On September 10, 2012, we issued $625.0 of 1.250% notes due 2015, $625.0 of
1.875% notes due 2018, $1,000.0 of 3.300% notes due 2023 and $1,000.0 of 4.650%
notes due 2043 under our shelf registration statement. We used the net proceeds
of this offering to pay a portion of the consideration for our acquisition of
Amerigroup and the balance for general corporate purposes. The notes have a call
feature that allows us to repurchase the notes at any time at our option and a
put feature that allows a note holder to require us to repurchase the notes upon
the occurrence of both a change in control event and a downgrade of the notes
below an investment grade rating.
At maturity on August 1, 2012, we repaid the $800.0 outstanding balance of our
6.800% senior unsecured notes.
On May 7, 2012, we issued $850.0 of 3.125% notes due 2022 and $900.0 of 4.625%
notes due 2042 under our shelf registration statement. We used the proceeds from
this offering for working capital and for general corporate purposes, including,
but not limited to, repayment of short-term and long-term debt. The notes have a
call feature that allows us to repurchase the notes at any time at our option
and a put feature that allows a note holder to require us to repurchase the
notes upon the occurrence of both a change in control event and a downgrade of
the notes below an investment grade rating.
At maturity on April 9, 2012, we refinanced the $100.0 outstanding balance of
our long-term 1.430% fixed rate FHLB secured loan to a three month term loan
with a fixed interest rate of 0.370% which matured on July 9, 2012.
At maturity on January 17, 2012, we repaid the $350.0 outstanding balance of our
6.375% senior unsecured notes.
As discussed in "Financial Condition" above, many of our subsidiaries are
subject to various government regulations that restrict the timing and amount of
dividends and other distributions that may be paid. Based upon these
requirements, we are currently estimating approximately $2,284.0 of dividends to
be paid to the parent company during 2013. During 2012, we received $2,935.1 of
dividends from our subsidiaries.
We regularly review the appropriate use of capital, including common stock
repurchases and dividends to shareholders. The declaration and payment of any
dividends or repurchases of our common stock is at the discretion of our Board
of Directors and depends upon our financial condition, results of operations,
future liquidity needs, regulatory and capital requirements and other factors
deemed relevant by our Board of Directors.
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A summary of the cash dividend activity for the year ended December 31, 2012 is
as follows:
Cash
Declaration Record Payment Dividend
Date Date Date per Share Total
January 24, 2012 March 9, 2012 March 23, 2012 $ 0.2875 $ 95.8
May 16, 2012 June 8, 2012 June 25, 2012 0.2875 93.5
July 24, 2012 September 10, 2012 September 25, 2012 0.2875 90.7
November 6, 2012 December 7, 2012 December 21, 2012 0.2875 87.1
On February 20, 2013, our Board of Directors increased the quarterly shareholder
cash dividend to $0.375 per share on the outstanding shares of our common stock.
This increased quarterly dividend is payable on March 25, 2013 to shareholders
of record as of March 8, 2013.
A summary of share repurchases for the period January 1, 2013 through
February 8, 2013 (subsequent to December 31, 2012) and for the year ended
December 31, 2012 is as follows:
January 1, 2013 Year Ended
Through December 31,
February 8, 2013 2012
Shares repurchased 1.1 39.7
Average price per share $ 59.01 $ 62.96
Aggregate cost $ 64.4 $ 2,496.8
Authorization remaining at the end of each period $ 1,772.5 $ 1,836.9
We expect to utilize unused authorization remaining at December 31, 2012 over a
multi-year period, subject to market and industry conditions. Our stock
repurchase program is discretionary as we are under no obligation to repurchase
shares. We repurchase shares when we believe it is a prudent use of capital.
Our current retirement benefits funding strategy is to fund an amount at least
equal to the minimum required funding as determined under ERISA with
consideration of maximum tax deductible amounts. We may elect to make
discretionary contributions up to the maximum amount deductible for income tax
purposes. For the year ended December 31, 2012, no material contributions were
necessary to meet ERISA required funding levels. However, during the year ended
December 31, 2012, we made tax deductible discretionary contributions to the
pension benefit plans and other benefit plans of $34.5 and $0.0, respectively.
Contractual Obligations and Commitments
Our estimated contractual obligations and commitments as of December 31, 2012
are as follows:
Payments Due by Period
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
Debt, including capital leases1 $ 23,815.1 $ 1,969.6 $ 2,668.9 $ 3,177.2 $ 15,999.4
Operating lease commitments 801.8 128.7 231.9 171.0 270.2
Projected other postretirement
benefits 486.8 38.6 125.1 129.6 193.5
Purchase obligations:
IBM outsourcing agreements2 445.0 193.9 251.1 - -
Other purchase obligations3 1,793.3 941.8 606.3 214.4 30.8
Other long-term liabilities4 989.9 - 403.8 379.6 206.5
Venture capital commitments 288.1 102.7 100.0 60.9 24.5
Total contractual obligations and
commitments $ 28,620.0 $ 3,375.3 $ 4,387.1 $ 4,132.7 $ 16,724.9
1 Includes estimated interest expense.
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2 Relates to agreements with International Business Machines Corporation, or
IBM, to provide information technology infrastructure services. See Note 14,
"Commitments and Contingences," to the audited consolidated financial
statements as of and for the year ended December 31, 2012 included in this
Form 10-K for further information.
3 Includes obligations related to non-IBM information technology service
agreements and telecommunication contracts.
4 Estimated future payments for funded pension benefits have been excluded from
this table as we had no funding requirements under ERISA at December 31, 2012
as a result of the value of the assets in the plans. In addition, amount
includes other obligations resulting from third-party service contracts.
The above table does not contain $159.2 of gross liabilities for uncertain tax
positions and interest for which we cannot reasonably estimate the timing of the
resolutions with the respective taxing authorities. See Note 8, "Income Taxes,"
to the audited consolidated financial statements as of and for the year ended
December 31, 2012 included in this Form 10-K for further information.
In addition to the contractual obligations and commitments discussed above, we
have a variety of other contractual agreements related to acquiring materials
and services used in our operations. However, we do not believe these other
agreements contain material noncancelable commitments.
We believe that funds from future operating cash flows, cash and investments and
funds available under our senior credit facility or from public or private
financing sources will be sufficient for future operations and commitments, and
for capital acquisitions and other strategic transactions.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that will require funding in
future periods.
Risk-Based Capital
Our regulated subsidiaries' states of domicile have statutory risk-based
capital, or RBC, requirements for health and other insurance companies largely
based on the National Association of Insurance Commissioners, or NAIC, RBC Model
Act. These RBC requirements are intended to measure capital adequacy, taking
into account the risk characteristics of an insurer's investments and products.
The NAIC sets forth the formula for calculating the RBC requirements, which are
designed to take into account asset risks, insurance risks, interest rate risks
and other relevant risks with respect to an individual insurance company's
business. In general, under this Act, an insurance company must submit a report
of its RBC level to the state insurance regulator at the end of each calendar
year. Our risk-based capital as of December 31, 2012, which was the most recent
date for which reporting was required, was in excess of all mandatory RBC
thresholds. In addition to exceeding the RBC requirements, we are in compliance
with the liquidity and capital requirements for a licensee of the BCBSA and with
the tangible net worth requirements applicable to certain of our California
subsidiaries.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This document contains certain forward-looking information about us that is
intended to be covered by the safe harbor for "forward-looking statements"
provided by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are statements that are not generally historical
facts. Words such as "expect(s)," "feel(s)," "believe(s)," "will," "may,"
"anticipate(s)," "intend," "estimate," "project" and similar expressions are
intended to identify forward-looking statements, which generally are not
historical in nature. These statements include, but are not limited to,
financial projections and estimates and their underlying assumptions; statements
regarding plans, objectives and expectations with respect to future operations,
products and services; and statements regarding future performance. Such
statements are subject to certain risks and uncertainties, many of which are
difficult to predict and generally beyond our control, that could cause actual
results to differ
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materially from those expressed in, or implied or projected by, the
forward-looking information and statements. These risks and uncertainties
include: those discussed and identified in our public filings with the U.S.
Securities and Exchange Commission, or SEC; increased government participation
in, or regulation or taxation of health benefits and managed care operations,
including, but not limited to, the impact of the Patient Protection and
Affordable Care Act and the Health Care and Education Reconciliation Act of
2010; trends in health care costs and utilization rates; our ability to secure
sufficient premium rates including regulatory approval for and implementation of
such rates; our ability to contract with providers consistent with past
practice; our ability to integrate and achieve expected synergies and operating
efficiencies in the Amerigroup and 1-800 CONTACTS, Inc. acquisitions within the
expected timeframes or at all and to successfully integrate our operations, as
such integrations may be more difficult, time consuming or costly than expected,
revenues following the transactions may be lower than expected and operating
costs, customer loss and business disruption, including, without limitation,
difficulties in maintaining relationships with employees, customers, clients and
suppliers, may be greater than expected following the transactions; competitor
pricing below market trends of increasing costs; reduced enrollment, as well as
a negative change in our health care product mix; risks and uncertainties
regarding Medicare and Medicaid programs, including those related to
non-compliance with the complex regulations imposed thereon and funding risks
with respect to revenue received from participation therein; a downgrade in our
financial strength ratings; litigation and investigations targeted at our
industry and our ability to resolve litigation and investigations within
estimates; medical malpractice or professional liability claims or other risks
related to health care services provided by our subsidiaries; risks inherent in
selling health care products in the consumer retail market; our ability to
repurchase shares of our common stock and pay dividends on our common stock due
to the adequacy of our cash flow and earnings and other
considerations; non-compliance by any party with the Express Scripts, Inc.
pharmacy benefit management services agreement, which could result in financial
penalties, our inability to meet customer demands, and sanctions imposed by
governmental entities, including the Centers for Medicare and Medicaid Services;
events that result in negative publicity for us or the health benefits industry;
failure to effectively maintain and modernize our information systems and
e-business organization and to maintain good relationships with third party
vendors for information system resources; events that may negatively affect our
licenses with the Blue Cross and Blue Shield Association; possible impairment of
the value of our intangible assets if future results do not adequately support
goodwill and other intangible assets; intense competition to attract and retain
employees; unauthorized disclosure of member sensitive or confidential
information; changes in the economic and market conditions, as well as
regulations that may negatively affect our investment portfolios and liquidity;
possible restrictions in the payment of dividends by our subsidiaries and
increases in required minimum levels of capital and the potential negative
effect from our substantial amount of outstanding indebtedness; general risks
associated with mergers and acquisitions; various laws and provisions in our
governing documents that may prevent or discourage takeovers and business
combinations; future public health epidemics and catastrophes; and general
economic downturns. Readers are cautioned not to place undue reliance on these
forward-looking statements that speak only as of the date hereof. Except to the
extent otherwise required by federal securities law, we do not undertake any
obligation to republish revised forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Readers are also urged to carefully review and consider
the various disclosures in our SEC reports.
