Health insurer grew stronger in 2007
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Highmark Inc.'s ascension of Pittsburgh's corporate ladder continued during 2007, with the nonprofit health insurer hitting $11.9 billion in operating revenue and $12.4 billion in total revenue, more than any company headquartered here except U.S. Steel, and nearly twice as much as rival UPMC.
The company, a Blue Cross Blue Shield insurer, continues to grow on strong performances from its for-profit subsidiaries. Davis Vision and two other eye-care subsidiaries, for example, recorded $1 billion in combined income for the first time, and doubled their net profits. United Concordia, the dental subsidiary, grew both in membership, to 7.6 million customers, and revenues, to $1.3 billion in 2007.
Highmark's surplus grew to $3.5 billion.
However, the company's revenue growth, about 10 percent, was not complemented by a similar growth in net profits, which dropped from $398.3 million in 2006 to $375.4 million across the company. Yesterday, when it released the figures publicly, Highmark said the company's drop in income was caused by smaller gains in its main health-care business, coupled with claims against the company growing to $9 billion in 2007, up from $7.99 billion in 2006.
Nanette DeTurk, Highmark's chief financial officer, said the drop was to some degree intentional, as Highmark took its foot off the accelerator after aggressive showings in net income in 2005 and 2006.
"It was a trend that we had expected when we built the 2007 plan," she said. We forecast "lower margins on the health care in '07 because business was so good in 2006 and 2005."
Insurance industry analyst Steve Zaharuk, a vice president with Moody's Investors Services, said Highmark was caught off guard a bit by increased utilization of insurance benefits, citing the billion-dollar increase in claims costs.
"It was a little disappointing when you peel back the onion a bit," he said. "They missed the utilization [forecast] ... Their medical loss ratio went up." ("Medical loss ratio" is a calculation of total premium revenue lost to clinical services.)
The increased utilization of insurance coverage and prescription benefits has been reflected in recent premium prices, said Rich Klavon, vice president with SMC Business Councils' insurance arm.
"All the trends went up this year," he said. "Premium increases reflect that."
Industry trends -- not just at Highmark -- are pointing to another round of premium increases in the summer: WellPoint, a multistate health insurer, three weeks ago issued a revision to its expected per-share earnings. Higher medical costs and lower-than-hoped full coverage enrollment translated into a share income between $5.76 and $6.01, down from a previous forecast of $6.41 per share.
The same week, the same thing happened to Humana, which cut its financial outlook after having banked -- wrongly -- that its customers would be using more expensive medication last year. The insurer revised its first-quarter earnings to a range of 44 cents to 46 cents per share, below the forecast of 80 cents to 85 cents.
"Everybody's biting their fingernails to see what the [July renewal rates] are," hoping for single digits, said Mr. Klavon of SMC. "January was not a good renewal cycle."
That's because Highmark may be resetting itself after a few years of aggressive (meaning lower) pricing, meant to fortify its market share in Western Pennsylvania, and eliciting competitive prices from HealthAmerica and UPMC Health Plan, said David Straight, president of Benefits Network, a consulting firm in Franklin Park. That meant more comfortable premium increases for businesses, a fact underscored by a March report from Cowden Associated Inc., which said average renewal rate increases have been in the single digits for three years.
But now, "they're being a little bit more conservative in their pricing," he said. "The shift is a little bit away from market share growth and tailored toward profitability."
They may need that extra cushion in the near future if the state should green-light the blockbuster merger of Highmark and Philadelphia's Independence Blue Cross, which would create a $22 billion company.
"We know that IBC is capitalized at a little lower level than Highmark," said Standard & Poor's insurance ratings analyst Shellie Stoddard. "They may want to raise their earnings [this year] just to offset that."
Highmark's pretax return on revenue, she said, is on the low end for an A-rated company. But otherwise, "the balance sheets among most of these Blues are very strong."
The biggest, and most pleasant, surprise may have come by way of Highmark's growing investment portfolio. Despite an up-and-down year on Wall Street, Highmark had a better-than-expected showing, with $399 million in investment income -- up 36 percent over the $294.3 million in 2006 investment revenue. Ms. DeTurk said the good showing was caused by a reshuffling of investment assets, creating a better mix of securities, bonds and international investments. Highmark had projected investment growth of $10 million to $20 million, and it ended up with more than $100 million.
In all, the report paints a portrait of a company that is healthy in all aspects, with revenues growing steadily -- operating revenue of $7.4 billion in 2002, $8.1 billion in 2003, $8.9 billion in 2004, $9.5 billion in 2005, finally topping $10 billion in 2006. The "lean" years ($83.4 million in net losses in 2002, for example) seem over, and Highmark doesn't expect any costly acquisitions this year, like the 2006 purchase of Texas-based Eye Care Centers of America, a 400-store chain.
Aside from last year's merger proposal, 2007 was, financially speaking, "a fairly routine year," said Ms. DeTurk.
Surplus growth is becoming a routine for Highmark, too.
The surplus, a source of controversy over the years as critics say excessive Blues surpluses should either be returned to policyholders or funneled into social mission programs for the under- and uninsured, now stands at $3.5 billion, 734 percent of Highmark's risk-based capital. (Risk-based capital is a measure of the money an insurer might need on hand to protect itself from insolvency in the face of unforeseen claims.)
That's a shade under the 750 percent cap that the state Department of Insurance set for Highmark's surplus in 2005. Anything beyond that might be considered excessive by the state, and could require Highmark to spend some of its surplus.
Highmark, in the months leading to the Insurance Department decision, had sought a surplus-to-risk cap of 950 percent. Meanwhile, critics including the National Association of Insurance Commissioners have said that insurer surpluses exceeding 250 percent of risk-based capital are troubling.
In its statement, Highmark said it spent $137 million in 2007 on social mission programs. It paid $184.4 million in income taxes in 2007, down from $215 million the year before because its pretax income was lower in 2007 than in 2006.
And it noted that, despite its surplus, its profit margin is at 3.1 percent, trim compared with the margins of national competitors like Aetna, Cigna and WellPoint.
Total membership, across the state and in West Virginia, was 4.6 million at the end of 2007.
First Published April 3, 2008 12:00 am