The following selected financial data presents consolidated financial information with respect to the Company. The balance sheet data as of December 31, 1999, 1998 and 1997 and the statement of income data for each of the four years in the period ended December 31, 1999, have been derived from the audited consolidated financial statements and notes thereto of the Company. The balance sheet data as of December 31, 1995 has been derived from unaudited financial statements which, in the opinion of the Company's management, include all adjustments necessary to present the financial position and results of operations at and for the years presented. The consolidated financial statements of the Company do not necessarily reflect the results of operations or financial position that would have resulted had the Company been a separate, independent company and are not necessarily indicative of the results to be expected for any future fiscal year. The following data should be read in conjunction with the Company's consolidated
(3)Ratios are based on health service revenues and selling, general and administrative expenses.
The Company is a leading provider of managed health care services and employee benefit products. The Company's two primary product lines are (i) Health Maintenance Organization ("HMO") products sold primarily in Wisconsin, including Compcare Health Services Insurance Corporation ("Compcare"), Valley Health Plan, Inc. ("Valley"), Unity Health Plans Insurance Corporation ("Unity") and certain point-of-service ("POS") and other related products managed by Compcare, Valley and Unity; and (ii) specialty managed care products and services, including dental, life, disability and workers' compensation products, managed care consulting, electronic claim submission, pharmaceutical management, managed behavioral health services, case management and receivables management, sold throughout the United States. Operating results and statistics for these product groups are presented below for the periods indicated.
Health services revenue for specialty managed care products and services in 1999 increased 12.6% to $155.1 million from $137.7 million in 1998. This was the result of a decrease in the percentage of ceded reinsurance, along with increases in covered lives, premium rates on insurance products and additional revenue of $4.5 million from recent acquisitions. During the third quarter of 1999, the Company formed Innovative Resources Group, Inc. ("IRG"), which is comprised of three of the Company's recent acquisitions and two existing specialty managed care subsidiaries. IRG provides medical and behavioral
health management services, case management, employee assistance programs, and workers' compensation case management and pharmacy management services. Health services revenue in 1998 increased 11.1% from $123.9 million in 1997. The increase was due to an increase of $8.4 million relative to life and disability products, an increase of $1.4 million in dental premiums and an increase in managed behavioral health and managed care consulting. The increases in life and disability premiums were driven by membership increases of 24.1% in 1998. In addition, acquisitions during 1998 provided $1.0 million of additional revenue.
Loss Ratio-The consolidated loss ratio represents the ratio of medical and other benefits to premium revenue on a consolidated basis, and is therefore a blended ratio for medical, life, dental, disability and other product lines. The consolidated loss ratio was 95.5% in 1999 compared with 85.3% in 1998 and 86.5% in 1997. The 1999 consolidated loss ratio is influenced by the component loss ratios for each of the Company's two primary product lines, as discussed below.
The medical loss ratio for HMO products for 1999 was 99.8%, compared with 88.8% for 1998 and 90.1% for 1997. The increase in the medical loss ratio in 1999 for HMO products is primarily the result of $15.6 million in prior year adverse reserve development, along with $16.1 million in current year adverse reserve development and $0.9 million of premium deficiency reserve for anticipated future losses related to the Medicaid business. Although the claims inventory remains stable following the Company's conversion to a Year 2000 compliant computer system, actuarial data indicate an increase in the lag between the time some HMO services were provided and the date the claims for those services were submitted by providers for payment. The increase in claim reserves is intended to cover the higher level of outstanding claims. The lower loss ratio in 1998 is also attributable to higher premium rate increases and a favorable development in the reserves as of December 31, 1997.
Selling, General and Administrative Expense Ratio-The selling, general and administrative ("SGA") expense ratio includes commissions, administrative expenses, and premium taxes and other assessments. The SGA expense ratio for HMO products in 1999 was 10.4%, compared with 9.6% in 1998 and 9.3% in 1997. The majority of the increase in the SGA expense ratio related to costs incurred to reduce Compcare's claim backlog and process claim adjustments, which were attributed to the system conversion as part of the Company's implementation of its Year 2000 readiness program and to increased customer service demands.
The operating expense ratio related to the service products within specialty managed care products and services in 1999 was 91.1% compared with 90.9% in 1998 and 95.7% in 1997. The deterioration in 1999 compared to 1998 is mainly attributable to an increase in the allowance for doubtful accounts. The improvement in 1998 compared to 1997 is due to successful product pricing strategies within the Behavioral Health line of business.
Amortization of goodwill and other intangibles was $0.8 million for 1999 compared with $0.5 million for 1998 and $0.8 million for 1997. The increase in 1999 is due to goodwill arising from recent acquisitions. The reduction in 1998 is due to full amortization of certain intangibles.
Consolidated net income (loss) in 1999 decreased to $(29.0) million from $18.1 million in 1998. Consolidated net income in 1998 increased 14.5% from $15.8 million in 1997. The decrease in 1999 resulted mainly from $16.1 million in current year reserve development and $15.6 million in prior year reserve development and an increase of $12.6 million in the allowance for doubtful accounts. In addition to these charges, 1999 included $2.8 million of charges for various transactions and reorganization costs. The charges are included in other operations.
On an historical basis, the Company has generated positive cash flow from operations. However, in 1999, net cash used in operating activities amounted to $45.2 million, compared with net cash provided by operating activities of $21.9 million for 1998. In addition to the net loss from operations, the decrease in cash flows from operations in 1999 was due primarily to increased cash payments relative to medical and other benefits payable and an increase in current prepaid tax receivable. Due to periodic cash flow requirements of certain subsidiaries, the Company made borrowings under its bank line-of-credit ranging up to $20.2 million during 1999 and $10.0 million during 1998 to meet short-term cash needs. The outstanding balance was $11.6 million at December 31, 1999, while no balance was outstanding at December 31, 1998.
The Company's investment portfolio consists primarily of investment grade bonds and Government securities and has a limited exposure to equity securities. At December 31, 1999, $105.0 million or 80.9% of the Company's total investment portfolio was invested in bonds compared with $133.1 million or 80.0% at December 31, 1998. The bond portfolio had an average quality rating by Moody's Investor Service of Aa3 at December 31, 1999 and 1998. The majority of the bond portfolio was classified as available-for-sale. The market value of the total investment portfolio, which includes stocks and bonds, was less than amortized cost by $4.98 million at December 31, 1999 and exceeded amortized cost by $1.9 million at December 31, 1998. Unrealized holding gains and losses on bonds classified as available-for-sale are included as a component of shareholders' equity, net of applicable deferred taxes. The Company has no investments in mortgage loans, no non-publicly traded securities (except for principal-only strips of U.S. Government securities), real estate held for investment or financial derivatives.
From time to time, capital contributions are made to the subsidiaries to assist them in maintaining appropriate levels of capital and surplus for regulatory and rating purposes. Insurance subsidiaries are required to maintain certain levels of statutory capital and surplus under the National Association of Insurance Commissioners ("NAIC") and the State of Wisconsin requirements. In Wisconsin, where a large percentage of the Company's premium is written, these levels are based upon the amount and type of premiums written and are calculated separately for each subsidiary. The Company intends to make capital contributions on an ongoing basis to satisfy all promulgated capital and surplus requirements, as needed.
In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company expensed approximately $3.6 million during 1999 in connection with remediating its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.
United Wisconsin Services, Inc. ("the Company") is a leading provider of managed health care services and employee benefit products. The Company's two primary product lines are (i) health maintenance organization ("HMO") products, sold primarily in Wisconsin, and (ii) specialty managed care products and services, including dental, life, disability and workers' compensation products, managed care consulting, electronic claim submission, pharmaceutical management, managed behavioral health services, case management and receivables management, sold throughout the United States.
On May 27, 1998, the Board of Directors of American Medical Security Group, Inc. ("AMSG") (formerly United Wisconsin Services, Inc.) approved a formal plan to spin- off its managed care companies and specialty business to its shareholders. The Spin-off involved the creation of a new corporation originally named Newco/UWS, Inc., subsequently renamed United Wisconsin Services, Inc. ("UWS"). The Spin-off resulted in the distribution of one share of common stock of UWS on September 25, 1998 ("Spin- off date") for each share of AMSG common stock held as of September 11, 1998. AMSG received a private letter ruling from the Internal Revenue Service that the Spin-off is tax free to AMSG, UWS and their shareholders. A further description of the Spin-off and certain transactions with AMSG is included in Notes 1, 6, 7 and 10.
The Company is affiliated with Blue Cross & Blue Shield United of Wisconsin ("BCBSUW") through certain common officers and directors. In addition, on August 17, 1999, BCBSUW completed its purchase of 1.4 million shares of the Company's common stock in the open market in connection with a previously disclosed plan for BCBSUW to increase its ownership in the Company. The ownership by BCBSUW, in combination with the ownership by the Company's 401(K) and pension plans enables Compcare Health Services Insurance Corporation, a wholly-owned subsidiary of the Company, to use the Blue Cross and Blue Shield brand on its products. At December 31, 1999, BCBSUW owned approximately 46% of the Company's common stock.
The consolidated financial statements present the Company's financial position, operations and cash flows as if the Company had been an independent, public company for all years presented. The Company consolidates majority-owned subsidiaries that are controlled by the Company. All intercompany transactions have been eliminated. The Company consolidates subsidiaries for which repurchase options exist (see Note 2) when control is deemed to be other than temporary. Management believes that control of Unity Health Plans Insurance Corporation ("Unity") and Valley Health Plan, Inc. ("Valley") is not temporary because exercise of the repurchase options is not probable. Any repurchase would not provide a substantial economic benefit to the option holders and would require regulatory approval pursuant to change of control regulations.
Cash and cash equivalents include operating cash and short-term investments with original maturities of three months or less. These amounts are recorded at cost, which approximates fair value.
Premium receivables are stated at net realizable value, net of allowances for uncollectible amounts of $2,858,000 and $719,000 at December 31, 1999 and 1998, respectively, based upon historical collection trends and management's judgment of the ultimate collectibility.
Other receivables are stated at net realizable value, net of allowances for uncollectible amounts of $3,498,000 and $27,000 at December 31, 1999 and 1998, respectively, based upon historical collection trends and management's judgment of the ultimate collectibility.
The Company periodically evaluates whether events and circumstances have occurred which may affect the estimated useful life or the recoverability of the remaining balance of its intangibles. At December 31, 1999, the Company's management believed that no material impairment of goodwill or other intangible assets existed.
Health services premiums and managed behavioral health fees are recognized as revenue in the period in which enrollees are entitled to care. Managed care consulting revenues are generally recognized when services are rendered. Case management and receivables management revenues are recognized when cash is received.
The Company's year-end claim liabilities are substantially satisfied through claim payments in the subsequent year. Any adjustments to prior period estimates are reflected in the current period. Capitation represents fixed payments on a per member per month basis to participating physicians, other medical specialists and hospital systems as compensation for providing comprehensive health or dental care services. In addition, certain subsidiaries have risk-sharing, stop-loss, and bonus arrangements with certain providers. Estimated settlements relating to these arrangements are developed based on historical payment patterns using standard actuarial techniques. The portion of medical and other benefits payable pertaining to long-term disability, workers' compensation and certain life insurance products which is estimated to be paid more than one year from the balance sheet date are classified as noncurrent liabilities on the accompanying balance sheets.
The following table sets forth the pro forma computation of basic and diluted EPS:
(1)Pro forma calculations for dilutive securities for the period January 1, 1997 through September 25, 1998, assume that the price of the stock and the strike price of the options is the same for the periods prior to the Spin-off date.
(3)EPS on pro forma net income are computed by dividing pro forma net income by the pro forma weighted average number of common shares outstanding. There is no dilutive effect on securities for the period prior to the Spin-off date (1).
Total revenues subject to repurchase options, pursuant to the various acquisition agreements, totaled $220,235,000, $207,014,000 and $186,318,000 for 1999, 1998 and 1997, respectively. Profit (loss) sharing expenses related to these provider arrangements is calculated based on the profitability of the HMO subsidiary and totaled $(2,366,000), $3,171,000 and $3,960,000 in 1999, 1998 and 1997, respectively. Total net income (loss) subject to repurchase options, pursuant to the various acquisition agreements, totaled $(1,071,000), $2,358,000 and $2,395,000 for 1999, 1998 and 1997, respectively. Total assets and total net assets subject to repurchase options were $39,409,000 and $16,970,000, respectively, at December 31, 1999 and $44,798,000 and $21,362,000, respectively, at December 31, 1998.
Proceeds from sales of stocks during 1999, 1998 and 1997 were $65,031,000, $73,156,000 and $89,681,000. Proceeds from sales of bonds classified as available-for-sale during 1999, 1998 and 1997, excluding maturities, were $78,730,000, $160,818,000 and $343,331,000.
outstanding line of credit balance was $11,550,000 at December 31, 1999. The interest expense on the line of credit was $441,300, $53,300 and $102,300 in 1999, 1998 and 1997, respectively.
The Company provides marketing, underwriting, actuarial and certain administrative services to BCBSUW. In addition, BCBSUW provides health insurance to the employees of the Company and provides office space to the Company. These activities are reimbursed at amounts approximating cost, which resulted in allocations to the Company of $11,959,000, $14,757,000 and $14,564,000 in 1999, 1998 and 1997, respectively, and allocations to BCBSUW of $11,659,000, $8,964,000 and $9,278,000 in 1999, 1998 and 1997, respectively. These amounts are included in selling, general and administrative expenses.
Prior to the Spin-off, the Company's operations were financed through its operating cash flows and investments by and advances from AMSG.
Due to affiliates-other relates primarily to operating expenses and reinsurance arrangements. The amounts due from/to affiliates are generally settled on a monthly basis for operating expenses and are settled in accordance with industry practice for reinsurance agreements.
Income tax expense has been calculated as if the Company filed separate federal income tax returns. Prior to the Spin-off, the Company was included in the consolidated federal income tax return filed by AMSG, except as noted below. UHLIC has filed separate federal income tax returns due to specific provisions of the Internal Revenue Code of 1986, as amended, related to consolidation of life insurance entities. The entities included in these consolidated financial statements file separate state franchise, income and premium tax returns, as applicable.
The Company had a net federal income tax receivable of $7,621,000 included in other current assets on the accompanying balance sheet and a net federal income tax payable of $1,650,000 included in other current liabilities on the accompanying balance sheet at December 31, 1999 and 1998, respectively. Federal and state income tax payments, net of refunds, totaled $3,486,000, $2,327,000 and $3,243,000 in 1999, 1998 and 1997, respectively. UWS and its affiliates have a federal net operating loss ("NOL") carryforward of $13,900,000 which expires in the year 2019. UWS and its affiliates have state net operating loss carryforwards totaling $46,355,000 which expire in the years 2011 through 2014.
Insurance companies are subject to regulation by the Office of the Commissioner of Insurance of the State of Wisconsin and certain other state insurance regulators. These regulations require, among other matters, the filing of financial statements prepared in accordance with statutory accounting practices prescribed or permitted for insurance companies. The statutory surplus of insurance subsidiaries at December 31, 1999 and 1998 aggregated $76,958,000 and $106,369,000, respectively. The statutory net income (loss) of insurance subsidiaries aggregated $(25,512,000), $15,884,000 and $17,380,000 in 1999, 1998 and 1997, respectively.
State insurance regulations also require the maintenance of a minimum compulsory surplus based on a percentage of premiums written. In addition, the Company's insurance subsidiaries are subject to risk-based capital ("RBC") requirements promulgated by the National Association of Insurance Commissioners. The RBC requirements establish minimum levels of capital and surplus based upon the insurer's operations. The Company intends to make capital contributions on an ongoing basis to satisfy all promulgated capital and surplus requirements, as needed.
Dividends paid by insurance subsidiaries are limited by state insurance regulations. The insurance regulator in the state of domicile may disapprove any dividend which, together with other dividends paid by an insurance company in the prior twelve months, exceeds the regulatory maximum as computed for the insurance company based on its statutory surplus and net income.
Based upon the financial statements of the insurance subsidiaries included in these consolidated financial statements as of December 31, 1999, as filed with the insurance regulators, the aggregate amount available for dividends in 2000 without regulatory approval is $1,318,000.
The following table summarizes the change in the pension and postretirement benefit obligations as of December 31, 1999 and 1998:
The pension and postretirement plans' assets are comprised primarily of debt, equity and other marketable securities, including 700,000 shares of UWS stock with a fair value of $2,975,000 at December 31, 1999. The plan did not own any UWS stock at December 31, 1998. The following table summarizes the change in the pension and postretirement plan assets as of December 31, 1999 and 1998:
The following table provides a reconciliation of the funded status of the plans to the prepaid pension and (accrued) postretirement costs at December 31, 1999 and 1998:
The components of the pension credit and postretirement benefit cost, which are included in selling, general and administrative expenses, for the years ended December 31, 1999 and 1998 are as follows:
In determining compensation cost pursuant to SFAS 123, the fair value for the options granted subsequent to the Spin-off date were estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1999: risk-free interest rate of 5.33%; dividend yield of .57%; volatility factor of the expected market price of the Company's common stock of .45; and a weighted average expected life of the options of 6 years. As calculated using the Black-Scholes model, the weighted average, grant-date fair value of options granted in which the exercise price equaled the market price on the date of the grant was $4.27 per share for 1999.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Since the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Selected quarterly financial data for the years ended December 31, 1999, 1998 and 1997 are as follows:
(1)Earnings per share data has not been provided for periods prior to the fourth quarter of 1998 since the Company was not an independent, public entity prior to the Spin-off date. A further description of the Spin-off is included in Note 1.
"Other Operations" includes operations not directly related to the business segments, unallocated corporate items (i.e. corporate interest expense on corporate debt, amortization of goodwill and intangibles and unallocated overhead expenses) and intercompany eliminations. The Company evaluates segment performance based on profit or loss from operations before income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.