Pittsburgh-based Highmark Inc. recorded more than $15 billion in 2012 revenues, but the company's net income slid last year and will continue to be weak in the years ahead, the health insurer's chief financial officer said Wednesday.
In its annual financial update, the insurer also reported its base of policyholders remained stable, despite a bruising battle for customers with UPMC Health Plan, Aetna and other health insurers over the last few years.
Even with rough waters ahead and behind, "Highmark had a very good year in 2012," said Nanette DeTurk, executive vice president and chief financial officer, in a telephone news conference.
"We were quite pleased in that we retained the vast majority of our membership," she said. Highmark and rival UPMC continue to jockey for position in preparation for Jan. 1, 2015, the day when the business relationship between the two expires and most UPMC doctors and hospitals would be "out-of-network" for Highmark customers, presuming no contract renewal.
Net income was down slightly -- from $444.7 million in 2011 to $432.3 million in 2012 -- but the 2012 figure includes a one-time boost from assets absorbed when Highmark acquired Blue Cross Blue Shield of Delaware.
With the Delaware company's contribution removed from the equation, Highmark's 2012 net income was $246.5 million, according to the financial synopsis. Much of that income was driven by the company's three main subsidiaries -- vision, dental and reinsurance units -- which, together, had net income of $193.6 million.
Which means that net income from company's mainline insurance business was minimal, and it's a trend that will continue.
"I think you are going to see [much] lower margins in the health care business" in 2013 and 2014, Ms. DeTurk said, thanks to the unpredictability of the federal health care overhaul and the local competition for commercial customers.
Highmark saw a big jump in net investment income, to $302.4 million in 2012 from $148.1 million the year before.
The insurer says it retained "more than 95 percent of its customers" -- it used the same 95 percent retention figure in last year's financial report -- in the large and mid-sized group markets, and grew its national membership base by 75,000 members.
Highmark and its affiliated companies, including Highmark Blue Cross Blue Shield West Virginia and the new Delaware acquisition, had 5.3 million health care members at the end of 2012.
In the Western Pennsylvania region, the company's core market, Highmark reported serving 3.2 million health care customers at the end of 2012, with an additional 1.1 million in central Pennsylvania and the Lehigh Valley.
Its vision coverage subsidiary, which has a growing U.S. footprint, had nearly 18 million insured customers in 2012, and its dental unit is now the sixth largest in the country, Highmark said. But the dental unit also had a weaker performance in 2012 than in 2011, with net income at United Concordia Co. dropping to $68.1 million from $89.7 million.
Much of that drop, Ms. DeTurk said, came because United Concordia lost a roughly $3 billion federal contract to manage dental benefits for families of U.S. soldiers. The contract decision was made in 2011, but the losses weren't felt until 2012.
The nonprofit's "surplus" grew slightly, from $4.1 billion in 2011 to $4.14 billion in 2012, and total revenues grew to $15.16 billion from $14.8 billion. That makes Highmark the fourth-largest company headquartered in the Pittsburgh area, behind the publicly traded U.S. Steel ($19.3 billion in 2012 revenues) and just behind PNC Financial Services ($15.5 billion) and PPG Industries ($15.2 billion).
"The results have been pretty resilient, given the market there," said Steve Zaharuk, senior vice president of Moody's Investors Service's U.S. insurance division. "Better than we expected."
Like Ms. DeTurk, Mr. Zaharuk said uncertainty lay ahead for Highmark and all health carriers, but he also said that he now expects the fallout from the Affordable Care Act will be "less [negative] than we previously anticipated" for insurers.
As for possible execution missteps related to Highmark's pending acquisition of West Penn Allegheny Health System, "we probably won't see the impact of that until late 2014 or even 2015."
On Tuesday, the day before the financial report was released, New Jersey-based insurance rating company A.M. Best Co. downgraded Highmark's financial strength ratings (from A to A-minus), and also downgraded the insurance company's debt ratings to "bbb-plus" from "a-minus."
The downgrades were issued, according to A.M. Best, because of "pricing pressure, increased expenses for operational changes related to health care reform, pressure on government program funding and expenditures for the organization's integrated delivery system development."
Ms. DeTurk said, "We are not concerned with this slight downgrade, [and] we are in a good financial position to execute" the company's hospital network strategy.
Highmark is the biggest health insurer in Pennsylvania, and one of the 10 largest health insurers in the country.
Bill Toland: email@example.com or 412-263-2625.