Our corporate office headquarters building is located in St. Louis, Missouri. The real estate we own surrounding this building is adequate to accommodate office expansion needs to support future company growth.
The following selected consolidated financial data should be read in connection with the consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this filing. The data for the years ended December 31, 2005, 2004 and 2003 and as of December 31, 2005 and 2004 are derived from consolidated financial statements included elsewhere in this filing. The data for the years ended December 31, 2002 and 2001 and as of December 31, 2003, 2002 and 2001 are derived from audited consolidated financial statements not included in this filing.
Medicaid Managed Care general and administrative (G&A) expense ratio of 10.5% and Specialty Services G&A ratio of 35.4%.
Diluted earning per share of $1.24, a 22% increase over 2004.
During the third quarter of 2005 we were awarded Medicaid contracts in Georgia by the Georgia Department of Community Health. Our subsidiary, Peach State Health Plan, Inc., will manage care for a portion of the Medicaid and SCHIP recipients in the Atlanta, Central and Southwest regions. Membership operations are scheduled to commence in 2006.
We have also experienced growth in our Specialty Services segment highlighted by the following acquisitions or new contracts:
Effective July 22, 2005, we acquired AirLogix, Inc., a disease management provider, for a purchase price of approximately $36.2 million. The results of operations of this entity are included in our consolidated financial statements since July 22, 2005.
Summarized comparative financial data for 2005, 2004 and 2003 are as follows ($ in millions):
We generate revenues in our Specialty Services segment under contracts with states and local government entities, our health plans and third-party customers. Revenues are recognized when the services are provided or as ratably earned over the covered period of services. For performance-based contracts, we do not recognize revenue subject to refund until data is sufficient to measure performance. Such amounts are recorded as unearned revenue.
Premium and service revenues collected in advance are recorded as unearned revenue. Premium and service revenues due to us are recorded as premium and related receivables and are recorded net of an allowance based on historical trends and our management’s judgment on the collectibility of these accounts. As we generally receive payments during the month in which services are provided, the allowance is typically not significant in comparison to total revenues and does not have a material impact on the presentation of our financial condition or results of operations.
In 2005, we received premium rate increases ranging from 0.6% to 8.7%, or 3.2% on a composite basis across our markets. In 2004, we received premium rate increases ranging from 2.3% to 5.3%, or 4.4% on a composite basis across our markets.
Our Medicaid and SCHIP HBR increased in 2005 due to our settlement of a lawsuit with Aurora Health Care, Inc., which increased our ratio by 0.3%; and expansion into new markets previously unmanaged by us; which increased our ratio by 1.2%. For example, we experienced higher cost trends in Indiana where we added membership in 2005 as the state expanded their Medicaid managed care program to include all Medicaid and SCHIP enrollees. Our Specialty Services ratio includes the behavioral health contracts in Arizona and Kansas and reflects the State of Arizona’s minimum HBR requirements.
Our general and administrative (G&A) expenses primarily reflect wages and benefits and other administrative costs related to health plans, specialty companies and our centralized functions that support all of our business units. Our major centralized functions are finance, information systems and claims processing. Premium taxes are classified as G&A expenses. G&A expenses increased in 2005 primarily due to expenses for additional facilities and staff to support our growth, especially in Arizona, Georgia, Kansas and Missouri.
The increase in the Medicaid Managed Care G&A expense ratio in 2004 reflects the impact of premium taxes enacted in September 2003 in Texas and July 2004 in New Jersey. These taxes totaled $5.5 million in 2004 and $1.4 million in 2003 and had the effect of increasing our G&A expense ratio by 0.5% in 2004 and 0.2% in 2003. Additionally, the 2004 results include 1) start-up costs associated with the Texas EPO contract, our claims processing facility in Montana and FirstGuard, 2) severance costs related to job eliminations, and 3) higher compensation costs related to our performance bonus plans.
Other income (expense) consists principally of investment income from our cash and investments and interest expense on our debt. Investment and other income increased $4.2 million in 2005 as a result of higher average investment balances and an increase in market interest rates. Interest expense increased $3.3 million from increased borrowings under our credit facility and mortgages.
We finance our activities primarily through operating cash flows and borrowings under our revolving credit facility. Our operating activities provided cash of $74.0 million in 2005, $99.4 million in 2004 and $56.0 million in 2003. Cash flow from operations in 2005 reflects an increase in premium and related receivables and a $4.5 million increase in medical claims liabilities. The increase in receivables resulted primarily from the timing of delivery receivable collections. The increase in medical claims liabilities, lower than in prior years, reflects the $9.5 million payment made to Aurora Health Care, Inc. to settle a lawsuit, information systems improvements to reduce our claims processing cycle time and the effect of our behavioral health contract in Arizona. During 2004, the increase in operating cash flow was due primarily to continued profitability, increases in membership and increases in medical claims liabilities.
Our investing activities used cash of $56.4 million in 2005, $122.5 million in 2004 and $140.7 million in 2003. During 2005, our investing activities primarily consisted of the acquisitions of AirLogix and certain Medicaid-related assets of SummaCare, Inc. Approximately $34.1 million was paid, net of cash acquired, for AirLogix. Of the total purchase price of approximately $30.4 million paid to SummaCare, $21.4 million was paid in cash and the remaining $9.0 million was paid through the issuance of our common stock. During 2004, our investing activities primarily consisted of the acquisition of FirstGuard. In 2003, the largest component of investing activities related to increases in our investment portfolio as a result of our stock offering. Our investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets within our investment guidelines. Net cash provided by and used in investing activities will fluctuate from year to year due to the timing of investment purchases, sales and maturities. As of December 31, 2005, our investment portfolio consisted primarily of fixed-income securities with an average duration of 1.6 years. Cash is invested in investment vehicles such as municipal bonds, corporate bonds, insurance contracts, commercial paper and instruments of the U.S. Treasury. The states in which we operate prescribe the types of instruments in which our regulated subsidiaries may invest their cash.
Effective December 30, 2005, we executed an agreement with the City of Clayton, Missouri, a suburb of St. Louis, for the redevelopment of certain properties surrounding our corporate offices. Our primary purpose for the agreement is to accommodate office expansion needs for future company growth. The total scope of the project includes building two new office towers and street-level retail space. We plan to occupy a portion of those towers. The total expected cost of the project is approximately $190 million. It is not our intent to serve as developer of the project; we expect a commercial real estate developer to fund the majority of the project cost.
During 2005, we acquired $5.0 million of property under capital leases. This property consists primarily of the land and building related to our new claims processing facility in Montana. During 2004, we purchased the property adjacent to our corporate headquarters in St. Louis, Missouri for an aggregate purchase price of $10.3 million. This property is being used for the expansion of our corporate offices. We financed a portion of the purchase price through a $5.5 million non-recourse mortgage loan arrangement. In July 2003, we purchased the building in which our corporate headquarters is located for an aggregate purchase price of $12.6 million. We financed a portion of the purchase price through an $8.0 million non-recourse mortgage loan arrangement. The mortgage agreements bear interest at the prevailing prime rate less .75%. At December 31, 2005, our mortgages bore interest at 6.5%.
credit facility. These borrowings were used primarily for our investing activities in conjunction with the acquisition of new business. During 2003, our financing cash flows primarily consisted of the proceeds from the issuance of common stock through our public offering completed in August 2003.
At December 31, 2005, we had working capital, defined as current assets less current liabilities, of $58.0 million as compared to $22.1 million at December 31, 2004. Our working capital is sometimes negative due to our efforts to increase investment returns through purchases of investments that have maturities of greater than one year and, therefore, are classified as long-term. Our investment policies are designed to provide liquidity and preserve capital. We manage our short-term and long-term investments to ensure that a sufficient portion is held in investments that are highly liquid and can be sold to fund short-term capital requirements as needed.
On September 9, 2005, we executed an amendment to our Revolving Credit Agreement dated September 14, 2004, with several lending institutions, for which LaSalle Bank National Association serves as administrative agent and co-lead arranger. The amendment increased the total amount available under the credit agreement to $200 million from $100 million, including a sub-facility for letters of credit in an aggregate amount up to $50 million. In addition, the lending institutions released our prior grant of a security interest in the outstanding common stock and membership interests of each of our subsidiaries. The credit agreement is now an unsecured facility. Borrowings under the agreement bear interest based upon LIBOR rates, the Federal Funds Rate or the Prime Rate. Under our current capital structure, borrowings under the agreement bear interest at LIBOR plus 1.25%. This rate may change under differing capital structures over the life of the agreement. The agreement contains non-financial and financial covenants, including requirements of minimum fixed charge coverage ratios, maximum debt-to-EBITDA ratios and minimum tangible net worth. The agreement will expire on September 9, 2010 or on an earlier date in the instance of a default as defined in the agreement. As of February 23, 2006, we had $109.0 million in borrowings outstanding under the agreement and $15.0 million in letters of credit outstanding, leaving an availability of $76.0 million. As of December 31, 2005, we were in compliance with all covenants.
Based on our operating plan, we expect that our available cash, cash equivalents and investments, cash from our operations and cash available under our credit facility will be sufficient to finance our operations and capital expenditures for at least 12 months from the date of this filing.
As of December 31, 2005, our regulated subsidiaries had aggregate statutory capital and surplus of $183.5 million, compared with the required minimum aggregate statutory capital and surplus requirements of $87.7 million.
The National Association of Insurance Commissioners has adopted rules which set minimum risk-based capital requirements for insurance companies, managed care organizations and other entities bearing risk for healthcare coverage. As of December 31, 2005, our Georgia, Indiana, New Jersey, Ohio, Texas and Wisconsin health plans were in compliance with risk-based capital requirements enacted in these states. If adopted by Kansas or Missouri, risk-based capital requirements may increase the minimum capital required for these subsidiaries. We continue to monitor the requirements in Kansas and Missouri and do not expect that they will have a material impact on our results of operations, financial position or cash flows. Acquisitions in new states or new markets in existing states may require additional capital funding for our regulated subsidiaries.
In December 2004 FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment,” (SFAS 123R). SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R requires public entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. We will adopt SFAS 123R on January 1, 2006 using the modified-prospective method, and expect the 2006 effect to decrease diluted earnings per share by approximately $0.15.
Our management uses its judgment to determine the assumptions to be used in the calculation of the required estimates. In developing our estimate for IBNR, we apply various estimation methods depending on the claim type and the period for which claims are being estimated. For more recent periods, incurred non-inpatient claims are estimated based on historical per member per month claims experience adjusted for known factors. Incurred hospital claims are estimated based on authorized days and historical per diem claim experience adjusted for known factors. For older periods, we utilize an estimated completion factor based on our historical experience to develop IBNR estimates. The completion factor is an actuarial estimate of the percentage of claims incurred during a given period that have been adjudicated as of the reporting period to the estimate of the total ultimate incurred costs. These approaches are consistently applied to each period presented.
The completion factor, claims per member per month and per diem cost trend factors are the most significant factors affecting the IBNR estimate. The following table illustrates the sensitivity of these factors and the estimated potential impact on our operating results caused by changes in these factors based on December 31, 2005 data:
While we believe our estimates are appropriate, it is possible future events could require us to make significant adjustments for revisions to these estimates. For example, a 1% increase or decrease in our estimated medical claims liabilities would have affected net earnings by $1.1 million for the year ended December 31, 2005. The estimates are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate.
(a) Days in claims payable is a calculation of medical claims liabilities at the end of the period divided by average expense per calendar day for the fourth quarter of each year. Days in claims payable decreased in 2005 due to the settlement of a lawsuit with Aurora Health Care, Inc., information systems improvements to reduce our claims processing cycle time and the effect of our behavioral health contract in Arizona. Acquisitions in the last quarter of 2004 contributed to an increase in our 2004 days in claims payable calculation.
Acquisitions in 2004 include reserves acquired in connection with our acquisition of FirstGuard. Acquisitions in 2003 include reserves acquired in connection with our acquisition of UHP.
Medical claims are usually paid within a few months of the member receiving service from the physician or other healthcare provider. As a result, these liabilities generally are described as having a “short-tail,” which causes less than 5% of our medical claims liabilities as of the end of any given year to be outstanding the following year. Management expects that substantially all the development of the estimate of medical claims liabilities as of December 31, 2005 will be known by the end of 2006.