March 1, 2010

RSS News Feed | | Visit our YouTube channel

Blue Cross Blue Shield of Michigan reports underwriting losses of $257 million in 2009, driven mostly by individual policies

Strong recovery by investment markets and aggressive action by company on investment management and cost control help offset underwriting losses

DETROIT — Blue Cross Blue Shield of Michigan today filed financial statements for 2009 that show a $257 million net underwriting loss on a SAP basis, the method of accounting required by state regulators.

Careful management of its investment portfolio helped the company avoid a net income loss. Investment returns of $241.5 million contributed to a positive net income of $12 million.

"Blue Cross is doing everything within our business ability to right the ship through difficult economic times," said Daniel J. Loepp, BCBSM president and CEO. "We are cutting our own costs, responsibly managing our investment portfolio and engaging with providers to address the cost of health care by improving quality. Our financial position in 2009 was sustained through a very determined effort to manage our investment returns. The investment markets cannot be expected to compensate every year for our losses on health care products offered in a broken individual market that desperately needs the attention of policymakers."

Problems Continue in the Individual Health Insurance Market

For BCBSM, the state's broken regulatory system will continue to drag down financial performance in the individual market until a fair and balanced system is put in place. The current system allows out-of-state for-profit insurers and nonprofit HMOs to reject unhealthier and costlier-to-insure applicants in the individual insurance market. BCBSM accepts all applicants, regardless of their condition or cost. BCBSM had a $280 million underwriting loss in its individual lines of business in 2009, including $94 million in its individual under-age-65 products and $186 million in Medicare Supplemental (Medigap).

BCBSM's Medigap $186 million underwriting loss is the equivalent of a state-imposed assessment in 2009 which BCBSM used to discount Medigap premiums. The discount is twice the value of the company's nonprofit state tax-exemption of $82 million. The company is concerned that the assessment amount, which has been set by the state, is unsustainable over time as the population ages and the cost-of-living increases for low-income seniors.

"Our biggest financial challenge lies within an antiquated, 30-year-old regulatory system in Michigan," said Mark Bartlett, BCBSM executive vice president and CFO. "We want to sustain affordable, quality coverage for people. But we need reform of the insurance market to help avoid more pressure on consumers as our losses in the individual market continue as the number of people looking for coverage in the individual market grows in Michigan."

Investment Returns Outperform Market Indexes, Help Stabilize RBC

BCBSM made a concerted effort to prevent further deterioration of its Risk-Based Capital (RBC) ratio, which is the measure established by the National Association of Insurance Commissioners to measure the amount of capital needed to operate a company, based on its size and business risk. BCBSM's RBC was stable—slightly declining to 650 percent in 2009 compared to 658 percent in 2008. BCBSM was able to maintain its RBC, thanks to out-sized investment returns. The maximum level for BCBSM reserves under state law is 1000 percent RBC.

BCBSM's return rate on its investments was 14.5 percent in 2009, which was more than three percent greater than the targeted capital market benchmarks of 11.4 percent. The results were outstanding, especially since BCBSM maintains a conservative investment strategy. More than 80 percent of investments are in fixed income securities.

The company made the right calls on key investments, including investing more in corporate bonds, which performed the best, and less in government securities which under-performed. The improvement included net realized gains of $46.9 million and investment income of $194.6 million.

The same level of investment returns is not expected to be obtainable in 2010 because of the historical rebound in the capital market in 2009 from 2008 will not repeat in 2010.

Other Results

Revenue grew only slightly in 2009. The company's total consolidated revenue under GAAP in 2009 was $21.6 billion in premiums and premium equivalents that include both fully-insured and self funded business, an increase from $21.2 billion in 2008. GAAP revenue includes income generated from insurance premiums and premium equivalents.
BCBSM is facing the challenges of a distressed economy which is having an impact on its membership. In 2009 BCBSM experienced a membership loss of 235,892 or six percent, driven by shrinking workforces in the automotive sector and in other groups it insures. The numbers include Blue Care Network (BCN). Total combined membership of BCBSM and BCN dropped to 4,462,600 members at year-end 2009 from 4,698,492 members at year-end 2008.
BCBSM took purposeful actions in 2009 to introduce better and far more efficient ways of doing business throughout the company and implemented a voluntary severance program that reduced its workforce by approximately 1,000 positions or 14 percent, which avoided massive involuntary layoffs.
Total executive compensation for BCBSM top executive group fell in 2009 from 2008.

"We know our members are expecting us to manage the business well and we are doing just that," Loepp said. "For instance, we have introduced products that reward people for following a healthy lifestyle and are working more closely than ever with doctors and hospitals. We want to continue in our mission to provide access to quality health care in our state and our financials play a role in enabling us to continue our commitment. We need to maintain our financial strength to fulfill our unique mission to protect the vulnerable and provide access to affordable health care coverage."

Blue Cross Blue Shield of Michigan is a nonprofit corporation and an independent licensee of the Blue Cross and Blue Shield Association.

Editor's note: BCBSM made a change this year to its news release to use SAP (Statutory Accounting Principles), rather than GAAP (Generally Accepted Accounting Principles), because SAP is used by state regulators. GAAP uses a different set of accounting standards and criteria. Both GAAP and SAP are used by BCBSM and independently audited.

# # #