Item 1. Business
DEMUTUALIZATION AND INITIAL PUBLIC OFFERING
Effective February 5, 1997, Blue Cross and Blue Shield of Virginia (dba Trigon Blue Cross Blue Shield) completed its conversion from a mutual insurance company to a stock insurance company in accordance with a Plan of Demutualization ("Demutualization"). In accordance with the Demutualization, Blue Cross and Blue Shield of Virginia changed its name to Trigon Insurance Company (dba Trigon Blue Cross Blue Shield) ("Trigon Insurance") and became a wholly owned subsidiary of Trigon Healthcare, Inc. (Trigon Healthcare, Inc. and subsidiaries herein collectively referred to as "Trigon" or the "Company"). The membership interests of Blue Cross and Blue Shield of Virginia's eligible members were converted into Class A common stock of Trigon Healthcare, Inc., or, in certain circumstances, cash. The Demutualization also required the Company to complete an Initial Public Offering ("IPO") of stock simultaneously with the conversion. Accordingly, Trigon Healthcare, Inc. issued 17.8 million shares of Class A common stock at $13 per share in the IPO, generating net proceeds of $215.2 million. In connection with the Demutualization, the Company was required to make a payment of $175 million to the Commonwealth of Virginia ("Commonwealth Payment") in February 1997. The Commonwealth Payment was accrued and reflected as an extraordinary charge in the consolidated financial statements for 1996. The Company used approximately $90 million of the net proceeds and $85 million in borrowings under a revolving credit agreement to fund this payment. The Company also used approximately $91.1 million of the offering proceeds to pay certain eligible members cash in lieu of shares of common stock that would otherwise have been issued to such eligible members pursuant to the Demutualization.
GENERAL
The Company is the largest managed health care company in Virginia, serving nearly 1.9 million members primarily through statewide and regional provider networks. The Company's membership represents approximately 26% of the Virginia population and 30% of the Virginia population in those areas where Trigon has the exclusive right to use the Blue Cross and Blue Shield service marks and tradenames.
The Company divides its business into four segments: health insurance, government programs, investments and all other. The Company's health insurance segment provides a comprehensive spectrum of managed care products primarily through three network systems with a range of utilization and cost containment controls. Within the Company's network product offerings, employer groups may choose various funding options ranging from fully insured to partially or fully self-funded financial arrangements. While self-funded customers participate in Trigon's networks, the claims are not underwritten by Trigon but are funded by the groups. As of December 31, 1998, fully insured, also referred to as commercial, products made up 52.5% of total enrollment. Its components include: three HMO networks which, with 255,879 members, are the Company's most tightly managed and cost efficient networks; the preferred provider organization ("PPO") networks which, with 297,939 members, offer greater choice of providers than Trigon's HMO networks; and the participating provider ("PAR") network which, with 165,239 members, is the Company's broadest and most flexible network. Commercial products also include Medicare supplement plans with 121,322 members, the Medicaid/Medicare HMO plans with 31,338 members and the Southeast network through Mid-South Insurance Company ("Mid-South"), a Fayetteville, North Carolina-based health and life insurance company which was acquired by the Company in 1996, with 105,056 members. Self-funded enrollment as of December 31, 1998 was 666,036 members and represents 35.8% of total enrollment. Self-funded arrangements are available to groups with more than 100 employees and are typically utilized by groups with more than 1,000 employees. Trigon charges self-funded groups an administrative fee based on the number of members in a group or the group's claims experience. In addition, most self-funded groups purchase aggregate and/or claim specific stop loss coverage. In exchange for a premium, the group's aggregate liability is capped for the year or the group's liability on any one episode of care is capped.
The government programs segment includes the Federal Employee Program ("FEP") and claims processing for Medicare. Through its participation in the national contract between the Blue Cross Blue Shield Association ("BCBSA") and the U.S. Office of Personnel Management ("OPM"), the Company provides health benefits to federal employees in Virginia. FEP revenues represent the reimbursement by OPM of medical costs incurred
including the actual cost of administering the program, as well as a performance based share of the national program's overall profit. As of December 31, 1998 FEP enrollment stood at 213,017 members and represents 11.4% of total enrollment. The FEP is the Company's largest customer, representing 18.2% of total consolidated revenues during 1998. The Company processes Medicare Part A claims for beneficiaries in Virginia and West Virginia. Additionally, the Company provides computer processing capabilities for Medicare Part A claims processing for certain other Blue Cross Blue Shield plans. As an administrative agent for Medicare, the Company allocates operating expenses to determine reimbursement due for services rendered in accordance with the contract. Medicare claims processed are not included in the consolidated statements of operations and the reimbursement of allocated operating expenses is recorded as a reduction of the Company's selling, general and administrative expenses.
All of the investment portfolios of the consolidated subsidiaries are managed and evaluated collectively within the investment segment. The Company's other health related business, third party administration for medical and workers compensation, life and disability insurance, health promotions and similar products are reflected in an "all other" category.
Refer to "Note 23. Segment Information" on pages 55 and 56 of the Company's Annual Report to Shareholders, which are incorporated by reference, for financial information relating to reportable segments.
The following table sets forth the data by network for the last five years:
ENROLLMENT BY NETWORK SYSTEM
As of December 31, 1998 1997 1996 1995 1994 ------------------------------------------------ Health Insurance Commercial HMO......................... 255,879 255,548 219,866 166,536 85,739 PPO......................... 297,939 263,828 230,675 212,322 155,433 PAR......................... 165,239 192,825 236,383 296,716 334,800 Medicaid/Medicare HMO....... 31,338 35,488 28,306 6,357 - Medicare supplement......... 121,322 125,686 128,015 129,252 131,864 Non-Virginia (1)............ 105,056 64,143 49,251 19,857 26,639 ------------------------------------------------ Total commercial............... 976,773 937,518 892,496 831,040 734,475 Self-funded.................... 666,036 679,667 700,482 705,459 686,697 Processed for other Blue Cross and Blue Shield Plans (ASO).... 5,545 15,728 70,330 64,558 65,187 ------------------------------------------------ Total health insurance.........1,648,354 1,632,913 1,663,308 1,601,057 1,486,359 Government Federal Employee Program (PPO). 213,017 207,457 197,241 198,561 195,314 ------------------------------------------------ Total .........................1,861,371 1,840,370 1,860,549 1,799,618 1,681,673 ================================================
(1) "Non-Virginia" enrollment includes Mid-South members beginning in 1996 and out-of-state student health care coverage (which was discontinued as of December 31, 1995).
SIGNIFICANT CUSTOMERS
Trigon's two largest customers are the FEP and the Commonwealth of Virginia ("COV"). FEP represents 18.2% of total consolidated revenues. The contract renews automatically for a term of one year each January 1, unless either party gives written notice at least 60 days prior to the date of renewal. Under the program, a special FEP reserve is maintained at the national level as a protection against adverse claims trends. However, if the contract should terminate with a negative balance in the FEP special reserve, the losses would be allocated to participating plans as subcontractors based on a ratio of the Company's past five year claims experience as a percent of the total program's experience. As of December 31, 1998, the national reserve stood at 4.7 months of claims and administrative payments in reserve, which is above the target of a 3.0 month reserve base. Since 1972, the Company has provided health benefits to employees and retirees of COV. The contract represents 14.0% of premium and premium
equivalents. During 1998, the COV exercised its option to extend the current contract to June 30, 2000. The Company expects the COV to issue a "Request For Proposal" to administer health benefits in May 1999. The Company believes it is well qualified to continue to meet the COV's health care requirements because of its proven ability to service the account and its broad offering of PPO and HMO network products.
NETWORKS
Trigon's HMO, PPO and PAR networks provide for the delivery of health care services at reduced costs due to favorable network arrangements with health care providers and by including members in health care decisions. The Company has the largest membership base in Virginia, which generally allows it to negotiate contracts with its Virginia providers that specify favorable rates and incorporate utilization management and other cost controls. Members assume responsibility for a portion of health care costs through copayments, coinsurance and annual deductible contract provisions. Members may choose to receive health care services from providers not part of the network at an additional cost to the member. Trigon believes that the copayment, coinsurance, annual deductible provisions and out of network costs enhance its ability to control costs by encouraging members to take more responsibility for their health care decisions.
Trigon established its first HMO in 1984 and now operates three separate HMOs. HealthKeepers, Inc. ("HealthKeepers") is a state qualified HMO that operates primarily in the central, eastern and southwestern areas of Virginia. Peninsula Health Care, Inc. ("PHC"), a joint venture owned 51% by Trigon, is a state qualified HMO operating primarily on the Peninsula in Eastern Virginia. The Company owns 80% of Priority Inc. (acquired in 1995), which owns a federally qualified HMO, Priority Health Care, Inc. ("Priority"), operating in the Tidewater area in Eastern Virginia. As of December 31, 1998, the HMO networks included approximately 2,200 primary care physicians, 7,200 specialist physicians and 56 acute care hospitals throughout Virginia. Members choose a primary care physician who is responsible for coordinating health care services for the member. The HMO product portfolio is presented to customers as a stand-alone HMO offering, or through "Blue Advantage," a program which includes HMO and PPO options administered and priced as a single program and which can only be utilized by groups that contract with Trigon on an exclusive basis. The Company's PPO network is a statewide PPO network, which as of December 31, 1998 included approximately 16,600 physicians and 88 acute care hospitals within Virginia. Members may seek care from any PPO network physician depending on services required. Trigon's PAR network provides more traditional health coverage and included approximately 17,700 physicians and 91 acute care hospitals. The PAR network offers members more providers to choose from, greater customization of benefit design and fewer restrictions in the use of non-network providers than the PPO network. Trigon expects that its PAR network and products will continue to be an important offering for groups desiring greater flexibility and choice in networks and benefits, as well as a source of new PPO and HMO members. Trigon also offers Medicaid and Medicare HMO products. PHC and Priority market a Medicaid HMO product to participants in the Aid to Families with Dependent Children program and the Aged, Blind and Disabled Individuals programs in the Peninsula and Tidewater regions of Virginia. HealthKeepers received federal and state regulatory approval in the first quarter of 1998 to begin selling a Medicare HMO product within the City of Richmond and five surrounding counties in central Virginia. The product is available to individuals who are eligible for Medicare either through age or disability. Health care services are provided by a special network comprised of a subset of the HealthKeepers provider network. The Company had 1,300 members enrolled in the Medicare HMO as of December 31, 1998. The Company is being disciplined and cautious with its entry into the Medicare HMO market and is closely monitoring the direction of government rules and regulations.
Trigon's networks have contracts with hospitals, physicians and other professionals at reduced rates due to the volume of business it offers to healthcare providers that are a part of the network. Hospital provider contracts, typically three to five years in duration, are generally paid on the basis of per diems (i.e., fixed fee schedules where the daily rate is based on the type of service; primary method of in-patient reimbursement), per case per admission (i.e., fixed fee schedules for all services during a member's hospitalization), or a percentage of covered charges with limits on the subsequent year increases. The average rate negotiated with hospitals under this arrangement is lower than the hospital's average standard retail charges. Services not subject to special per case or per diem payment arrangements are generally paid according to a fee schedule or as a percentage of billed charges. When considering whether to contract with a physician, the Company conducts a credentialing program to evaluate the applicant's professional experience, including licensure. The Company's HMO network provides reimbursement to almost all of the primary care physicians in the HMO network on a capitated basis. Specialists are reimbursed based on a fee
schedule or, in some cases, on a capitated basis. Some ancillary services, lab services, behavioral health and vision services are also capitated. Based on these payment arrangements, physicians and hospitals in the HMO networks have financial incentives to control health care costs. PPO and PAR physician provider contracts employ fixed fee schedules, which are below standard billing rates. Physician fee schedule payments are set by the Company using Medicare's Resource Based Relative Value System methodologies and are generally adjusted annually.
UTILIZATION MANAGEMENT
Trigon also manages health care costs in its networks by using utilization management system guidelines for the networks that are intended to address quality of care and help to ensure that only appropriate services are rendered and that such services are provided in the most cost-effective manner. Trigon recognizes that the right care in the right setting for the right price at the right time using the right provider equates to quality medical care. In the HMO network, the primary care physicians are considered to be the overall manager of the individual's health care needs and manage and optimize care through the use of referrals and by approving all specialty care before it is rendered. In addition, the HMO reviews all high cost services needed by individual members that are not provided by the primary care physician. The Company also manages health care costs and quality by reviewing monthly cost and utilization trends within all networks. Utilization rates and cases are reviewed in the aggregate and by service type to identify opportunities for better cost and quality control. In addition, the highest cost services are studied to determine if costs can be reduced by using new, less expensive technologies or by creating additional networks or contracts, such as networks for ambulatory care, to reduce provider costs. Trigon utilizes Milliman & Robertson's healthcare management guidelines and requires pre-admission approvals of all hospital and skilled nursing facility stays and concurrent review of length of stay. Trigon prospectively reviews the medical necessity of home health, private duty nursing and durable medical equipment. Also, the Company retrospectively reviews physician practice patterns. Physicians are required to meet certain profiling criteria that indicate cost effective and quality practice standards. All new medical technologies are reviewed in advance in an attempt to ensure that only safe and effective new medical procedures are covered. Additionally, the Company also employs a comprehensive disease management program. In this program, the Company identifies those members having certain chronic diseases, such as asthma, hypertension and diabetes, and proactively works with the member and the physician to facilitate appropriate treatment, help to ensure compliance with recommended therapies and educate members on lifestyle modifications to manage the disease. The Company believes that the program promotes the delivery of efficient care and helps to improve the quality of health care delivered.
QUALITY
Trigon's HMO quality improvement standards are modeled on those of the National Committee on Quality Assurance ("NCQA"), an independent, nonprofit institution that reviews and accredits health maintenance and managed care organizations. The quality improvement program instituted by the Company's HMOs provides for the review of quality of care service and the initial and ongoing review of the credentials of all network providers. This credentialing process includes a review of whether the provider has the necessary licenses, is qualified in the specialty indicated and meets standards for safety, sanitation and accessibility. The HMO reviews the findings with a quality improvement committee, which includes practicing physicians from the HMO network. In addition, quality of care services are monitored through profiling and data analysis, member satisfaction surveys and problem case review. During 1998, the Company obtained three-year full accreditation from the NCQA for HealthKeepers, its largest HMO. The three-year full accreditation is granted to companies that have excellent programs for continuous quality improvement and meet NCQA's rigorous standards. Also during 1998, PHC received a one-year accreditation. A one-year accreditation is provided to companies that have well established quality improvement programs and meet most NCQA standards. The remaining Trigon HMO plan, Priority, did not seek accreditation in 1998.
The Company has an active program to evaluate the quality and appropriateness of care provided by its PPO and PAR networks. Provider credentialing, profiling and member satisfaction, along with monitoring of outcomes and clinical studies are all performed to monitor and manage quality of care. Network physicians and other providers participate in quality management programs overseen by medical advisory panels. Using the Company's computerized medical information database, these programs involve profiles of the tests, types of treatment and procedures performed for specific diagnoses by these physicians, as well as reviews of aggregate data. The
American Accreditation Health Care Commission/URAC has awarded Trigon Insurance a full, two-year accreditation for health utilization management services. Trigon Insurance has been certified since 1992.
MARKETING
Trigon markets its products and services to both individuals and groups. The individual products are marketed principally through direct marketing initiatives and through brokers. The group market includes small, medium and large group employers. The smaller group employers generally use insurance brokers to assist in the selection of products and analysis of the actual cost of competing plans. As the group size grows, employers may use consultants to assist them in the tailoring of benefits and networks. The larger group employers are generally more sophisticated purchasers, often engaging consultants to work with the Trigon sales staff to tailor benefit and network design to match their specific needs more closely. In addition, Trigon has a direct sales staff that markets the full range of Trigon products and services.
COMPETITION
The health care industry is highly competitive both in Virginia and in other states in the southeastern and mid-Atlantic United States into which the Company principally intends to expand. Managed care companies, including large, well-capitalized companies which market managed care products nationwide, have targeted the southeastern and mid-Atlantic regions of the United States as being favorable for expansion and have begun entering Virginia and markets targeted by Trigon in increasing numbers. In some cases, new market entrants, as well as existing health care companies, have competed with the Company for business by offering very favorable pricing terms to customers. The Company is facing this increased competition in the areas in which it is licensed to use the Blue Cross and Blue Shield service marks and tradenames, as well as the areas in which it operates without these service marks and tradenames. In areas outside of its licensed territory, the Company's ability to successfully compete may be adversely affected by its inability to use the Blue Cross and Blue Shield service marks and tradenames, by the presence of competitors that are able to use such service marks and tradenames in the areas and by the Company's lack of substantial market share or established provider networks in these areas. The Company also faces competition from a trend among health care providers to combine and form their own networks in order to contract directly with employer groups and other prospective customers to provide health care services. It is possible that such overall increased competition will exert strong pressures upon Trigon's profitability, its ability to increase enrollment and its ability to successfully pursue growth in areas both within and outside of Virginia.
INVESTMENTS
The Company's investment policies are designed to provide liquidity to meet anticipated payment obligations and preserve capital. Trigon fundamentally believes that concentrations of investments in any one asset class are unwise due to constantly changing interest rates as well as market and economic conditions. Accordingly, the Company maintains a diversified investment portfolio consisting both of fixed income and equity securities, with the objective of producing a consistently growing income stream and maximizing risk-adjusted total return. The fixed income portfolio includes government and corporate securities, both domestic and international, with an average quality rating of A as of December 31, 1998. The portfolio had an average contractual maturity of 8.4 years as of December 31, 1998. A portion of the fixed income portfolio is designated as a short-term fixed income portfolio and is intended to cover near-term cash flow needs and to serve as a buffer for unanticipated business needs. The equity portfolios contain readily marketable securities ranging from small growth to well-established Fortune 500 companies. The international portfolio is diversified by industry, country and currency-related exposure. As of December 31, 1998, the Company's equity exposure, comprised of direct equity as well as equity-indexed investments, was 14.0% of the total portfolio, as compared to 13.9% as of December 31, 1997 and 27.8% as of December 31, 1996. During 1998, emphasis in the fixed income portion of the portfolio was on high quality, long duration securities. Later in the year, corporate and tax-exempt municipal bonds were given greater weight.
The Company utilizes internal and external investment managers. Both the internal and external managers invest within guidelines established by the Company designed to fit into the overall investment strategy. These guidelines establish minimum quality and diversification requirements which, among other things, provide limitations on the allowable investment for a single issuer as well as currency exposure for those managers investing in international securities.
As of December 31, 1998 the investment portfolio was comprised of the following (in thousands):
ESTIMATED PERCENT FAIR OF VALUE PORTFOLIO ----------------------- Fixed income Domestic U.S. Treasury securities and obligations of U.S. government agencies................. $ 514,292 32.3 % Mortgage-backed obligations of U.S. 19,405 1.2 government agencies...................... States and political subdivision securities 246,407 15.5 Other mortgage-backed and asset-backed 122,084 7.7 securities............................... Domestic corporate bonds................... 451,501 28.4 Short-term debt securities with maturities 83,018 5.2 of less than one year.................... Foreign: Debt securities issued by foreign governments.............................. 18,092 1.1 Foreign corporate bonds.................... 25,790 1.6 Short-term debt securities with maturities of less than one year...................... 30 - ----------------------- Total fixed income............................. 1,480,619 93.0 ----------------------- Equities Domestic..................................... 61,156 3.8 Foreign...................................... 51,106 3.2 ----------------------- Total equities................................. 112,262 7.0 Derivative instruments......................... (12) - ----------------------- Total investments.............................. $ 1,592,869 100.0 % =======================
As of December 31, 1998, the composition of the Company's fixed income investment securities by rating is as follows (in thousands):
Estimated Fair Percent Rating (1) Value of Total ----------------------- AAA............................................ $ 890,063 60.1 % AA............................................. 36,201 2.4 A.............................................. 40,722 2.8 BBB............................................ 131,425 8.9 BB............................................. 210,538 14.2 B.............................................. 169,465 11.4 CCC or lower................................... 2,205 0.2 ----------------------- Total.......................................... $ 1,480,619 100.0 % ========================
(1) Ratings are assigned by Standard & Poor's Corporation, Moody's Investor Service, Inc. or Fitch Investors Service, L.P.
Derivative instruments consist of foreign currency forward contracts and foreign currency options. The Company enters into foreign currency derivative instruments to hedge exposure to fluctuations in foreign currency exchange rates. Company policy only permits utilization of these instruments in its foreign denominated bond and equity portfolios. The counterparties to these transactions are major financial institutions. The Company may incur a loss with respect to these transactions to the extent that a counterparty fails to perform under a contract and exchange rates have changed unfavorably since the inception of the contract. The Company anticipates that the counterparties will be able to fully satisfy their obligations under the agreements. The forward contracts involve the exchange of one currency for another at a future date and typically have maturities of one year or less. As of December 31, 1998, the Company had forward contracts outstanding to purchase approximately $600,000 in foreign currencies and to sell approximately $3.1 million in foreign currencies (primarily Japanese Yen, British Pound and German Mark (which was redenominated to the Euro on January 1, 1999)). The gross unrealized losses related to these contracts
as of December 31, 1998 aggregated $12,000. There were no gross unrealized gains related to these contracts as of December 31, 1998. Foreign currency options are contracts that give the option purchaser the right, but not the obligation, to buy or sell, within a specific period of time, a financial instrument at a specified price. These options generally expire within twelve months. There were no foreign currency options outstanding as of December 31, 1998.
The Company enters into financial futures contracts for portfolio strategies such as minimizing interest rate risk and managing portfolio duration. The notional amount of the futures contracts, $210.9 million as of December 31, 1998, is limited to that of the market value of the underlying portfolios.
Other than currently or formerly occupied Company property or through mortgage-backed securities, the Company has no investment in real estate or mortgage loans.
INFORMATION SYSTEMS
The Company develops and maintains its own information systems. Information systems have played and will continue to play a key role in ongoing plans to continually improve quality, lower costs and improve service for the Company's customers. Trigon's centralized, common database and analytical technologies allow for increasingly more sophisticated methods of managing costs and quality of care. The database includes comprehensive information on virtually all physicians and hospitals and one third of the population in Virginia, which assists Trigon in analyzing the medical and economic performance of providers and the medical and economic experience of specific customer groups and individuals. The Company believes that its information systems are a competitive advantage and are sufficient to meet its current needs and future expansion plans.
The Company uses an integrated set of applications software to support marketing and underwriting, eligibility and billing, electronic claims submission, claims administration, managed care programs and corporate financial management. A combination of custom developed and licensed systems are used to meet the unique needs of different products and markets. An overall systems architecture is maintained to promote consistency of data, processing rules and flexibility. Different systems serving the unique products or markets feed data to a corporate information and decision support system. This decision support system provides a single source of information for all of the Company's data reporting and analytic needs. This includes operational and financial performance, underwriting and marketing analysis, utilization management and actuarial reporting.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Readiness Disclosure" included in the Company's Annual Report to Shareholders, which is incorporated herein by reference, for a comprehensive discussion of the Year 2000 issue, the steps being taken by the Company to address it and the potential effects on the Company.
REGULATION
HEALTHCARE REFORM - VIRGINIA. In its 1999 Session, the Virginia General Assembly passed a number of bills affecting health care, most of which will become effective July 1, 1999, if approved by the Governor of Virginia. At this time, the Company does not believe that the legislation described below will have a material effect on the Company's operational results.
o Comprehensive reforms in managed care health insurance plans, including: (i) an independent external review of adverse utilization review decisions; (ii) a managed care ombudsman under the offices of the State Corporation Commission, Bureau of Insurance to assist consumers enrolled in managed care programs and to gather and report certain data to the General Assembly; (iii) a provision requiring insurers and HMOs to allow patients with terminal or disabling conditions to have a "standing referral" to specialists; (iv) new rules for allowing patients to access non-formulary drugs in certain circumstances; and (v) 24-hour availability of personnel to provide pre-authorization for proposed medical treatments.
o Mandates implementing coverage for diabetes management, minimum hospital stays for hysterectomy, coverage for Phase II, Phase III and Phase IV clinical trials for treatment studies on cancer, mental health parity, certain pap smears and hospice care.
o Fair business practices standards applicable to the claims reimbursement practices of health insurers and HMOs that contract with providers in the establishment of networks. In general, the standards require carriers to (i) pay claims within 40 days of claim receipt, unless the claim is not a clean claim, is disputed in good faith, or there is otherwise no obligation to pay, (ii) contact health care providers within 30 days of receiving claims if they desire further claim information or documentation, and (iii) establish reasonable policies giving providers notice of and detailed information concerning carriers' required administrative claims processing procedures.
In 1998, the Virginia General Assembly passed legislation that transferred the responsibility for regulation of utilization review activities and quality of care in managed care plans from the State Corporation Commission to the Department of Health. Full implementation of the quality bill does not occur until regulations are promulgated by the Department of Health. Certificates of quality are not required to maintain a carrier's insurance license until July 1, 2000, so long as an application for a certificate is made by December 1, 1999. There is no indication or expectation that the regulatory process will result in requirements that will materially affect the Company's operations or financial condition, however, there can be no assurance of that result at this time.
HEALTHCARE REFORM - FEDERAL. Effective January 1, 1998, provisions of the Health Insurance Portability and Accountability Act ("HIPAA") affecting the individual market took effect. The provisions impose requirements concerning guaranteed renewability and availability, the waiving of waiting periods for certain eligible individuals coming from group coverage and limitations on the insurers ability to terminate policies. Also, new requirements on group insurance plans concerning maternity length of stay and mental health benefits became effective for group coverage with the commencement of plan years beginning on or after January 1, 1998. There is no expectation that any of these requirements will materially affect the Company's operations or financial condition.
Also in 1998, significant new federal regulations were proposed including regulations to implement the Medicare + Choice provisions of the Balanced Budget Act of 1997 ("BBA"), as well as the BBA provisions that allow states greater flexibility to bring managed care techniques into the Medicaid program. In addition, regulations were proposed requiring expedited appeals for ERISA plans and making other changes to claims processing requirements. Based on comments on this proposed ERISA regulation from the public and industry, both in the form of written comments and public hearings, changes to the proposed regulation limiting its scope are anticipated.
In 1999, it is anticipated that federal legislative proposals focusing on such issues as "patient protection," health plan liability, confidentiality of health information, Medicare reform and the uninsured will likely be considered by Congress. While many of these proposals are viewed by health plans as adverse to managed care, it is not clear at present whether any of these federal proposals will be adopted. Moreover, there can be no assurance that additional legislative and regulatory initiatives will not be undertaken in the future, to address "patient protection," to engage in structural reform of the health care industry in order to reduce the escalation in health care costs or to make health care more accessible. Such reform, if it occurs, could adversely affect Trigon's results of operations or financial condition.
HMO REGULATION. Trigon has three HMO subsidiaries, one of which is a federally qualified HMO. All of Trigon's HMO subsidiaries are licensed by the Commonwealth of Virginia and are subject to regulation and review by the State Corporation Commission and certain other state authorities, with which they must file periodic reports. Among the areas regulated by Virginia law are policy forms, market conduct, quality assurance, covered benefits, contracts between the HMO and its health care providers, the HMO's financial condition, including net worth requirements, and the accessibility of providers in the service area of an HMO.
Trigon's federally qualified HMO is also subject to regulation and review by the OPM and certain other federal authorities, with which they must file periodic reports. Areas covered by federal law are similar to those covered by state law and regulation. In addition, one of the Company's HMOs offers a Medicare risk product that subjects that HMO to regulation and review by the U.S. Department of Health and Human Services and certain other federal authorities as well.
INSURANCE HOLDING COMPANY REGULATION. Trigon Healthcare, Inc. is not regulated as an insurance company but, as the direct or indirect owner of all the capital stock of Trigon Insurance, Trigon Health and Life Insurance Company ("Trigon Health and Life"), a Virginia-based health and life company, and Mid-South, is regulated as an insurance holding company and subject to the insurance holding company acts of Virginia and North
Carolina, the states in which the insurance company subsidiaries are domiciled. Effective July 1, 1998, the Company's HMOs, HealthKeepers, PHC and Priority, became subject to the obligations and restrictions under the Virginia Holding Company Act. These acts contain certain reporting requirements as well as restrictions on transactions between an insurer or HMO and its affiliates. The Virginia insurance holding company laws and regulations generally require insurance companies and HMOs within an insurance holding company system to register with the State Corporation Commission and to file with the State Corporation Commission certain reports describing capital structure, ownership, financial condition, certain intercompany transactions and general business operations. In addition, various notice and reporting requirements generally apply to transactions between insurance companies and HMOs and their affiliates within an insurance holding company system, depending on the size and nature of the transactions. Virginia insurance holding company laws and regulations require prior regulatory approval or, in certain circumstances, prior notice of, certain material intercompany transfers of assets as well as certain transactions between insurance companies, HMOs, their parent holding companies and affiliates.
Additionally, holding company acts (including those of Virginia and North Carolina) restrict the ability of any person to obtain control of an insurance company or HMO without prior regulatory approval. Without such approval (or an exemption), no person may acquire any voting security of an insurance holding company which controls a Virginia insurance company or HMO, or merge with such a holding company, if as a result of such transaction such person would "control" the insurance holding company. "Control" is defined as the direct or indirect power to direct or cause the direction of the management and policies of a person and is presumed to exist if a person directly or indirectly owns or controls 10% or more of the voting securities of another person.
INSURANCE COMPANY REGULATION. Trigon Insurance, the HMO subsidiaries and Trigon Health and Life are subject to the insurance laws and regulations of the Commonwealth of Virginia, the domiciliary state of these companies. Mid-South is domiciled in North Carolina and is subject to the laws and regulations of that state. In addition, Trigon Insurance, the HMO subsidiaries, Trigon Health and Life and Mid-South are subject to the insurance laws and regulations of the other jurisdictions in which they are licensed or authorized to do business. These insurance laws and regulations generally give state regulatory authorities broad supervisory, regulatory and administrative powers over insurance companies and insurance holding companies with respect to most aspects of their insurance businesses. This regulation is intended primarily for the benefit of the policyholders and members of insurance companies and not investors. Regulatory authorities exercise extensive supervisory power over health and life insurance companies with respect to the licensing of insurance companies; the approval of forms and insurance policies used; the nature of, and limitations on, an insurance company's investments; the periodic examination of the operations of insurance companies; the form and content of annual statements and other reports required to be filed on the financial condition of insurance companies; and the establishment of capital requirements for insurance companies. Trigon Insurance, the HMO subsidiaries, Trigon Health and Life and Mid-South are required to file periodic statutory financial statements in each jurisdiction in which they are licensed. Additionally, Trigon Insurance, the HMO subsidiaries, Trigon Health and Life and Mid-South are periodically examined by the insurance departments of the jurisdictions in which they are licensed to do business.
RISK-BASED CAPITAL REQUIREMENTS. Virginia and North Carolina have statutory risk-based capital ("RBC") requirements for health and other insurance companies. Such requirements are intended to assess the capital adequacy of life and health insurers, taking into account the risk characteristics of an insurer's investments and products. The formula for calculating such RBC requirements, set forth in instructions adopted by the NAIC, is 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. Under these laws, an insurance company must submit a report of its RBC level to the Virginia State Corporation Commission or Insurance Commissioner of North Carolina, as appropriate, as of the end of the previous calendar year.
The RBC requirements categorize insurance companies according to the extent to which they meet or exceed certain RBC thresholds. The law requires increasing degrees of regulatory oversight and intervention as an insurance company's RBC declines. The level of regulatory oversight ranges from requiring the insurance company to inform and obtain approval from the domiciliary Insurance Commissioner of a comprehensive financial plan for increasing its RBC to mandatory regulatory intervention requiring an insurance company to be placed under regulatory control in a rehabilitation or liquidation proceeding.
As of December 31, 1998, the RBC levels of Trigon Insurance, Trigon Health and Life and Mid-South, as calculated in accordance with the NAIC RBC instructions, exceeded all RBC thresholds.
The NAIC has proposed that states adopt RBC standards for HMOs. To date, Virginia has not adopted these standards. The Company does not expect that RBC standards for HMOs if adopted by Virginia would have a material effect on the consolidated financial position of the Company.
RESTRICTIONS ON DIVIDENDS. In the event the Company determines to pay dividends, the principal source of funds to pay dividends to stockholders would be dividends received by the Company from its subsidiaries, including Trigon Insurance. Virginia insurance laws and regulations restrict the payment of extraordinary dividends declared by insurance companies, including health care insurers such as Trigon Insurance, in a holding company system. An insurance company is prohibited from paying an extraordinary dividend unless it obtains the approval of the State Corporation Commission. An extraordinary dividend is one which, together with the amount of dividends and distributions paid by the insurance company during the immediately preceding 12 months, exceeds the lesser of (i) 10% of the insurance company's surplus to policyholders as of the preceding December 31 or (ii) the insurance company's net income (not including realized capital gains) for the preceding calendar year. Further, an insurance company may not pay a dividend unless, after such payment, its surplus to policyholders is reasonable in relation to its outstanding liabilities and adequate to meet its financial needs. The State Corporation Commission may bring an action to enjoin or rescind payment of any dividend or distribution that would cause the insurance company's statutory surplus to be unreasonable or inadequate. The maximum amount available after certain dates in 1999 for payment of dividends by Trigon Insurance to the Company without the prior approval of the State Corporation Commission is $48.9 million. During 1998 and 1997, Trigon Insurance Company received permission from the State Corporation Commission to pay dividends to its parent, Trigon Healthcare, Inc., of $227.5 million and $238.7 million, respectively. The 1998 dividend was effected July 1, 1998 and included $200.0 million of cash and $27.5 million of stock of a wholly-owned subsidiary. The 1997 dividend was effected July 31, 1997 and consisted of $188.7 million of stock of a wholly-owned subsidiary and $50.0 million of cash.
North Carolina, Mid-South's domiciliary state, similarly restricts the payment of dividends by their domiciliary insurance companies.
ASSESSMENTS AGAINST INSURERS. Under insolvency or guaranty association laws in most states, insurance companies can be assessed for amounts paid by guaranty funds for policyholder losses incurred by insolvent insurance companies. Most state insolvency or guaranty association laws, including Virginia's, currently provide for assessments based upon the amount of premiums received on insurance underwritten within such state (with a minimum amount payable where Mid-South is licensed even if no premium is received). Substantially all of Trigon's premiums are currently derived from insurance underwritten in Virginia.
Under the Virginia Life, Accident and Sickness Insurance Guaranty Association (the "Association") Act, assessments against insurance companies which issue policies of accident or sickness insurance, such as Trigon Insurance, are made retrospectively and are based (up to prescribed limits) upon the ratio of (i) the insurance company's premiums received in Virginia over the previous three calendar years on accident and sickness insurance, to (ii) the aggregate amount of premiums received by all assessed member insurance companies over such three calendar years on accident and sickness insurance. The guaranty fund and assessments made under the act are administered by the Association, which has its own board of directors selected by member insurers with the approval of the State Corporation Commission. An assessment may be abated or deferred by the Association if, in the opinion of the board, payment would endanger the ability of the member to fulfill its contractual obligations, but the other member insurers may be assessed for the amount of such abatement or deferral. Any such assessment paid by a member insurance company may be offset against its premium tax liability to the Commonwealth of Virginia in each succeeding year in an amount not to exceed 0.05 (one twentieth) of one percent of the member's direct gross premium income for the class of insurance for which the insurer is assessed. The amount and timing of any future assessments, however, cannot be reasonably estimated and are beyond the control of the Company. During 1997, legislation was enacted in Virginia that changed the methodology by which these amounts are offset against the premium tax liability. Any assessments issued after January 1, 1998 will be offset against the premium tax liability over the ten calendar years following the year of the payment, in amounts equal to ten percent of the amount paid.
VIRGINIA'S OPEN ENROLLMENT PROGRAM. The Commonwealth of Virginia has an open enrollment program pursuant to which Trigon Insurance is required to offer comprehensive accident and sickness insurance contracts to individuals without imposition of certain underwriting criteria that would deny coverage on the basis of medical condition, age or employment status. As an incentive for participating in the open enrollment program, Trigon Insurance pays Virginia premium tax of three-fourths of one percent (0.75%) on premiums received from individual accident and sickness insurance rather than the general Virginia premium tax of two and one fourth percent (2.25%). This general Virginia premium tax applies to accident and sickness insurance premiums received by Trigon Insurance from group business. Prior to January 1, 1998, policies issued to small employers were also part of the open enrollment program. Subsequent to health care reform legislation in 1997, all carriers offering coverage in the small group market are required to issue any policy in its small group market portfolio to any small employer that wants to purchase the product. To withdraw from the open enrollment program, Trigon Insurance would be required to give 24 months advance notice of withdrawal to the State Corporation Commission.
BANKRUPTCY AND INSOLVENCY. In the event of a default on any debt incurred by the Company or the bankruptcy of the Company, the creditors and stockholders of the Company would have no right to proceed against the assets of Trigon Insurance or any other subsidiary of the Company. If Trigon Insurance were subject to a rehabilitation or liquidation proceeding, such proceeding would be brought by the State Corporation Commission which would act as the receiver with respect to such insurance company's property and business. All creditors of Trigon Insurance, including, without limitation, members and, if applicable, the various state guaranty associations, would be entitled to payment in full from such assets before the Company, as a stockholder, would be entitled to receive any distributions therefrom.
THE BLUE CROSS BLUE SHIELD LICENSE
The Company and certain of its subsidiaries have the exclusive right to use certain Blue Cross and Blue Shield service marks and tradenames for all of their plans and products throughout Virginia other than a small portion of the northern Virginia suburbs adjacent to Washington, D.C. The license requires a fee to be paid to BCBSA equal to total association expenses allocated to members based upon enrollment and premium. BCBSA is a national trade association of Blue Cross and Blue Shield licensees, the primary function of which is to promote and preserve the integrity of the Blue Cross and Blue Shield name and service marks as well as provide certain coordination among plan and provider services. BCBSA has 52 primary licensee members, each of which holds exclusive rights to use the Blue Cross and/or Blue Shield name and service mark in specific geographic areas, subject to annual licensing fees and certain other guidelines. Each BCBSA licensee is an independent legal organization and is not responsible for obligations of other BCBSA member organizations. The Company has no right to use the Blue Cross and Blue Shield service marks and tradenames outside of its designated territory within the Commonwealth of Virginia.
Under the Company's license agreement with BCBSA, an institutional investor (generally defined as an entity identified in Rule 13d-1(b) (1) (ii) of the rules and regulations under the Securities Exchange Act of 1934 and which makes certifications required by item 10 of SEC Schedule 13G) may own up to 10% of the outstanding voting securities of the Company. All other stockholders are subject to a 5% ownership limitation. Ownership by any stockholder of voting securities in excess of such limits would subject the Company to automatic termination of its license.
The Company's Articles of Incorporation contain certain provisions which are intended to prevent any holder from acquiring shares in excess of the limits set forth in the Company's license agreement. However, there can be no assurance that a court would enforce these provisions or that if these provisions were not enforced that the Company would retain the license from BCBSA. If the BCBSA license were to be terminated, there would be a material adverse effect on the Company's business and operations, which the Company does not believe it can meaningfully quantify.
The license agreements between BCBSA and its licensees prohibit a licensee from entering into certain transactions which would result in an unlicensed entity obtaining control of the licensee or acquiring a substantial portion of the licensee's assets related to services provided under the Blue Cross or Blue Shield service marks. The license agreements also require that a licensee pay to BCBSA a specific amount upon termination of the license agreement, subject to certain limited exceptions. The amount payable upon termination of the license agreement is equal to $25 multiplied by the number of the licensee's members receiving products or services sold or administered under the
Blue Cross or Blue Shield service marks, subject to reduction to the extent the payment of such fee would cause such licensee to fall below certain capital requirements established by the BCBSA.
RATING
Trigon Insurance and HealthKeepers are each presently assigned a rating of "A" (Excellent) by A.M. Best Company. Mid-South, Trigon Health and Life, PHC and Priority are each presently assigned an A.M. Best rating of "A-" (Excellent). A.M. Best's ratings of "A" and "A-" are assigned to companies which have, on balance, excellent financial strength, operating performance and market profile when compared to the standards established by the A.M. Best Company. It is the opinion of A.M. Best Company that such companies have a strong ability to meet their ongoing obligations. Such ratings are not directed to the protection of investors and are subject to review and change over time.
EMPLOYEES
As of December 31, 1998, the Company had 3,740 full-time employees. The employees are primarily located in Virginia, with the majority of the Virginia employees in the cities of Richmond and Roanoke. Employees are also located in Illinois, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Washington D.C. and West Virginia. The Company believes that its relationship with its employees is good. No employees are subject to collective bargaining agreements.
EXECUTIVE OFFICERS
Age as of Name December 31, 1998 Position ---- ----------------- --------
Norwood H. Davis, Jr. 58 Chairman of the Board and Chief Executive Officer
Thomas G. Snead, Jr. 45 President and Chief Operating Officer
John C. Berry 61 Senior Vice President, Government and Individual Business Unit
William P. Bracciodieta, M.D. 53 Senior Vice President and Chief Medical Officer
Ralph T. Bullock, Jr. 50 Senior Vice President and Chief Information Officer
Thomas R. Byrd 41 Senior Vice President and Chief Financial Officer
James W. Copley, Jr. 46 Senior Vice President and Chief Investment Officer, Investment Division, Trigon Services, Inc.
Ellen C. Harrison 40 Senior Vice President, Health Maintenance Organization Operations
Kathy Ashby Merry 36 Senior Vice President, Member Services
Ronald M. Nash 61 Senior Vice President, Corporate Services
Paul F. Nezi 51 Senior Vice President, Marketing and Sales
Timothy P. Nolan 37 Senior Vice President, Business Integration
Age as of Name December 31, 1998 Position ---- ----------------- --------
Thomas A. Payne 54 Senior Vice President, Corporate Audit
Peter L. Perkins 41 Senior Vice President and Chief Actuary
J. Christopher Wiltshire 44 Senior Vice President, General Counsel and Corporate Secretary
For a listing of the positions held with the Company by each executive officer and other information, refer to page 58, "Officers," of Trigon Healthcare Inc.'s Annual Report to Shareholders, which is incorporated herein by reference.
SERVICE MARKS
The Company has registered and maintains several service marks, trademarks and tradenames at the federal level, in the Commonwealth of Virginia and in certain other states. "Trigon," "Keycare" and "HealthKeepers" are included among these marks. Although the Company considers its registered service marks, trademarks and tradenames important in the operation of its business, the business of the Company is not dependent on any individual service mark, trademark or tradename. For a discussion of the Company's license to use certain Blue Cross and Blue Shield service marks and tradenames, see "The Blue Cross Blue Shield License."
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. The Company desires to take advantage of these safe harbor provisions. Certain information contained in this Form 10-K is forward-looking within the meaning of the Act or Securities and Exchange Commission rules. Words such as expects, anticipates, intends, plans, believes, seeks or estimates, or variations of such words and similar expressions are also intended to identify forward-looking statements. These forward-looking statements are subject to significant uncertainties and contingencies, many of which are beyond the control of the Company. Set forth below are certain important factors that, in addition to general economic conditions and other factors, some of which are discussed elsewhere in this Form 10-K, may affect these forward-looking statements and the Company's business generally.
ESCALATING HEALTH CARE COSTS AND THE HEALTH CARE INDUSTRY. The Company's profitability depends in large part on accurately predicting and effectively managing health care costs. Predicting medical costs is difficult partially due to the variability of medical inflation. Trigon continually reviews and adjusts its premium and benefit structure to reflect its underlying claims experience and revised actuarial data; however, several factors could adversely affect the medical loss ratios. Certain of these factors, which include changes in health care practices, inflation, new technologies, major epidemics, natural disasters and malpractice litigation, are beyond any health plan's control and could adversely affect the Company's ability to accurately predict and effectively control health care costs.
Competitive price pressures in the health insurance and managed care industry, which generally result from the entry and exit of health care companies in the marketplace, historically have resulted in, or contributed to, pricing and profitability cycles. The extent to which recent structural changes in the managed health care and health insurance industry have altered cyclical patterns is uncertain. There can be no assurance, however, that a continuation of the typical cyclical pattern will not adversely affect the profitability of the Company in the next few years.
COMPETITION. The health care industry is highly competitive both in Virginia and in other states in the southeastern and mid-Atlantic United States into which the Company principally intends to expand. See "Competition." There is no assurance that the overall increased competition will not exert strong pressures upon
Trigon's profitability, its ability to increase enrollment, or its ability to successfully pursue growth in areas both within and outside of Virginia.
GOVERNMENT REGULATION. The Company and its subsidiaries are subject to federal and state regulation. See "Regulation." Regulatory initiatives may be undertaken in the future, either at the federal or state level, to engage in structural reform of the health care industry in order to reduce the escalation in health care costs or to make health care more accessible. Such reform, if it occurs, could adversely affect Trigon's results of operations or financial condition.
POTENTIAL RISKS ASSOCIATED WITH GROWTH THROUGH ACQUISITIONS. As a result of the expansion of managed care companies into Virginia and the southeastern and mid-Atlantic regions of the United States, the competition to purchase health care companies has intensified, which in many instances has resulted in significant increases in the costs of acquiring such companies, and which could affect the availability of attractive acquisition opportunities. In addition, the Company has no significant experience in expanding its managed health care business outside Virginia. There can be no assurance that the Company will successfully identify or complete acquisitions or that any acquisitions, if completed, will perform as expected or will contribute significant revenues or profits to the Company. The Company's ability to expand successfully outside of Virginia through acquisitions or otherwise may be adversely affected by its inability to use the Blue Cross and Blue Shield service marks and trademarks outside of the Company's licensed territory in Virginia, by the Company's lack of substantial market share or established provider networks outside of Virginia and by the presence of competitors with strong market positions in these areas.
CONCENTRATION OF BUSINESS IN VIRGINIA. While the Company's growth strategy includes expansion outside Virginia, for the foreseeable future a significant portion of the Company's revenues may be subject to economic factors specific to Virginia. Therefore, there can be no assurance that a downturn in the Virginia economy would not adversely affect the Company.
POTENTIAL LOSS OF BLUE CROSS AND BLUE SHIELD SERVICE MARKS AND TRADENAMES. Trigon and the BCBSA are parties to a license agreement pursuant to which the Company and certain of its subsidiaries have the exclusive right to use certain Blue Cross and Blue Shield service marks and tradenames for their products throughout Virginia other than certain northern Virginia suburbs adjacent to Washington, D.C. See "The Blue Cross Blue Shield License." If the BCBSA license were to be terminated, there would be a material adverse effect on the Company's business and operations, which the Company does not believe it can meaningfully quantify. To the extent that the Company continues to use the Blue Cross and Blue Shield service marks and tradenames in marketing its managed care products, there can be no assurance that any negative publicity concerning BCBSA and other BCBSA licenses will not adversely affect the sales of the Company's managed care products and the Company's operations.
Item 2.
Item 2. Properties
The Company is headquartered in Richmond, Virginia, where it owns a four-story building with 265,000 square feet. The Company also owns an office facility and warehouse in Roanoke, Virginia with 201,000 square feet and an office facility in Fayetteville, North Carolina with 71,000 square feet. The Company leases an additional 428,000 square feet at various other locations in Richmond, Virginia. The Company also leases space at two other facilities in Roanoke, Virginia comprising 52,000 square feet. These properties are primarily used by the health insurance segment for operations and for corporate administration.
The Company leases 73,000 square feet for regional offices throughout Virginia and 22,000 square feet for office space in Maryland, North Carolina, West Virginia, Pennsylvania and South Carolina.
Square footage utilized by segment as of December 31, 1998 was as follows: health insurance, 896,500; government programs, 60,900; investments, 3,700; and other reportable segments, 39,800. The remaining 111,100 square feet was used for corporate administration.
Item 3.
Item 3. Legal Proceedings
The Company is the defendant in one lawsuit that has been filed by a self-funded employer group in connection with the Company's past practices regarding provider discounts. The suit claims that the Company was obligated to credit the self-funded plan with the full amount of the discounts that the Company negotiated with facilities providing health care to members covered by the plan. The suit seeks an audit and unspecified compensatory, punitive and other damages. The Company is also presently the subject of four other claims by self-funded employer groups related to the Company's past practices regarding provider discounts. The Company is communicating with these groups, and lawsuits have not been filed in connection with these claims. Although the ultimate outcome of such claims and litigation cannot be estimated, the Company believes that the discount-related claims and litigation brought by these self-funded employer groups will not have a material adverse effect on the financial condition of the Company.
The Company and certain of its subsidiaries are involved in various other legal actions occurring in the normal course of their business. While the ultimate outcome of such litigation cannot be predicted with certainty, in the opinion of Company management, after consultation with counsel responsible for such litigation, the outcome of those actions is not expected to have a material adverse effect on the financial condition of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Refer to page 30, "Market Prices of Common Stock and Dividend Data," of Trigon Healthcare Inc.'s Annual Report to Shareholders, which is incorporated herein by reference.
Refer to "Part 1 - Business -- Regulation -- Insurance Holding Company Regulation" and "Part 1 - Business -- Regulation -- Restrictions on Dividends" for discussion of insurance holding company regulations and dividend restrictions. In addition, under the terms of the Company's $300 million revolving credit agreement, the Company may not pay dividends on the Company's common stock unless the aggregate of all dividends paid by the Company plus payments to purchase, redeem or otherwise acquire capital stock of the Company (other than the Commonwealth Payment) does not exceed the sum of (i) $10,000,000 plus (ii) 50% of the consolidated net income (or minus 100% of consolidated net loss) of the Company for the period from the effectiveness of the Demutualization through the end of the most recently completed fiscal quarter, plus (iii) an amount (not to exceed $50,000,000) equal to 50% of the cumulative cash dividends paid out of income of certain subsidiaries of the Company earned prior to January 1, 1997 and received by the Company after the date of the revolving credit agreement and before December 31, 1997.
Item 6.
Item 6. Selected Financial Data
Refer to pages 18 through 19, "Selected Consolidated Financial and Operating Data," of Trigon Healthcare Inc.'s Annual Report to Shareholders, which are incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Refer to pages 20 through 30, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of Trigon Healthcare Inc.'s Annual Report to Shareholders, which are incorporated herein by reference.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Refer to pages 29 through 30, "Quantitative And Qualitative Disclosures About Market Risk," included in "Management's Discussion and Analysis of Financial Condition and Results of Operations," of Trigon Healthcare Inc.'s Annual Report to Shareholders, which are incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data
Refer to pages 31 through 56, the Consolidated Financial Statements, page 57, "Independent Auditors' Report," and page 17, "Quarterly Financial Information," of Trigon Healthcare Inc.'s Annual Report to Shareholders, which are incorporated herein by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Refer to pages 1 through 3, "Election of Directors," and page 6, "Section 16(a) Beneficial Ownership Reporting Compliance," of the Company's definitive Proxy Statement dated March 29, 1999, which are incorporated herein by reference solely as they relate to the Directors of the Company.
Pursuant to General Instruction G(3) to Form 10-K, information as to executive officers of the Company is set forth in Part I of this Form 10-K. See "Part 1 - - Business -- Executive Officers."
Item 11.
Item 11. Executive Compensation
Refer to pages 6 through 11, "Compensation of Executive Officers," of the Company's definitive Proxy Statement dated March 29, 1999, which are incorporated herein by reference solely as they relate to this item.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Refer to pages 3 and 4, "Beneficial Ownership of Securities," of the Company's definitive Proxy Statement dated March 29, 1999, which are incorporated herein by reference solely as they relate to this item.
Item 13.
Item 13. Certain Relationships and Related Transactions
R. Gordon Smith, a director of the Company, is a partner of McGuire, Woods, Battle & Boothe, LLP, a law firm which serves as counsel to the Company and its subsidiaries.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as part of this report. 1. Consolidated Financial Statements from Trigon Healthcare Inc.'s Annual Report to Shareholders are incorporated herein by reference in Item 8: -- Consolidated Balance Sheets as of December 31, 1998 and 1997 (page 31) -- Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 (page 32) -- Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 (page 33) -- Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 (page 34)
-- Notes to Consolidated Financial Statements (pages 35 through 56) -- Independent Auditors' Report (page 57)
2. Financial statement schedules
Independent Auditors' Report on Financial Statement Schedule ......................(filed herein on page S-1) Schedule I - Condensed Financial Information of Registrant (parent only) as of December 31, 1998 and 1997 and for the year ended December 31, 1998 and for the period February 5, 1997 through December 31, 1997 ....................(filed herein on pages S-2 - S-6)
3. Exhibits. The following is a list of exhibits to this Form 10-K.
Exhibit Number Description
2 -- Amended and Restated Plan of Demutualization. (1) 3.1 -- Amended and Restated Articles of Incorporation of Trigon Healthcare, Inc. (1) 3.2 -- Amended and Restated Bylaws of Trigon Healthcare, Inc. (2) 3.3 -- Articles of Amendment to Amended and Restated Articles of Incorporation setting forth the designation, preferences and rights of Series A Junior Participating Preferred Stock of Trigon Healthcare, Inc. dated July 16, 1997. (4) 3.4 -- Amendment to the Amended and Restated Bylaws of Trigon Healthcare, Inc. 4 -- Form of Stock Certificate (other Instruments Defining the Rights of Security-Holders). (1) 4.1 -- Rights Agreement dated as of July 16, 1997 between Trigon Healthcare, Inc. and First Chicago Trust Company of New York, as Rights Agent. (4) 4.2 -- Form of Rights Certificate. (4) 10.1 -- License Agreement by and between the Blue Cross Blue Shield Association and the Company. (2) (a) Blue Cross license (b) Blue Shield license 10.2 -- Limited Fixed Return Plan for Certain Officers and Directors of Trigon Insurance Company. (1) * 10.4 -- Non-Contributory Retirement Program for Certain Employees of Trigon Insurance Company. (1) * 10.5 -- Amended and Restated Supplemental Executive Retirement Program for Certain Employees of Trigon Insurance Company dated as of October 1, 1998. * 10.6 -- Salary Deferral Plan for Norwood H. Davis, Jr. (1) * 10.7 -- Amended and Restated Employment Agreement dated September 16, 1998 by and between Trigon Insurance Company and Norwood H. Davis, Jr. (7) * 10.9 -- Amended and Restated Employees' Thrift Plan of Trigon Insurance Company dated as of October 1, 1998. * 10.10 -- Amended and Restated Trigon Insurance Company 401(k) Restoration Plan dated as of October 1, 1998. * 10.12 -- Form of Employment Agreement dated as of December 12, 1990 by and between Trigon Insurance Company and John C. Berry and certain other executive officers. (1) * 10.14 -- Credit Agreement dated as of February 5, 1997 among Trigon Healthcare, Inc., the banks party thereto and Morgan Guaranty Trust Company of New York, as Agent. (2) 10.15 -- 1997 Stock Incentive Plan. (6) * 10.16 -- Employee Stock Purchase Plan. (6) * 10.17 -- Non-Employee Directors Stock Incentive Plan. (6) * 10.18 -- Amendment to the License Agreement by and between the Blue Cross Blue Shield Association and the Company. (5) 10.19 -- Amendment to the Non-Contributory Retirement Program for Certain Employees of Trigon Insurance Company. (3) * 10.20 -- Form of Executive Continuity Agreement dated as of September 16, 1998 between Trigon Insurance Company and Thomas G. Snead, Jr. and certain other executive officers. (7) *
10.21 -- Form of Executive Continuity Agreement dated as of September 16, 1998 between Trigon Insurance Company and John C. Berry and certain other executive officers. (7) * 10.22 -- Amendment to the Non-Contributory Retirement Program for Certain Employees of Trigon Insurance Company (now to be known as) The Trigon Insurance Company Retirement Program dated as of October 1, 1998. * 10.23 -- Clarifying Amendment to the Non-Contributory Retirement Program for Certain Employees of Trigon Insurance Company (now to be known as) The Trigon Insurance Company Retirement Program dated as of October 1, 1998. * 11 -- Computation of per share earnings. Refer to page 51, "Note 15. "Net Income and Pro Forma Net Income Per Share," of Trigon Healthcare Inc.'s Annual Report to Shareholders, which is incorporated herein by reference. 13 -- Excerpts from the Company's Annual Report to Shareholders for the year ended December 31, 1998. 21 -- Subsidiaries of the Registrant. 23.1 -- Consent of KPMG LLP. 27 -- Financial Data Schedule.
(1)Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-1 (registration number 333-09773). (2)Incorporated by reference to exhibits filed with the Company's Form 10-K for the year ended December 31, 1996. (3)Incorporated by reference to exhibits filed with the Company's Form 10-K for the year ended December 31, 1997. (4)Incorporated by reference to exhibits filed with the Company's Form 8-A/A filed on July 16, 1997. (5)Incorporated by reference to exhibits filed with the Company's Form 10-Q for the period ended September 30, 1997. (6)Incorporated by reference to exhibits filed with the Company's Proxy Statement dated March 13, 1997. (7)Incorporated by reference to exhibits filed with the Company's Form 10-Q for the period ended September 30, 1998. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this Form 10-K.
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TRIGON HEALTHCARE, INC. Registrant
By: /s/ THOMAS R. BYRD ------------------ THOMAS R. BYRD
Title: SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Date: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ NORWOOD H. DAVIS, JR. Chairman (Principal Executive March 29, 1999 - ------------------------- Officer) NORWOOD H. DAVIS, JR.
/s/ THOMAS R. BYRD Senior Vice President and Chief March 29, 1999 - ------------------------- Financial Officer THOMAS R. BYRD (Principal Financial and Accounting Officer)
/s/ HUNTER B. ANDREWS Director March 25, 1999 - ------------------------- HUNTER B. ANDREWS, ESQ.
/s/ LENOX D. BAKER, JR., M.D. Director March 28, 1999 - ----------------------------- LENOX D. BAKER, JR., M.D.
/s/ JAMES. K. CANDLER Director March 24, 1999 - ------------------------------ JAMES K. CANDLER
/s/ ROBERT M. FREEMAN Director March 25, 1999 - ------------------------------ ROBERT M. FREEMAN
/s/ WILLIAM R. HARVEY Director March 30, 1999 - ------------------------------ WILLIAM R. HARVEY, Ph.D.
/s/ GARY A. JOBSON Director March 26, 1999 - ------------------------------ GARY A. JOBSON
SIGNATURE TITLE DATE
/s/ DONALD B. NOLAN Director March 24, 1999 - ------------------------------- DONALD B. NOLAN, M.D.
/s/ WILLIAM N. POWELL Director March 26, 1999 - ------------------------------- WILLIAM N. POWELL
/s/ J. CARSON QUARLES Director March 24, 1999 - ------------------------------- J. CARSON QUARLES
/s/ R. GORDON SMITH Director March 30, 1999 - ------------------------------- R. GORDON SMITH, ESQ.
/s/ HUBERT R. STALLARD Director March 25, 1999 - ------------------------------- HUBERT R. STALLARD
/s/ JACKIE M. WARD Director March 26, 1999 - ------------------------------- JACKIE M. WARD
/s/ STIRLING L. WILLIAMSON, JR. Director March 27, 1999 - ------------------------------- STIRLING L. WILLIAMSON, JR.
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors Trigon Healthcare, Inc.:
Over date of February 16, 1999, we reported on the consolidated balance sheets of Trigon Healthcare, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule included in this annual report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Richmond, Virginia February 16, 1999
SCHEDULE I
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
Balance Sheets December 31, 1998 and 1997 (in thousands)
1998 1997 ------------ ------------ ASSETS
Current assets Cash $ 12 1 Investment securities, at estimated fair value 259,514 81,364 Other receivables 3,873 2,569 Other 29 - ------------ ------------
Total current assets 263,428 83,934 ------------ ------------
Investment in subsidiaries 895,690 960,677 Deferred income taxes 1,240 - Other assets 126 166 ------------ ------------
Total assets $ 1,160,484 1,044,777 ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities Accounts payable and accrued expenses $ 1,296 562 Deferred income taxes 512 389 Income taxes payable 1,701 - Payable for investment securities 672 - Payable to affiliates 79 89 ------------ ------------
Total current liabilities 4,260 1,040 ------------ ------------
Long-term debt 85,000 85,000 ------------ ------------
Total liabilities 89,260 86,040 ------------ ------------
SHAREHOLDERS' EQUITY
Common stock, $0.01 par, 42,300 shares issued and outstanding 423 423 Capital in excess of par 839,187 842,035 Retained earnings 202,554 78,982 Accumulated other comprehensive income 29,060 37,297 ------------ ------------
Total shareholders' equity 1,071,224 958,737
Commitments and contingencies ------------ ------------
Total liabilities and shareholders' equity $ 1,160,484 1,044,777 ============ ============
See accompanying independent auditors' report and notes to condensed financial information.
S-2
SCHEDULE I
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY), CONTINUED
Statements of Operations For the year ended December 31, 1998 and for the period February 5, 1997 through December 31, 1997 (in thousands)
1998 1997 ------------ ------------ REVENUES
Investment Income $ 12,590 4,358 Net realized gains (losses) 614 (105) Cash dividends from subsidiaries 200,000 50,000 ------------ ------------
Total revenues 213,204 54,253
EXPENSES Selling, general and administrative expenses 2,359 1,742 Interest expense 5,291 4,601 ------------ ------------
Total expenses 7,650 6,343 ------------ ------------
Income before income taxes and equity in undistributed net income of subsidiaries 205,554 47,910
Income tax expenses (benefit) 941 (868) ------------ ------------
Income before equity in undistributed net income of subsidiaries 204,613 48,778
Equity in undistributed net income of subsidiaries after cash dividends (81,041) 30,204 ------------ ------------
Net income $ 123,572 78,982 ============ ============
See accompanying independent auditors' report and notes to condensed financial information.
S-3
SCHEDULE I
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY), CONTINUED
Statements of Changes in Shareholders' Equity For the year ended December 31, 1998 and for the period February 5, 1997 through December 31, 1997 (in thousands)
See accompanying independent auditors' report and notes to condensed financial information.
S-4
SCHEDULE I
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY), CONTINUED
Statements of Cash Flows For the year ended December 31, 1998 and for the period February 5, 1997 through December 31, 1997 (in thousands)
1998 1997 ------------ ------------
Net income $ 123,572 78,982 Adjustments to reconcile net income to net cash provided by (used in) operating activities Accretion of discounts and amortization of premiums, net (845) (129) Undistributed earnings of subsidiaries 81,041 (30,204) Increase in other receivables (1,254) (2,569) (Increase) decrease in other assets 11 (166) Increase in accounts payable and accrued expenses 734 562 Increase in income taxes payable 1,701 - Change in deferred income taxes (1,293) 53 Increase (decrease) in obligation for Commonwealth Payment - (175,000) Increase (decrease) in payable to affiliates (10) 89 Realized investment (gains) losses, net (614) 105 ------------ ------------
Net cash provided by (used in) operating activities 203,043 (128,277) ------------ ------------
Cash flows from investing activities Investment securities purchased (492,562) (214,562) Proceeds from investment securities sold 227,515 77,002 Maturities of fixed income securities 89,481 57,180 Investment in subsidiary (25,000) - ------------ ------------
Net cash used by investing activities (200,566) (80,380) ------------ ------------
Cash flows from financing activities Proceeds from long-term debt - 85,000 Payments to members in lieu of common stock pursuant to Plan of Demutualization (690) (91,144) Net proceeds from issuance of common stock - 215,205 Purchase and reissuance of common stock under employee benefit and stock option plans (1,307) (144) Common stock purchased by grantor trusts (469) (259) ------------ ------------
Net cash provided by (used in) financing activities (2,466) 208,658 ------------ ------------
Increase in cash 11 1 Cash - beginning of year 1 - ------------ ------------ Cash - end of year $ 12 1 ============ ============
Cash paid during the year for Interest $ 5,006 4,344 ============ ============ Income taxes 525 - ============ ============
See accompanying independent auditors' report and notes to condensed financial information.
S-5
SCHEDULE I
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT ONLY), CONTINUED
Notes to Condensed Financial Information of Registrant (Parent Only)
The condensed financial information provided should be read in conjunction with the Consolidated Financial Statements of Trigon Healthcare, Inc. ("Registrant") incorporated by reference in Part II, Section 8 of this Form 10-K and the following notes:
(a) Basis of Presentation
The accompanying condensed financial information reflects the financial position as of December 31, 1998 and 1997 and the results of operations, changes in shareholders' equity and cash flows for the year ended December 31, 1998 and for the period after the Demutualization and Initial Public Offering, February 5, 1997 through December 31, 1997. The Registrant had no operations prior to February 5, 1997, the date it became the holding company. Refer to note 2 to the consolidated financial statements of the Registrant for details regarding the Demutualization and Initial Public Offering.
Certain prior year amounts have been reclassified to conform to the current year presentation.
(b) Long-Term Debt
The information about long-term debt contained in note 12 of the notes to the consolidated financial statements of the Registrant is incorporated herein by reference.
(c) Cash and Stock Dividends
During 1998 and 1997, a subsidiary of the Registrant, Trigon Insurance Company, received permission from the Virginia Bureau of Insurance to pay dividends to the Registrant of $227.5 million and $238.7 million, respectively. The 1998 dividend was effected July 1, 1998 and included $200.0 million of cash and $27.5 million of stock of a wholly owned subsidiary. The 1997 dividend was effected July 31, 1997 and consisted of $50.0 million in cash and $188.7 million in stock of a wholly owned subsidiary.
(d) Investment in Subsidiary
The Registrant made a $25,000,000 capital contribution to its subsidiary, Monticello Service Agency, Inc. (MSA) during 1998. MSA immediately made a $25,000,000 capital contribution to its subsidiary, Trigon Health and Life Insurance Company.
(e) Comprehensive Income
The information about comprehensive income contained in note 16 of the notes to the consolidated financial statements of the Registrant is incorporated herein by reference.
S-6
EXHIBIT INDEX
Exhibit Number Description
3.4 -- Amendment to the Amended and Restated Bylaws of Trigon Healthcare, Inc.
10.5 -- Amended and Restated Supplemental Executive Retirement Program for Certain Employees of Trigon Insurance Company dated as of October 1, 1998.
10.9 -- Amended and Restated Employees' Thrift Plan of Trigon Insurance Company dated as of October 1, 1998.
10.10 -- Amended and Restated Trigon Insurance Company 401(k) Restoration Plan dated as of October 1, 1998.
10.22 -- Amendment to the Non-Contributory Retirement Program for Certain Employees of Trigon Insurance Company (now to be known as) The Trigon Insurance Company Retirement Program dated as of October 1, 1998.
10.23 -- Clarifying Amendment to the Non-Contributory Retirement Program for Certain Employees of Trigon Insurance Company (now to be known as) The Trigon Insurance Company Retirement Program dated as of October 1, 1998.
13 -- Excerpts from the Company's Annual Report to Shareholders for the year ended December 31, 1998.
21 -- Subsidiaries of the Registrant.
23.1 -- Consent of KPMG LLP.
27 -- Financial Data Schedule.