UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from .................. to ...............
Commission File Number: 001-12617
Trigon Healthcare, Inc.
(Exact name of registrant as specified in its charter)
Virginia 54-1773225
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2015 Staples Mill Road, Richmond, VA 23230
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (804) 354-7000
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [x] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Title of each class Outstanding at November 9, 1999
------------------- -------------------------------
Class A Common Stock, $0.01 par value 39,265,922 shares
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
THIRD QUARTER 1999 FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 1
Consolidated Statements of Operations for the Three Months
and Nine Months Ended September 30, 1999 and 1998 2
Consolidated Statements of Changes in Shareholders' Equity for the
Three Months and Nine Months Ended September 30, 1999 and 1998 3
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22-23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23-24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
--------------- --------------
<S> <C>
Assets
Current assets
Cash $ 11,219 7,500
Investment securities, at estimated fair value 1,781,167 1,582,522
Premiums and other receivables 421,122 378,436
Deferred income taxes 24,395 -
Other 14,049 10,891
--------------- --------------
Total current assets 2,251,952 1,979,349
Property and equipment, net 51,674 47,890
Deferred income taxes 74,729 55,841
Goodwill and other intangibles, net 15,124 62,999
Restricted investments, at estimated fair value 9,963 10,347
Other assets 9,078 17,799
--------------- --------------
Total assets $ 2,412,520 2,174,225
=============== ==============
Liabilities and Shareholders' Equity
Current liabilities
Medical and other benefits payable $ 543,064 468,455
Unearned premiums 120,809 99,464
Accounts payable and accrued expenses 67,390 67,971
Deferred income taxes - 8,022
Other liabilities 330,676 231,151
--------------- --------------
Total current liabilities 1,061,939 875,063
Obligations for employee benefits, noncurrent 71,110 55,022
Medical and other benefits payable, noncurrent 63,487 75,212
Long-term debt 249,339 89,339
Minority interest in subsidiary 9,791 8,365
--------------- --------------
Total liabilities 1,455,666 1,103,001
--------------- --------------
Shareholders' equity
Common stock 405 423
Capital in excess of par 837,343 839,187
Retained earnings 129,614 202,554
Unearned compensation (2,250) -
Accumulated other comprehensive income (loss) (note 6) (8,258) 29,060
--------------- --------------
Total shareholders' equity 956,854 1,071,224
Commitments and contingencies (note 7)
--------------- --------------
Total liabilities and shareholders' equity $ 2,412,520 2,174,225
=============== ==============
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months and nine months ended September 30, 1999 and 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C>
Revenues
Premium and fee revenues
Commercial $ 429,079 385,998 1,246,639 1,137,119
Federal Employee Program 108,374 100,673 322,666 303,018
Amounts attributable to self-funded arrangements 305,069 272,691 900,865 814,922
Less: amounts attributable to claims under
self-funded arrangements (270,685) (243,276) (797,397) (732,960)
-------- -------- -------- --------
571,837 516,086 1,672,773 1,522,099
Investment income 25,457 22,182 70,859 64,689
Net realized gains (losses) (12,872) 541 (26,981) 34,760
Other revenues 5,985 6,197 18,158 17,514
------- ------- --------- ---------
Total revenues 590,407 545,006 1,734,809 1,639,062
Expenses
Medical and other benefit costs
Commercial (note 8) 368,672 316,641 1,039,883 942,449
Federal Employee Program 103,615 96,441 308,215 289,315
--------- ------- --------- ---------
472,287 413,082 1,348,098 1,231,764
Selling, general and administrative expenses (note 8) 173,500 99,421 392,780 288,722
Interest expense 2,281 1,349 4,658 4,022
--------- ------- --------- ---------
Total expenses 648,068 513,852 1,745,536 1,524,508
--------- ------- --------- ---------
Income (loss) before income taxes and minority interest (57,661) 31,154 (10,727) 114,554
Income tax expense (benefit) (20,956) 10,066 (5,415) 37,763
--------- ------ ------ ------
Income (loss) before minority interest (36,705) 21,088 (5,312) 76,791
Minority interest 847 875 1,859 1,818
--------- ------ ------ ------
Net income (loss) $ (37,552) 20,213 (7,171) 74,973
========== ====== ====== ======
Earnings (losses) per share (note 5)
Basic $ (0.91) 0.48 (0.17) 1.77
========== ==== ===== ====
Diluted $ (0.91) 0.47 (0.17) 1.75
========== ==== ===== ====
Weighted average number of common shares outstanding
Basic 41,168 42,300 41,691 42,300
====== ====== ====== ======
Diluted 41,168 42,735 41,691 42,735
====== ====== ====== ======
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
For the three months and nine months ended September 30, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
1999 1998
--------------- --------------
<S> <C>
Balance at July 1 $ 1,051,966 1,010,905
Net income (loss) (37,552) 20,213
Net unrealized gains (losses) on investment
securities, net of income taxes (11,640) 5,795
--------------- --------------
Comprehensive income (loss) (49,192) 26,008
--------------- --------------
Purchase and reissuance of common stock under employee
benefit plans, including tax benefits and net of amortization 128 (164)
Change in common stock held by consolidated grantor trusts (231) (227)
Purchase and retirement of common stock (45,817) -
--------------- --------------
Balance at September 30 $ 956,854 1,036,522
=============== ==============
Balance at January 1 $ 1,071,224 958,737
Net income (loss) (7,171) 74,973
Net unrealized gains (losses) on investment
securities, net of income taxes (37,318) 5,135
--------------- --------------
Comprehensive income (loss) (44,489) 80,108
--------------- --------------
Adjustment to cash payments to eligible policyholders in
lieu of common stock in the Demutualization - (705)
Purchase and reissuance of common stock under employee
benefit plans, including tax benefits and net of amortization (3,092) (937)
Change in common stock held by consolidated grantor trusts (1,001) (681)
Purchase and retirement of common stock (65,788) -
--------------- --------------
Balance at September 30 $ 956,854 1,036,522
=============== ==============
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended September 30, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------
1999 1998
-------------- ---------------
<S> <C>
Net income (loss) $ (7,171) 74,973
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization 14,639 13,220
Write-off of subsidiary goodwill and other intangibles 55,927 -
Amortization of unearned compensation 706 -
Accretion of discounts and amortization of premiums, net (10,012) (17,304)
Change in allowance for doubtful accounts receivable 2,087 (1,045)
Increase in premiums and other receivables (24,953) (22,858)
Increase in other assets (8,656) (7,966)
Increase in medical and other benefits payable 62,884 60,408
Increase in unearned premiums 21,345 8,645
Increase (decrease) in accounts payable and accrued expenses (581) 10,826
Increase in other liabilities 2,318 21,553
Change in deferred income taxes (31,211) (3,158)
Increase in minority interest 1,857 1,818
Increase in obligations for employee benefits 16,088 10,111
(Gain) loss on disposal of property and equipment and other assets 131 (26)
Net realized (gains) losses on investment securities 26,981 (34,760)
-------------- ---------------
Net cash provided by operating activities 122,379 114,437
-------------- ---------------
Cash flows from investing activities
Proceeds from sale of property and equipment and other assets 255 101
Capital expenditures (14,183) (12,299)
Investment securities purchased (3,424,223) (2,745,408)
Proceeds from investment securities sold 2,370,677 2,021,235
Maturities of fixed income securities 840,045 629,608
-------------- ---------------
Net cash used in investing activities (227,429) (106,763)
-------------- ---------------
Cash flows from financing activities
Payments on long-term debt - (808)
Proceeds from long-term debt 160,000 -
Payments to members in lieu of common stock
pursuant to Plan of Demutualization - (705)
Purchase and reissuance of common stock under employee
benefit plans, including tax benefits (3,798) (937)
Change in common stock purchased by consolidated grantor trusts (1,001) (681)
Purchase and retirement of common stock (65,788) -
Change in outstanding checks in excess of bank balance 19,356 (5,586)
-------------- ---------------
Net cash provided by (used in) financing activities 108,769 (8,717)
-------------- ---------------
Net increase (decrease) in cash 3,719 (1,043)
Cash - beginning of period 7,500 7,010
-------------- ---------------
Cash - end of period $ 11,219 5,967
============== ===============
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
TRIGON HEALTHCARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements prepared by Trigon
Healthcare, Inc. and its subsidiaries (collectively, "Trigon" or the
"Company") are unaudited, except for the balance sheet information as of
December 31, 1998, which is derived from the Company's audited consolidated
financial statements, pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, the consolidated financial statements
do not include all of the information and the footnotes required by generally
accepted accounting principles for complete financial statements. These
consolidated interim financial statements should be read in conjunction with
the audited consolidated financial statements included in the Company's
annual report on Form 10-K for the year ended December 31, 1998.
In the opinion of management, all adjustments, consisting of normal recurring
adjustments and a charge related to a subsidiary discussed in note 8,
necessary for a fair presentation of such consolidated financial statements
have been included. The results of operations for the three months and nine
months ended September 30,1999 are not necessarily indicative of the results
for the full year.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
2. LONG TERM DEBT
The Company has a $300 million revolving credit agreement with a syndicate of
banks, which expires February 2002. The credit agreement provides for various
borrowing options and rates and requires the Company to pay a facility fee on
a quarterly basis. The credit agreement also contains certain financial
covenants and restrictions including minimum net worth requirements as well
as limitations on dividend payments. The Company borrowed an additional $160
million under the revolving credit agreement during the third quarter of 1999
increasing the total borrowed and outstanding under this agreement to $245
million as of September 30, 1999. The additional borrowings will be used in
part to provide additional funding for the stock repurchase program (note 4).
The weighted average interest rate on the outstanding borrowings during the
three months ended September 30, 1999 and 1998 was 5.43% and 5.88%,
respectively, and 5.30% and 5.91% for the nine months ended September 30,
1999 and 1998, respectively.
3. INCOME TAXES
The effective tax rate on income (loss) before income taxes and minority
interest for the three months ended September 30, 1999 and 1998 was 36.3% and
32.3%, respectively. The effective tax rate on income (loss) before income
taxes and minority interest for the nine months ended September 30, 1999 and
1998 was 50.5% and 33.0%, respectively. The effective tax rate for the
5
<PAGE>
quarter and nine months ended September 30, 1999, excluding the Mid-South
charge (note 8), was 31.5% and 32.6%, respectively. The effective tax rate
differs from the statutory tax rate of 35% primarily due to the Company's
investments in tax-exempt municipal bonds which reduces the effective tax
rate by the effect of the tax-exempt investment income earned.
In conjunction with the Demutualization, the Company was required to make a
payment of $175 million to the Commonwealth of Virginia (Commonwealth
Payment) which was expensed and paid in prior years. The Company amended its
1996 federal tax return to claim the $175 million Commonwealth Payment as a
deduction. The Internal Revenue Service (IRS) has denied this deduction
during the course of its audit of the Company. The Company continues to
pursue the deduction. In addition, the Company is pursuing another claim that
relates to substantial other deductions over a 10-year period. If the Company
is successful on this claim, the amount recovered will be substantial and
material in relation to the Company's financial condition and results of
operations. Favorable resolution of the claims is subject to various
uncertainties, including whether the IRS or the courts will recognize the
deductions and how long it will take to resolve the claims. While the Company
believes that its claims have merit, it cannot predict the ultimate outcome
of the claims. The Company has not recognized the impact of the claims, if
any, in the consolidated financial statements.
4. CAPITAL STOCK
The Company commenced its previously suspended stock repurchase program in
June 1999. Under the program, up to ten percent of the Company's common stock
may be repurchased. The purchases may be made from time to time at prevailing
prices in the open market, by block purchase or in private transactions and
may be discontinued at any time. The repurchases are subject to restrictions
relating to volume, price, timing and debt covenant requirements. During the
third quarter of 1999, the Company purchased 1,289,300 shares of its common
stock for approximately $45.8 million bringing the total shares purchased as
of September 30, 1999 to 1,827,500 at a cost of approximately $65.8 million.
The excess of the cost of the acquired shares over par value is charged to
retained earnings.
On February 17, 1999, the Board of Directors granted 89,939 shares of the
Company's common stock as restricted stock awards in accordance with the
provisions of the 1997 Stock Incentive Plan (Incentive Plan). The shares vest
on a pro-rata basis over three years. The recipients of the restricted stock
awards generally may not dispose or otherwise transfer the restricted stock
until vested. For grants of restricted stock, unearned compensation
equivalent to the fair market value of the shares at the date of grant is
recorded as a separate component of shareholders' equity and subsequently
amortized to compensation expense over the vesting period. Amortization for
the three months and nine months ended September 30, 1999 was $241,114 and
$706,353, respectively.
6
<PAGE>
5. NET INCOME AND NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted earnings
(losses) per share for the three months and nine months ended September 30,
1999 and 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-----------------------------------------------------------------------------
<S> <C>
Numerator for basic and diluted
earnings (losses) per
share - net income
(loss) $ (37,552) 20,213 (7,171) 74,973
=============================================================================
Denominator
Denominator for basic
earnings (losses) per
share - weighted average
shares 41,168 42,300 41,691 42,300
Effect of dilutive securities
Employee and director
stock options - 435 - 435
Restricted stock awards - - - -
-----------------------------------------------------------------------------
Denominator for diluted
earnings (losses) per
share 41,168 42,735 41,691 42,735
-----------------------------------------------------------------------------
Basic net income (loss) per
share $ (0.91) 0.48 (0.17) 1.77
=============================================================================
Diluted net income (loss) per
share $ (0.91) 0.47 (0.17) 1.75
=============================================================================
</TABLE>
Shares of nonvested restricted stock are not considered outstanding in
computing the weighted average number of common shares for basic earnings
(losses) per share. Additionally, the computation of diluted losses per share
for the three months and nine months ended September 30, 1999 does not
consider the common share equivalents of stock options and restricted stock
awards as the effects of assumed conversion would be antidilutive.
6. COMPREHENSIVE INCOME
The reclassification entries under SFAS No. 130, Reporting Comprehensive
Income, for the three months ended September 30, 1999 and 1998 were as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------------------------
<S> <C>
Net unrealized gains (losses) on investment
securities, net of income taxes
Net unrealized holding gains (losses) arising
during the period, net of income taxes
(benefit) of $(9,975) and $3,310 $ (20,007) 6,147
Less: reclassification adjustment for net
gains (losses) included in net income
(loss), net of income taxes (benefit) of
$(4,505) and $189 (8,367) 352
-------------------------------------------------------------------------
Net unrealized gains (losses) on investment
securities, net of income taxes $ (11,640) 5,795
=========================================================================
</TABLE>
7
<PAGE>
The reclassification entries under SFAS No. 130, Reporting Comprehensive
Income, for the nine months ended September 30, 1999 and 1998 were as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------------------------
<S> <C>
Net unrealized gains (losses) on investment
securities, net of income taxes
Net unrealized holding gains (losses) arising
during the period, net of income taxes
(benefit) of $(29,536) and $14,931 $ (54,856) 27,729
Less: reclassification adjustment for net
gains (losses) included in net income, net
of income taxes (benefit) of $(9,443) and
$12,166 (17,538) 22,594
-------------------------------------------------------------------------
Net unrealized gains (losses) on investment
securities, net of income taxes $ (37,318) 5,135
=========================================================================
</TABLE>
The components of accumulated other comprehensive income (loss) as of
September 30, 1999 and December 31, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------------------------------------------------------------
<S> <C>
Net unrealized gain (loss) on investment
securities, net of deferred income taxes
(benefit) of $(3,827) and $16,265 $ (7,109) 30,209
Minimum pension liability, net of deferred
income taxes of $619 (1,149) (1,149)
------------------------------------------------------------------------
Accumulated other comprehensive income (loss) $ (8,258) 29,060
========================================================================
</TABLE>
7. LITIGATION
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 and results of operations 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 and results of
operations of the Company.
8
<PAGE>
8. Mid-South Exit of Health Insurance Market
On October 5, 1999, the Company announced that Mid-South Insurance Company, a
subsidiary headquartered in Fayetteville, North Carolina, intends to exit the
health insurance market with a targeted effective date of April 30, 2000 for
group business and with the targeted or actual effective dates for the exit
of individual business to vary depending upon the regulations of each
affected state. The subsidiary has approximately 100,000 members, mostly
small group and individual members in rural areas of several Southeastern
states. The announcement followed the development and board of director
approval of a comprehensive exit plan in September 1999. After taking a
number of steps to improve the performance of Mid-South and assessing various
alternatives, it was concluded that Mid-South could not bring its financial
performance up to expectations within a reasonable time frame. The exit would
permit the Company to intensify its focus on its successful business in
Virginia and pursue more substantial opportunities for growth in the
surrounding regions. The announcement resulted in a pretax charge to
operations during the third quarter of 1999 of $79.9 million or $51.9 million
net of tax. The charge includes costs associated with the write-off of
goodwill and other intangibles determined not to be recoverable, closed pool
reserves for the run-off of the excess of expected claims and maintenance
costs over premiums on this business and certain other costs associated with
the exit. The Company recognized the charge for goodwill and other
intangibles and certain other costs associated with the exit in selling,
general and administrative expenses and recognized the closed pool reserves
in medical and other benefit costs in the accompanying statements of
operations.
A summary of the exit costs on a pretax basis for the three months and nine
months ended September 30, 1999 follows (in thousand):
Goodwill and other
intangibles $ 55,927
Closed pool reserves 20,591
Other costs 3,366
-------------------------------------
Total $ 79,884
=====================================
The Company does not expect any significant additional costs other than costs
such as severance and career development services that will be expensed as
incurred.
9
<PAGE>
9. SEGMENT INFORMATION
The following table presents information by reportable segment for the three
months and nine months ended September 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Health Government All
Insurance Programs Investments Other Total
----------------------------------------------------------------------------------
<S> <C>
Three months ended September 30, 1999
Revenues from external
customers $ 463,584 108,374 - 5,446 577,404
Investment income and net
realized losses - - 12,585 - 12,585
Intersegment revenues 2,881 - - 1,791 4,672
Depreciation and
amortization expense 4,546 63 5 382 4,996
Income (loss) before income
taxes and minority interest (59,867) (1,283) 12,585 827 (47,738)
1998
Revenues from external
customers $ 415,749 100,673 - 5,443 521,865
Investment income and net
realized gains - - 22,723 - 22,723
Intersegment revenues 3,103 - - 1,530 4,633
Depreciation and
amortization expense 3,706 63 5 294 4,068
Income (loss) before income
taxes and minority interest 17,560 (242) 22,723 524 40,565
Nine months ended September 30, 1999
Revenues from external
customers $ 1,350,703 322,666 - 16,307 1,689,676
Investment income and net
realized losses - - 43,878 - 43,878
Intersegment revenues 8,893 - - 4,772 13,665
Depreciation and
amortization expense 14,080 198 14 1,094 15,386
Income (loss) before income
taxes and minority interest (27,129) (1,196) 43,878 1,691 (17,244)
1998
Revenues from external
customers $ 1,219,617 303,018 - 16,023 1,538,658
Investment income and net
realized gains - - 99,449 - 99,449
Intersegment revenues 8,455 - - 4,480 12,935
Depreciation and
amortization expense 11,496 179 14 1,356 13,045
Income before income taxes
and minority interest 40,988 1,933 99,449 659 143,029
-----------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
A reconciliation of reportable segment total revenues, income (loss) before
income taxes and minority interest, and depreciation and amortization expense
to the corresponding amounts included in the consolidated statements of
operations for the three months and nine months ended September 30, 1999 and
1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C>
Revenues
Reportable segments
External revenues $ 577,404 521,865 1,689,676 1,538,658
Investment revenues 12,585 22,723 43,878 99,449
Intersegment revenues 4,672 4,633 13,665 12,935
Other corporate revenues 418 418 1,255 955
Elimination of intersegment
revenues (4,672) (4,633) (13,665) (12,935)
---------- ------- --------- ---------
Total revenues $ 590,407 545,006 1,734,809 1,639,062
========== ======= ========= =========
Profit or Loss
Reportable segments $ (47,738) 40,565 17,244 143,029
Corporate expenses not allocated
to segments (7,642) (8,062) (23,313) (24,453)
Unallocated amount - interest
expense (2,281) (1,349) (4,658) (4,022)
---------- ------ ------ -------
Income (loss) before income taxes and
minority interest $ (57,661) 31,154 (10,727) 114,554
========== ====== ======= =======
Depreciation and amortization expense
Reportable segments $ 4,996 4,068 15,386 13,045
Not allocated to segments (286) 448 (747) 175
---------- ----- ------ ------
Depreciation and amortization expense $ 4,710 4,516 14,639 13,220
========== ===== ====== ======
</TABLE>
On May 7, 1999, the Company announced that it would discontinue its role as a
claims processing intermediary for the federal government with the Medicare
Part A program in Virginia and West Virginia, effective August 31, 1999. The
Medicare Part A benefits for individuals in those states will remain the
same; a different intermediary will process the claims. Additionally, the
Company will discontinue its role as the primary provider of computer
processing capabilities for Medicare Part A claims processing to certain
other Blue Cross and Blue Shield plans after November 1999. This decision
does not affect the Company's medicare supplement product. Individuals with
this type of coverage have private contracts with the Company and their
benefits remain unchanged.
This decision to discontinue as an intermediary reflects the Company's
sharpened focus on its commercial managed health care business. As a result,
145 employee positions will be eliminated in the Company's Medicare Part A
division. The Company expects that the decision will not have a material
impact on the financial condition and results of operations of the Company.
On July 2, 1999, the Company announced that it would withdraw its
Medicare+Choice HMO product effective January 1, 2000 due to concerns about
reduced government reimbursements for Medicare+Choice plans. The
approximately 2,700 members, all in the Richmond, Virginia area, that are
affected are eligible to continue to be covered through December 31, 1999.
The decision will not have a material impact on the financial condition and
results of operations of the Company.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
Substantially all of the revenues of Trigon Healthcare, Inc. and subsidiaries
(collectively, Trigon or the Company) are generated from premiums and fees
received for health care services provided to its members and from investment
income. Trigon's expenses are primarily related to health care services provided
which consist of payments to physicians, hospitals and other providers. A
portion of medical costs expense for each period consists of an actuarial
estimate of claims incurred but not reported to Trigon during the period. The
Company's results of operations depend in large part on its ability to
accurately predict and effectively manage health care costs.
The Company divides its business into four reportable segments: health
insurance, government programs, investments and all other. Its health insurance
segment offers several network products, including health maintenance
organizations (HMO), preferred provider organizations (PPO) and traditional
indemnity products with access to the Company's participating provider network
(PAR) as well as medicare supplement plans. 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 and
Blue Shield Association 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. The Company discontinued its role as a
claims processing intermediary for the federal government with the Medicare Part
A program in Virginia and West Virginia, effective August 31, 1999.
Additionally, the Company will discontinue its role as the primary provider of
computer processing capabilities for Medicare Part A claims processing to
certain other Blue Cross and Blue Shield plans after November 1999. 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 including third-party administration for medical
and workers compensation, life and disability insurance, disease management,
health promotion and similar products, are reflected in an "all other" category.
Within the Company's health insurance 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 customers bear all or portions of the
claims risk.
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<PAGE>
ENROLLMENT
The following table sets forth the Company's enrollment data by network:
<TABLE>
<CAPTION>
As of September 30,
-----------------------
1999 1998
- ---------------------------------------------------------
<S> <C>
Health Insurance
Commercial
HMO 267,486 257,161
PPO 355,931 281,458
PAR 155,933 171,348
Medicaid / Medicare HMO 51,513 31,651
Medicare supplement 119,074 122,371
Non-Virginia 93,341 105,403
- ---------------------------------------------------------
Total commercial 1,043,278 969,392
Self-funded 694,260 664,837
Processed for other Blue Cross
and Blue Shield Plans (ASO) 4,663 9,636
- ---------------------------------------------------------
Total health insurance 1,742,201 1,643,865
Government
Federal Employee Program (PPO) 216,347 213,027
=========================================================
Total 1,958,548 1,856,892
=========================================================
</TABLE>
PREMIUM AND PREMIUM EQUIVALENTS BY NETWORK SYSTEM
The following table sets forth the Company's premium and premium equivalents by
network (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------
<S> <C>
Health Insurance
Commercial
HMO $ 100,650 93,609 294,132 279,529
PPO 137,869 108,994 387,124 319,581
PAR 71,241 76,359 214,184 236,779
Medicaid / Medicare HMO 29,771 16,177 75,788 44,500
Medicare supplement 57,580 56,061 171,995 167,229
Non-Virginia 31,968 34,798 103,416 89,501
- ----------------------------------------------------------------------------
Total commercial 429,079 385,998 1,246,639 1,137,119
Self-funded 305,069 272,691 900,865 814,922
- ----------------------------------------------------------------------------
Total health insurance 734,148 658,689 2,147,504 1,952,041
Government
Federal Employee Program (PPO) 108,374 100,673 322,666 303,018
============================================================================
Total $ 842,522 759,362 2,470,170 2,255,059
============================================================================
</TABLE>
13
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Trigon Healthcare, Inc. announced on October 5, 1999 that Mid-South Insurance
Co., a subsidiary, would exit the health insurance market with a targeted
effective date of April 30, 2000 for group business and with the targeted or
actual effective dates for the exit of individual business to vary depending
upon the regulations of each affected state. The decision was due to the
continued unacceptable performance and increased medical costs of Mid-South and
will allow the Company to concentrate its efforts and resources on its
successful Virginia business and the pursuit of other growth opportunities. The
Company's action resulted in an after-tax charge of $51.9 million including
$36.4 million for goodwill and other intangibles, $13.4 million for closed pool
reserves and $2.1 million for other costs.
Premium and fee revenues increased 10.8% to $571.8 million in the third quarter
of 1999 from $516.1 million in the third quarter of 1998. The $55.8 million
increase is due to a combination of rate increases and enrollment growth in the
Company's health insurance segment. Commercial revenue from the Virginia HMO,
PPO and PAR networks increased 15.0% to $339.5 million in 1999 from $295.1
million in 1998. This increase is attributed to a 10.2% increase in member
months and a 4.5% increase in average revenue per member. Overall, premium
revenues on a per member per month basis for the Company's commercial business
increased 3.8% to $139.40 for the third quarter of 1999 from $134.30 for the
third quarter of 1998. Excluding the impact of a changing mix of business
related to the out-of-state markets and higher than average growth in individual
PPO business in-state, premiums on a per member per month basis for the third
quarter of 1999 increased 5.6% over the third quarter of 1998. Self-funded net
revenues increased $5.0 million as a result of improving margins and increased
enrollment. The government segment's FEP revenues increased 7.6% to $108.4
million from $100.7 million in the third quarter of last year. The increase is
due to increased medical costs to be reimbursed by OPM and a 1.6% increase in
enrollment.
Total enrollment grew to 1,958,548 as of September 30, 1999 from 1,856,892 as of
September 30, 1998. The growth was a result of a 98,336 increase in the
Company's health insurance segment enrollment and a 3,320 increase in the
government segment. Total commercial enrollment increased 7.6% to 1,043,278
members as of September 30, 1999 from 969,392 members last year as a result of
favorable retention rates and improved sales reflecting favorable customer
reaction to moderate rate increases and focused efforts on sales training,
geographical and segment targeting and ongoing enhancement to broker sales
programs. The majority of the increase has come from growth in the PPO network,
up 26.5% over last year and growth in the HMO network, up 10.5% year over year.
Growth in PPO enrollment was offset by an expected decline of 9.0% in the
Company's PAR network as members migrate into more tightly managed networks. The
PAR network enrollment represents only 14.9% of the Company's total commercial
enrollment. The increase in self-funded enrollment of 29,423 members is a result
of efforts to intensify sales efforts, target certain large groups that
recognize the value of Trigon's provider networks and the Company's ability to
effectively service multi-state accounts.
Investment income increased 14.8% to $25.5 million in the third quarter of 1999
from $22.2 million in the third quarter of 1998. Net realized losses were $12.9
million in the third quarter of 1999, compared to net realized gains of $0.5
million for the same period in 1998. The third quarter 1999 net realized losses
were incurred primarily in the sale of municipal bonds and Treasury notes, for
which the proceeds were used to pay income taxes and purchase mortgage-backed
and international securities.
14
<PAGE>
Medical costs increased 14.3% to $472.3 million in the third quarter of 1999
from $413.1 million in the third quarter of 1998. The $59.2 million increase
includes a charge of $20.6 million for Mid-South closed pool reserves and $38.6
million as the result of expected levels of medical cost inflation, growth in
the health insurance segment's commercial enrollment and an increase in the
government segment's FEP medical costs reimbursed by OPM. Excluding the
Mid-South charge, the medical cost per member per month for the Company's
commercial business increased 2.6% to $113.08 in 1999 from $110.17 in the third
quarter of 1998. Combined with a 3.8% increase in commercial premium revenues
per member per month, the loss ratio on commercial business, excluding the
Mid-South charge, improved to 81.1% in 1999 from 82.0% for the same period last
year. The loss ratio improvement can be attributed to a combination of factors
including the favorable impact of a number of medical cost management
initiatives and pricing discipline. Regarding medical cost management
initiatives, the Company continues to diligently work at negotiating lower
reimbursement rates with facilities and to better manage utilization. During the
twelve month period ended September 30, 1999, commercial Virginia inpatient days
per thousand were down 3.8% as compared to the same period last year. Outpatient
cost per member declined by 1.8% for the same period due to the Company's
conversion to a fixed fee schedule for services from percentage of charge type
arrangements. In addition, the Company is taking a more active role in working
with physicians and specialists to manage medical costs and to continue
implementing national medical management guidelines.
Selling, general and administrative expenses (SG&A) increased by 74.5% to $173.5
million in the third quarter of 1999 from $99.4 million in the third quarter of
1998. Excluding the $59.3 million charge to SG&A related to the Mid-South market
exit, SG&A increased 15.0% due to growth in commission-based individual and
small group business enrollment and additional investments in the Company.
Overall, the SG&A ratio of 20.6% for the third quarter of 1999 was 13.5%
excluding the Mid-South charge compared to 13.0% for the same period last year.
Interest expense increased to $2.3 million in the third quarter of 1999 from
$1.3 million in the third quarter of 1998 as a result of an increase in the
amount of long-term debt outstanding.
Income before income taxes and minority interest decreased $88.8 million to a
loss of $57.7 million in the third quarter of 1999 from a gain of $31.2 million
in the third quarter of 1998. Excluding the Mid-South charge, income before
taxes and minority interest decreased $8.9 million. This decrease is primarily a
result of lower net realized gains (losses) on the sale of investments of $13.4
million offset by a $2.1 million increase in operating income and a $3.3 million
increase in investment income. Operating income increased primarily due to
improving margins in the health insurance segment resulting from pricing and
medical cost management efforts.
The effective tax rate on income before income taxes and minority interest,
excluding the Mid-South charge, for the three months ended September 30, 1999
and 1998 was 31.5% and 32.3%, respectively. The effective tax rate differs from
the statutory tax rate of 35% primarily due to the Company's investments in
tax-exempt municipal bonds.
15
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Premium and fee revenues increased 9.9% to $1.7 billion in the first nine months
of 1999 from $1.5 billion in the first nine months of 1998. The $150.7 million
increase is due to a combination of rate increases and enrollment growth in the
Company's health insurance segment. Commercial revenue from the Virginia HMO,
PPO and PAR networks increased 10.3% to $971.2 million in 1999 from $880.4
million in 1998. This increase is attributed to a 6.4% increase in member months
and a 3.7% increase in average revenue per member. Overall, premium revenues on
a per member per month basis for the Company's commercial business increased
3.1% to $137.18 for the first nine months of 1999 from $133.07 for the first
nine months of 1998. Excluding the impact of a changing mix of business related
to the out-of-state markets and higher than average growth in individual PPO
business in-state, premiums on a per member per month basis increased 4.9% year
to year. Self-funded net revenues increased $21.5 million as a result of
improving margins, the impact of lower medical costs creating favorable stop
loss settlements and increased enrollment. The government segment's FEP revenues
increased 6.5% to $322.7 million from $303.0 million in the first nine months of
last year. The increase is due to increased medical costs to be reimbursed by
OPM and a 1.6% increase in enrollment.
Investment income increased 9.5% to $70.9 million in the first nine months of
1999 from $64.7 million in the first nine months of 1998. Net realized losses
were $27.0 million in the first nine months of 1999, compared to net realized
gains of $34.8 million for the same period in 1998. The net realized losses for
the first nine months of 1999 reflected the Company's repositioning of the
investment portfolio in an environment of rising interest rates, by reducing
Treasury and municipal bond holdings, and increasing investments in corporate
bonds and mortgage-backed securities.
Medical costs increased 9.4% to $1.3 billion in the first nine months of 1999
from $1.2 billion in the first nine months of 1998. The $116.3 million increase
includes a charge of $20.6 million for Mid-South closed pool reserves and $95.7
million as the result of expected levels of medical cost inflation, growth in
the health insurance segment's commercial enrollment and an increase in the
government segment's FEP medical costs reimbursed by OPM. Excluding the
Mid-South charge, the medical cost per member per month for the Company's
commercial business increased 1.7% to $112.17 in 1999 from $110.29 in the first
nine months of 1998. Combined with a 3.1% increase in commercial premium
revenues per member per month, the loss ratio on commercial business, excluding
the Mid-South charge, improved to 81.8% in 1999 from 82.9% for the same period
last year. The loss ratio improvement can be attributed to a combination of
factors including, the favorable impact of a number of medical cost management
initiatives and pricing discipline. Regarding medical cost management
initiatives, the Company continues to diligently work at negotiating lower
reimbursement rates with facilities and to better manage utilization. In
addition, the Company is taking a more active role in working with physicians
and specialists to manage medical costs and to continue implementing national
medical management guidelines.
SG&A expenses increased by 36.0% to $392.8 million in the first nine months of
1999 from $288.7 million in the first nine months of 1998. Excluding the $59.3
16
<PAGE>
million charge to SG&A related to the Mid-South market exit, SG&A increased
15.5% due to growth in commission-based individual and small group business
enrollment and additional investments in the Company. Overall, the SG&A ratio of
15.8% for the first nine months of 1999 was 13.4% excluding the Mid-South charge
compared to 12.7% for the same period last year.
Interest expense increased to $4.7 million in the first nine months of 1999 from
$4.0 million in the first nine months of 1998 as a result of an increase in the
long-term debt outstanding.
Income before income taxes and minority interest decreased $125.3 million to a
loss of $10.7 million in the first nine months of 1999 from a gain of $114.6
million in the first nine months of 1998. Excluding the Mid-South charges,
income before taxes and minority interest decreased $45.4 million. The decrease
is primarily a result of lower net realized gains (losses) on the sale of
investments of $61.7 million offset by an $10.8 million increase in operating
income. Operating income increased primarily due to improving margins in the
health insurance segment resulting from pricing and medical cost management
efforts.
The effective tax rate on income before income taxes and minority interest,
excluding the third quarter Mid-South charge, for the nine months ended
September 30, 1999 and 1998 was 32.6% and 33.0%, respectively. The effective tax
rate differs from the statutory tax rate of 35% primarily due to the Company's
investments in tax-exempt municipal bonds.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are premiums and fees received and
investment income. The primary uses of cash include health care benefit expenses
and capitation payments, brokers' and agents' commissions, administrative
expenses, income taxes and repayment of long-term debt. Trigon generally
receives premium revenues in advance of anticipated claims for related health
care services.
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 September 30, 1999. The portfolio had an average contractual
maturity of 6.1 years as of September 30, 1999. 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 September 30, 1999, the Company's equity exposure, comprised of
direct equity as well as equity-indexed investments, was 10% of the total
portfolio, as compared to 14% as of December 31, 1998.
The Company has a $300 million revolving credit agreement with a syndicate of
banks, which expires February 2002. The Company borrowed an additional $160
million under the revolving credit agreement during the third quarter of 1999
increasing the total borrowed and outstanding under this agreement to $245
million as of September 30, 1999. The additional borrowings will be used in part
to provide additional funding for the stock repurchase program.
17
<PAGE>
The Company commenced its previously suspended stock repurchase program in June
1999. Under the program, up to ten percent of the Company's common stock may be
repurchased. During the third quarter of 1999, the Company purchased 1,289,300
shares of its common stock for approximately $45.8 million bringing the total
shares purchased as of September 30, 1999 to 1,827,500 at a cost of
approximately $65.8 million.
The Company believes that cash flow generated by operations and its cash and
investment balances will be sufficient to fund continuing operations, capital
expenditures and debt repayment costs for the foreseeable future. The nature of
the Company's operations is such that cash receipts are principally premium
revenues typically received up to three months prior to the expected cash
payment for related health care services. The Company's operations are not
capital intensive, and there are currently no commitments for major capital
expenditures to support existing business.
On May 7, 1999, the Company announced that it would discontinue its role as a
claims processing intermediary for the federal government with the Medicare Part
A program in Virginia and West Virginia, effective August 31, 1999.
Additionally, the Company will discontinue its role as the primary provider of
computer processing capabilities for Medicare Part A claims processing to
certain other Blue Cross Blue Shield plans after November 1999. Subsequent to
that announcement, the Company announced on July 2, 1999 that it would withdraw
its Medicare+Choice HMO product effective January 1, 2000. The Company's
decision to discontinue as an intermediary reflects the Company's sharpened
focus on its commercial managed health care business and its withdrawal from the
Medicare+Choice plans was due to concerns about reduced government
reimbursements for such plans. The Company expects that the decisions will not
have a material impact on the financial condition and results of operations of
the Company.
YEAR 2000 READINESS DISCLOSURE
NOTE: Statements made throughout the Year 2000 Readiness Disclosure concerning
the Year 2000 readiness of entities other than the Company (i.e., third parties)
are based upon information provided to the Company by the third parties. This
information has not been independently verified.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs and infrastructure systems that have date-sensitive software
may recognize a date using "00", for example, as the Year 1900 rather than the
Year 2000. Failure to adequately address this issue could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process claims, prepare invoices, retain
membership data, maintain accounting records, safeguard and manage its invested
assets and operating cash accounts, perform utilization management, provide
adequate customer service and other similar processes. The Company is
approaching the Year 2000 readiness issue from both a technical and business
perspective.
The Company began its Year 2000 initiative in late 1994. The Company has
developed and continues to refine comprehensive plans to prepare its critical
computer systems and application software and key business functions for the
Year 2000. Those plans address hardware and software maintained by the Company,
software products licensed from external vendors and functions outsourced to
18
<PAGE>
external vendors. The plan also includes "infrastructure systems" and non-IT
systems and equipment, which contain date-sensitive imbedded hardware or
software. Due to the Company's reliance on computer systems, senior management
has supported the Year 2000 plan and has committed significant financial and
human resources to the goal of making the hardware and software Year 2000 ready.
The Company is using both external and internal resources for the project.
Compliant versions of the majority of the Company's core systems and software
were installed in production as of year end 1998. All initial Year 2000 testing
planned for these systems and products has been completed. The Company will
continue to test as needed throughout 1999.
The Company's plan to resolve the Year 2000 issue involves four phases:
inventory/assessment, remediation, testing and implementation. Uniform project
management techniques are in place with overall oversight responsibility
residing with the Company's Senior Vice President and Chief Information Officer.
At this time, the Company has completed all phases for systems that are
important to the business. In addition, comprehensive contingency and business
resumption planning has been conducted for critical systems and functions. The
Company has also developed extensive crossover plans, which will cover the
actions to be executed in the days immediately before and after December 31,
1999. A detailed communications plan for the crossover period is being created.
INTERNALLY DEVELOPED APPLICATION SYSTEMS. Changes required to the mainframe
computer for the membership records systems and non-HMO claims processing were
handled by internal and contract programming resources. This was the largest and
most complex part of the Company's Year 2000 readiness plan. Trigon has
completed all of the Year 2000 application remediation and testing of these
applications. Limited testing will continue throughout the fourth quarter of
1999 to assure that the systems' readiness status remains unchanged.
EXTERNALLY LICENSED APPLICATION SYSTEMS. Trigon has received and installed
into production all vendor-certified Year 2000 compliant releases of these
application systems
EXTERNALLY LICENSED OPERATING SYSTEM/UTILITY PRODUCTS. These products support
the Company's mainframe, midrange, file server and desktop environments. Trigon
has received all of the vendor-certified Year 2000 compliant releases of these
vendor software products and all have been installed into production. The
Company continues to receive Year 2000 patches for a small percentage of these
products to correct problems discovered during testing. These patches are being
installed as received.
Trigon is conducting independent Year 2000 testing of vendor software, wherever
possible, to confirm compliance and, if necessary, to assess and address the
Company's potential business exposure if any of the software is non-compliant.
Testing of these products began in early 1998 and will continue during 1999.
OUTSOURCED FUNCTIONS. Trigon has outsourced support for some segments of its
business. These include, for example, administering certain specialty services
such as pharmacy and dental. The Company has contacted its critical outsourcing
vendors to determine their state of readiness with regard to the Year 2000
issue. For certain outsourcing arrangements, the Company has met with the
19
<PAGE>
vendors and conducted several reviews of their plans and progress including
contingency plans. The Company will continue to monitor these vendors' progress
and review their plans, as appropriate, in order to assess and address the
potential business exposure for the Company if these parties fail to achieve
compliance.
INFRASTRUCTURE SYSTEMS. All necessary upgrades to the telephone, security, HVAC
and all other infrastructure systems that the Company maintains have been
completed. Wherever possible, the systems have been tested to assure their Year
2000 compliance. In certain circumstances, the Company relies on third-party
service providers for infrastructure systems maintenance and, accordingly, Year
2000 compliance. The Company has surveyed the critical third parties to assess
and address the potential business exposure if these systems fail to achieve
compliance.
CRITICAL BUSINESS PARTNERS. The Company also depends upon other individuals and
entities who must each address their own Year 2000 readiness issues. This
includes, among others, hospitals, other health care providers, third party
benefit administrators, public utilities, communications service providers,
funds transfer networks and customers. The Company is periodically surveying its
critical business partners and gathering other pertinent documentation in an
effort to determine whether such third parties are assessing and correcting any
issues relating to the Year 2000 that could impact their ability to conduct
business with the Company. Despite the Company's efforts, in a relatively small
number of cases, the Company has not received assurances that certain third
parties' systems are Year 2000 compliant. In addition, to help health care
providers better understand the significance of Year 2000 preparedness, the
Company is using a number of communications vehicles to draw their attention to
the issue. Lack of appropriate action on the part of third parties could impact
the Company's ability to serve its customers.
The Company has investments in publicly and privately placed securities. The
Company may be exposed to credit risk to the extent that the Year 2000 issue
materially adversely impacts the issuers of the securities. Portfolio
diversification should reduce the overall risk.
The incremental costs for the Year 2000 project were $18.8 million through
September 30,1999, including $0.9 million incurred during the third quarter of
1999. Total incremental costs are expected to approximate $19.6 million through
1999, increasing to nearly $20.0 million through 2000. The costs have been
expensed as incurred and were funded through operating cash flows. The estimates
for 1999 and 2000 are lower than previously reported based on the current
forecast of remaining Year 2000 work.
The Company expects to identify and resolve all Year 2000 issues that could
materially adversely affect its business operations. However, management
believes that it is not possible to determine with complete certainty that all
Year 2000 issues affecting the Company will be identified or corrected.
Depending on the volume and duration, the Company's operations could experience
intermittent disruptions or be significantly impacted by incomplete or untimely
resolution of the problem by internal or external parties. Specifically, without
20
<PAGE>
limitation, the Company's ability to process claims, prepare invoices, retain
membership data, maintain accounting records, safeguard and manage its invested
assets and operating cash accounts, perform utilization management, provide
adequate customer service and other similar processes could be affected. The
success of the Company's project is partially dependent upon the work of third
parties. In addition, some of the Company's business operations are provided and
maintained by outside vendors. A lack of appropriate action on the part of
others could affect the Company's ability to serve its customers. Although the
Company has developed plans designed to mitigate the aforementioned risks, there
can be no assurances that all potential problems will be mitigated by these
procedures. The Company cannot determine the level of financial exposure
relating to the possibility that vendors and other business partners with whom
the Company contracts may be unable to address all pertinent Year 2000 issues.
The Company began a comprehensive contingency planning effort in the fourth
quarter of 1998 to address situations that may result if the Company or its
critical business partners encounter Year 2000 problems. Contingency plans will
outline the procedures to follow for the most likely areas of risk. The
Company's contingency planning methodology includes three types of planning:
contingency planning; business resumption planning; and crossover planning.
Contingency and business resumption plans each have a methodology, templates,
training and facilitated workshops that have been provided to each business
area. The Company has written plans to cover failures of critical systems and
key business functions. Contingency and business resumption plans include, among
other things, on call staff dedicated to problem response, manual work-arounds
for information systems as well as substitution of systems or vendors, if
necessary and commercially reasonable. Crossover plans cover the actions to be
executed in the days immediately before and after December 31, 1999. The plans
include, among other things, production schedules, data backup and system
checkout processes. Contingency and business resumption plans, as well as
crossover plans, have been completed. The plans will be modified as necessary
depending upon any specific circumstances that may arise. A detailed
communications plan for the crossover period is also being developed.
REGULATORY AND OTHER DEVELOPMENTS
The Company's business is subject to a changing legal, legislative and
regulatory environment. Some of the more significant current issues that may
affect the Company's business include:
o efforts to expand tort liability of health plans;
o proposed class action lawsuits targeting the health care industry's
efforts to deliver quality care at affordable costs; and
o initiatives to increase health care regulation.
Pending initiatives to increase health care regulation at the federal level
include "managed care reform" and "patients' bill of rights" legislation. The
bill that recently passed the House of Representatives would expand tort
liability for health plans and change the practices for defining medical
necessity. The corresponding bill that recently passed the Senate lacks similar
provisions. Given these differences between the House and Senate bills and the
general uncertainty of the political process, it is not possible to determine
what, if any, legislation will ultimately be enacted or what the effect on the
Company of any such legislation would be.
Several major companies in the health care industry recently have had proposed
class action lawsuits filed against them by a coalition of plaintiffs'
attorneys. Given that no such lawsuits are currently pending against the Company
and given the uncertainties of predicting the outcome of litigation generally,
it is not possible to determine at this time what the ultimate effect, if any,
on the Company of any such litigation would be.
21
<PAGE>
The Commonwealth of Virginia (COV), with about 200,000 members, is one of the
Company's two largest customers. As of September 30, 1999, the contract
represented 13.7 % of premium and premium equivalents. The current multi-year
contract with the COV expires in June 2000. The Company has submitted bids for
the next multi-year contract, which begins in July 2000. The Company has made
the decision not to bid on the COV's HMO product offering because it has not
generated acceptable returns under the current contract. The Company recently
received notice that it will retain both the dental and pharmacy programs. The
award of the medical/surgical portion of the contract is expected to be
announced around the end of 1999. In keeping with the philosophy of providing
more health care choices to its employees, the COV plans to award contracts to
multiple companies. Although there can be no assurances about the outcome of the
contract bid process, the Company believes it is well positioned to compete for
these members based upon the Company's track record and high satisfaction scores
among COV employees.
FORWARD-LOOKING INFORMATION
This Item, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and this Form 10-Q contain certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, including, among other things, statements concerning future earnings,
premium rates, enrollment and medical and administrative costs. Such
forward-looking statements are subject to inherent risks and uncertainties, many
of which are beyond the control of the Company, that may cause actual results to
differ materially from those contemplated by such forward-looking statements.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, but are not limited to,
rising health care costs, business conditions and competition in the managed
care industry, government action and other regulatory issues. Additional
information concerning factors that could cause actual results to differ
materially from those in forward-looking statements is contained in the
Company's Annual Report on Form 10-K under the caption "Forward-Looking
Information."
The discussion of the Company's efforts, and management's expectations, relating
to Year 2000 compliance are forward-looking statements. The costs of the project
and the date on which the Company believes it will complete necessary Year 2000
preparations are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. There can be no assurance that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of programming and testing resources, the ability to
locate and correct all relevant computer codes, the ability of third parties
whose products and services impact the Company to convert their systems and
software and other similar uncertainties.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of its investing and borrowing activities, the Company is exposed to
financial market risks, specifically those resulting from changes in interest
22
<PAGE>
rates, foreign currency exchange rates and marketable equity security prices.
All of the potential changes noted below are based upon sensitivity analyses
performed on the Company's investment holdings as of September 30, 1999. Actual
results may vary materially.
All of the Company's investments are categorized as available-for-sale. The
majority of these are fixed income securities. Market risk is addressed by
actively managing the duration and diversification of the portfolio. The Company
has evaluated the impact on the portfolio's fair value considering a 100 basis
point change in interest rates over the next twelve-month period. A hypothetical
100 basis point increase in interest rates would result in an approximate $45.7
million increase in fair value, whereas a corresponding 100 basis point decrease
in interest rates would result in an approximate $189.9 million increase in fair
value. This analysis includes the assumption that the 100 basis point change
occurs evenly throughout the twelve-month period. The analysis also assumes
investment income earned is reinvested into the portfolio thus mitigating the
effects of change in fair value from an increase in interest rates or enhancing
the effects of change in fair value from a decrease in interest rates over the
twelve-month period. Moreover, the analysis is performed at the individual
portfolio level, with only the sum of these amounts presented herein.
The Company's equity portfolio is comprised of domestic and international direct
equity investments as well as domestic equity-indexed investments. An immediate
10% decrease in each equity investment's value, arising from a combination of
market and foreign exchange movement, would result in a fair value decrease of
$23.3 million. Correspondingly, an immediate 10% increase in each equity
investment's value, attributable to the same two factors, would result in a fair
value increase of $23.3 million. The majority of the $85.3 million international
equity portfolio is non-U.S. dollar denominated. Foreign currency forward
contracts are utilized to hedge some, but not all, of the Company's foreign
currency exposure.
As of September 30, 1999, the Company has long-term debt outstanding in the
amount of $249.3 million. Of this amount only $1.3 million represents
obligations with a fixed interest rate. Therefore, the impact of an interest
rate increase or decrease upon the fair value of the Company's long-term debt
would be de minimus.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(a) 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
23
<PAGE>
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 and results of operations 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 and results of
operations of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following is a list of exhibits filed with the Form 10-Q:
Exhibit
Number Description
- ------ -----------
11 -- Computation of per share earnings (losses) for the three months
and nine months ended September 30, 1999. Exhibit has been
omitted as the detail necessary to determine the computation of
per share earnings can be clearly determined from the material
contained in Part I of this Form 10-Q.
27 -- Financial Data Schedule.
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.
(b) Reports on Form 8-K:
None filed during the three months ended September 30, 1999.
24
<PAGE>
SIGNATURES
Pursuant to the requirements 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
Dated: November 12, 1999 By: /s/ Thomas R. Byrd
--------------------------------
THOMAS R. BYRD
SENIOR VICE PRESIDENT & CHIEF
FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING AND
FINANCIAL OFFICER)
<PAGE>
EXHIBIT INDEX
Exhibit
Number
- ------
27 -- Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS
INCLUDED IN THE TRIGON HEALTHCARE, INC. AND SUBSIDIARIES FORM 10-Q FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 11,219
<SECURITIES> 1,781,167
<RECEIVABLES> 421,122
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,251,952
<PP&E> 145,661
<DEPRECIATION> 93,987
<TOTAL-ASSETS> 2,412,520
<CURRENT-LIABILITIES> 1,061,939
<BONDS> 249,339
0
0
<COMMON> 405
<OTHER-SE> 956,449
<TOTAL-LIABILITY-AND-EQUITY> 2,412,520
<SALES> 1,690,931
<TOTAL-REVENUES> 1,734,809
<CGS> 1,348,098
<TOTAL-COSTS> 1,740,878
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,658
<INCOME-PRETAX> (10,727)
<INCOME-TAX> (5,415)
<INCOME-CONTINUING> (7,171)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,171)
<EPS-BASIC> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
