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Maine.gov > PFR Home > Insurance Regulation> Administrative & Enforcement Actions > Document 642 : INS 99-14 : Hearing Decision
STATE OF MAINE
March 28, 2000
Q. Please state your name and your position with Anthem.
A. My name is Mike Smith and I am Executive Vice President and Chief Financial Officer of Anthem Insurance Companies, Inc. ("Anthem").
Q. What matters will you cover in your testimony?
A. I will provide a financial overview of Anthem; describe its capital adequacy; and discuss the financial aspects of the proposed acquisition of Associated Hospital Services of Maine, d/b/a Blue Cross and Blue Shield of Maine ("BCBSME").
Q. Please provide an overview of Anthems financial performance and condition.
A. Anthem now operates Blue Cross and Blue Shield plans in Indiana, Ohio, Kentucky, Colorado, Nevada, Connecticut and New Hampshire. Anthem is among the largest Blue Cross Blue Shield organizations in the country, with substantial market share in each of its core markets. In addition to its ranking among other Blue Cross and Blue Shield licensees, Anthem is the eight or ninth largest health management company in the United States.
Anthems 1998 and 1999 Consolidated Financial Statements are contained in Applicants Exhibit 65. The financial statements show that Anthem ended 1999 with surplus at more than $1.6 billion, based on Generally Accepted Accounting Principles ("GAAP"). In addition to providing financial security for our policyholders, our surplus provides the capital resources needed to invest in information systems, health care technology and health management initiatives that will further our position of leadership in our industry. Anthem intends to maintain a strong surplus position post closing of the BCBSME transaction. We have projected an increase in total surplus on a consolidated basis to [REDACTED] at December 31, 2000. (Applicants Exhibit C-67). I will address the projected adequacy of Anthem's surplus in more detail later in my testimony.
Anthem continues to experience very strong operating results. In 1998, reported net income was $172.4 million, on GAAP revenues of approximately $5.7 billion. For 1999, although Anthems reported net income decreased to $44.9 million on $6.3 billion in GAAP revenues, this decrease was due, in large part, to extraordinary, one-time payments. These one-time payments were for the settlement of charitable trust claims in Ohio, Connecticut and Kentucky totaling $71.8 million and a payment of $41.9 million following investigation of Connecticut BCBS Medicare fiscal intermediary operations during periods that preceded Anthems 1997 merger with that company. The Companys income before discontinued and unusual items for 1999 and 1998 was $152 million and $178.4 million, respectively. Much of this success is attributable to operations which have been integrated into Anthem from previous mergers, and economies gained from reaching scale in each of our regions. Our projected net income for the year 2000 is [REDACTED]. (Applicants Exhibit C-67).
Q. How does Anthem compare under risk based capital adequacy measures?
A. Anthem has consistently maintained statutory surplus well above industry averages. Capital adequacy measures reflecting Anthems strong capital position include the Risk Based Capital formula, used by the National Association of Insurance Commissioners (NAIC) to measure the strength of an insurance companys surplus.
Exhibit A to my testimony illustrates Anthem's total adjusted capital levels, as well as the corresponding NAIC Risk Based Capital (RBC) ratio. As evidenced in Exhibit A, Anthem's total adjusted capital on a statutory basis has grown, from $1.2 billion in 1995, to $1.4 billion at the end of 1999.
The $1.4 billion in total adjusted capital for 1999 represents a reduction from 1998 levels of approximately $300 million. This reduction in statutory surplus is attributable, in large part, to Anthems acquisitions of the New Hampshire and Colorado/Nevada plans and its resulting inability to carry the goodwill associated with those acquisitions as admitted assets under statutory accounting rules. This also explains the difference between Anthems year-end 1999 GAAP surplus of more than $1.6 billion and its statutory surplus of $1.4 billion: GAAP does not require reduction of surplus levels for amounts attributable to goodwill.
Anthem's RBC ratio has remained consistently above industry averages with adjusted capital and surplus as a percentage of Company Action Level Risk Based Capital growing from 268% of statutory requirements in 1995 to 293 % at December 31, 1999. While it can be observed that the RBC ratio dropped slightly in 1997, that drop was due to the merger with Blue Cross and Blue Shield of Connecticut. The merger lowered Anthem's ratios because of the lower relative capital strength of Blue Cross and Blue Shield of Connecticut and one-time charges associated with the merger. Anthem's strong earnings in 1998 and 1999 brought capital adequacy levels above pre-1997 levels.
Q. What impact does Anthems investment portfolio have on its financial strength?
A. Anthem's investment portfolio as of December 31, 1999 of nearly $2.8 billion is a significant symbol of Anthems overall financial strength and operating success. Our conservative, diversified investment approach seeks to preserve capital while yielding adequate investment returns, consistent with insurance statutes and other regulatory requirements. Anthem's investment policy stresses high quality instruments and prohibits the use of derivative securities. As of December 31, 1999, 98 % of our investment portfolio consists of investment grade securities. The size of our portfolio allows for cost effective management utilizing outside professional money managers. Total returns on our portfolios have exceeded benchmark performances, including the Lehman Aggregate Bond Index, in each of the past several years, including 1999.
Q. What financial ratings does Anthem enjoy from financial rating organizations?
A. The financial community has long judged Anthem to be a strong company. The
insurance industry's most respected rating agencies continued to recognize our
financial strength in 1999. Duff and Phelps maintained their rating of our
claims-paying ability as A+, while Standard & Poor's gave our claims-paying
ability its A rating. A.M. Best, a leader among insurance rating agencies,
affirmed our A- Excellent rating. Anthems consistently strong ratings over the years is evidence of Anthem's commitment to our policyholders' security.
Our focus on growth and financial strength is integral to our strategic plan to remain competitive. With size comes the ability to maximize efficiencies and to withstand regional economic swings. For example, Anthem's size and flexibility allowed our Kentucky subsidiary to stay in the individual market during that states 1995-1998 experimentation with health care reform, a period during which all other commercial carriers exited the market while Anthem persevered and worked with governmental, consumer and industry representatives to produce necessary changes.
Q. What steps has Anthem taken to focus on its health insurance business?
A. During 1997 and 1998, we divested substantially all of our non-health holdings in order to focus on our core health business. These transactions, which involved the sale of more than 40% of the Companys assets and revenues, were accomplished without any serious disruption of our core insurance operations. With the completion of these efforts in 1998, Anthem has focused on its future as a health management company, and one which is better able to devote its resources to its health insurance and health management business.
Q. What benefits will Anthems financial strength and organization bring to Anthem BCBS in Maine?
A. Anthem Health Plans of Maine will enjoy the strength of its parent company and the entire Anthem family of successful insurance operations. This ensures that Anthem Health Plans of Maines operations will have adequate reserves to meet all financial requirements under Maine law.
Our focus on growth and financial strength is part of our strategic plan to remain competitive in our industry. With size comes the ability to maximize efficiencies, spread fixed costs over a larger enrollment, fund the development of innovative systems, and capture savings that accrue from bargaining advantages in vendor selection and procurement activities, such as telecommunications, office supplies, equipment, etc.
Additionally, the transaction will allow the Maine company access to many other resources which are already in place at Anthem, including experienced management and valuable relationships with highly respected outside parties, such as investment managers.
Also, Anthem is developing regional divisions to support the local plans in the states in which we operate. While our Anthem Midwest region is the most developed at this point, we are in the early stages of developing the Anthem East region, which will support the Blue Cross and Blue Shield plans in Connecticut, New Hampshire and, if this acquisition is approved, Maine. Our goal is for each region to have annual revenues in excess of $2 billion. Each region will provide operational and administrative support to local operations, and will be able to deliver significant economies of scale and operating efficiencies to our local/state operations. For instance, "back office" operations such as claims processing, billing and enrollment processing can be managed more efficiently, and common vendors and volume purchasing can reduce costs for products and services such as procurement of technology and equipment, supplies and printing. Information systems and support can also be implemented and managed more efficiently. Savings are also expected in other areas that will be administered or managed as shared services or corporate services. Those functions include accounting, investment management, treasury and employee benefits and payroll.
This approach demonstrated its effectiveness following the integration of Anthems Indiana, Kentucky and Ohio operations to form Anthem Midwest. Administrative expenses in Anthem Midwest now represent less than 19% of our premium revenues, a much smaller percentage than those experienced by the three midwest state companies prior to their integration.
As I previously noted, as of December 31, 1999, the surplus of Anthem was in excess of $1.6 billion on a GAAP basis, with total adjusted capital on a statutory basis in excess of $1.4 billion. In comparison, standing alone, BCBSMEs reserve for the protection of policyholders at the end of 1999 was [REDACTED] on a GAAP basis and [REDACTED] on a statutory basis. (Applicants Exhibit C-53). BCBSMEs 1999 year end loss of approximately [REDACTED] also substantially eroded its reserves. These figures make clear that the financial condition of Anthem will not jeopardize the financial stability of BCBSME or prejudice the interests of its policyholders. On the contrary, the combination will significantly strengthen the position of the Maine company and thus benefit its policyholders. Maines recent member growth, through the acquisition of the State of Maine contract and other accounts, will increase their required capital under RBC, thus making the additional capital to be provided by Anthem all the more important.
Although Anthem has no formal capitalization policy, we typically maintain subsidiary capitalization at least at 100-125% of Company Action Level Risk Based Capital, or the applicable Blue Cross Blue Shield Association minimum standard, whichever is greater. As reflected in Applicants Exhibit C-76, Anthem anticipates infusing over $11 million to initially capitalize Anthem Health Plans of Maine at 125% of Company Action Level Risk Based Capital. Anthem regularly monitors the statutory capitalization of its subsidiaries against internal, NAIC, state, and Blue Cross Blue Shield Association capitalization requirements. Included in the review are current capital needs as well as known or anticipated changes. We also consider statutes and regulations in the subsidiary state of domicile relative to dividend payments. Should surplus exceed current and projected capital needs, a dividend will be considered in accordance with relevant laws and regulations.
Does this conclude your testimony?
Historical Capital Adequacy Anthem, Inc. and BCBSME
CERTIFICATE OF SERVICE
The undersigned hereby certifies that on March 28, 2000, a copy of Anthems Prefiled Testimony of Michael Smith was served by electronic mail, overnight mail, or via hand delivery on each of the persons listed below.
Robert S. Frank, Esq.
Harvey & Frank
Two City center
P.O. Box 126
Portland, Maine 04112
(Blue Cross/Blue Shield of Maine)
Judith Chamberlain, Esq.
State of Maine
Department of the Attorney General
6 State House Station
Augusta, Maine 04333-0006
(Bureau of Insurance)
William H. Laubenstein, Esq.
State of Maine
Department of the Attorney General
6 State House Station
Augusta, Maine 04333-0006
(Office of the Attorney General)
Joseph P. Ditre, Esq.
Consumer Health Law Program
One Weston Court, Level One
P.O. Box 2490
Augusta, Maine 04338-2490
(Consumers for Affordable Health Care Foundation/Coalition)
Maine Peoples Alliance
192 State Street
Portland, ME 04101
(Maine Peoples Alliance)
Kellie P. Miller, M.S.
Maine Osteopathic Association
693 Western Avenue
Manchester, Maine 04351
(Maine Osteopathic Association)
Michele M. Garvin, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110-2624
(Central Maine Healthcare Corporation; Central Maine Partners Health Plan)
Executive Director of the Maine Ambulatory Care Coalition
P.O. Box 390
Manchester, Maine 04351
(Sacopee Valley Health center, Regional Medical center at Lubec, Eastport Health Care, Inc., and the Maine Ambulatory Care Coalition)
Gordon H. Smith, Esq.
Maine Medical Association
30 Association Drive
P.O. Box 190
Manchester, Maine 04351
(Thomas D. Hayward, M.D.,
Maroulla S. Gleaton, M.D.,
And the Maine Medical Association)
Donald E. Quigley, Esq.
465 Congress Street, Suite 600
Portland, Maine 04101-3537
(Maine Medical center)
Sandra L. Parker, Esq.
John Doyle, Jr., Esq.
Attorneys for MHA, Inc.
150 Capitol Street
Augusta, Maine 04330
DATED: March 28, 2000
James B. Zimpritch, Esq.
Jeffrey M. White, Esq.
Catherine R. Connors, Esq.
Portland, Maine 04101
Attorneys for Anthem Insurance Companies, Inc.
Last Updated: January 22, 2014
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