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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
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)
Registrant's telephone number, including area code (804) 354-7000
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, $.01 Par Value New York Stock Exchange
(Title of Class) (Name of Exchange)
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 27, 2000 was approximately $1,266,419,000 (based on the
last reported sales price of $33 5/8 per share on March 27, 2000, on the New
York Stock Exchange).
As of March 27, 2000, 37,663,024 shares of the registrant's Class A Common
Stock, par value $.01 per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of Trigon Healthcare Inc.'s Annual Report to Shareholders for
the year ended December 31, 1999 into Parts II and IV of this Form 10-K.
Certain portions of Trigon Healthcare Inc.'s definitive Proxy Statement dated
March 24, 2000 for the Annual Meeting of Shareholders into Part III of this Form
10-K.
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TRIGON HEALTHCARE, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
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Page
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PART I
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Item 1. Business................................................................................. 1
Item 2. Properties............................................................................... 13
Item 3. Legal Proceedings........................................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders...................................... 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................... 14
Item 6. Selected Financial Data.................................................................. 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................... 14
Item 8. Financial Statements and Supplementary Data.............................................. 14
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 15
PART III
Item 10. Directors and Executive Officers of the Registrant....................................... 15
Item 11. Executive Compensation................................................................... 15
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 15
Item 13. Certain Relationships and Related Transactions........................................... 15
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 15
</TABLE>
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PART I
Item 1. Business
DEMUTUALIZATION AND INITIAL PUBLIC OFFERING
Effective February 5, 1997, Blue Cross and Blue Shield of Virginia (dba Trigon
Blue Cross Blue Shield) completed its conversion from a mutual insurance company
to a stock insurance company in accordance with a Plan of Demutualization
("Demutualization"). In accordance with the Demutualization, Blue Cross and
Blue Shield of Virginia changed its name to Trigon Insurance Company (dba Trigon
Blue Cross Blue Shield) ("Trigon Insurance") and became a wholly owned
subsidiary of Trigon Healthcare, Inc. (Trigon Healthcare, Inc. and subsidiaries
herein collectively referred to as "Trigon" or the "Company"). The membership
interests of Blue Cross and Blue Shield of Virginia's eligible members were
converted into Class A common stock of Trigon Healthcare, Inc., or, in certain
circumstances, cash. The Demutualization also required the Company to complete
an Initial Public Offering ("IPO") of stock simultaneously with the conversion.
Accordingly, Trigon Healthcare, Inc. issued 17.8 million shares of Class A
common stock at $13 per share in the IPO, generating net proceeds of $215.2
million. In connection with the Demutualization, the Company was required to
make a payment of $175 million to the Commonwealth of Virginia ("Commonwealth
Payment") in February 1997. The Commonwealth Payment was accrued and reflected
as an extraordinary charge in the consolidated financial statements for 1996.
The Company used approximately $90 million of the net proceeds and $85 million
in borrowings under a revolving credit agreement to fund this payment. The
Company also used approximately $91.1 million of the offering proceeds to pay
certain eligible members cash in lieu of shares of common stock that would
otherwise have been issued to such eligible members pursuant to the
Demutualization.
GENERAL
The Company is the largest managed health care company in Virginia, serving
nearly 1.9 million members primarily through statewide and regional provider
networks. The Company's membership represents approximately 27% of the Virginia
population and 32% of the Virginia population in those areas where Trigon has
the exclusive right to use the Blue Cross and Blue Shield service marks and
tradenames.
The Company divides its business into four segments: health insurance,
government programs, investments and all other. The Company's health insurance
segment provides a comprehensive spectrum of managed care products primarily
through three network systems with a range of utilization and cost containment
controls. Within the Company's network product offerings, employer groups may
choose various funding options ranging from fully insured to partially or fully
self-funded financial arrangements. While self-funded customers participate in
Trigon's networks, the claims are not underwritten by Trigon but are funded by
the groups. As of December 31, 1999, fully insured, also referred to as
commercial, products covered 974,717 members and made up 52.2% of total
enrollment. Its components include: three HMO networks which, with 274,184
members, are the Company's most tightly managed and cost efficient networks; the
preferred provider organization ("PPO") networks which, with 378,406 members,
offer greater choice of providers than Trigon's HMO networks; and the
participating provider ("PAR") network which, with 151,673 members, is the
Company's broadest and most flexible network. Commercial products also include
Medicare supplement plans with 119,050 members and the Medicaid HMO plans with
49,174 members. 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. As of
December 31, 1999 enrollment in this product stood at 2,230 members. Self-
funded enrollment as of December 31, 1999 was 677,545 members and represents
36.3% of total enrollment. Self-funded arrangements are available to groups
with more than 100 employees and are typically utilized by groups with more than
1,000 employees. Trigon charges self-funded groups an administrative fee based
on the number of members in a group or the group's claims experience. In
addition, most self-funded groups purchase aggregate and/or claim specific stop
loss coverage. In exchange for a premium, the group's aggregate liability is
capped for the year or the group's liability on any one episode of care is
capped.
On October 5, 1999, the Company announced that Mid-South Insurance Company (Mid-
South), a subsidiary, intended to exit the health insurance market effective
April 30, 2000. The Company's decision was due to the continued unacceptable
performance and increased medical costs of Mid-South. On March 1, 2000, Trigon
signed a
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definitive agreement to sell Mid-South to another carrier. The pending
sale, which is subject to regulatory approval, does not affect Mid-South's exit
from the group health insurance market. However, completion of the sale would
eliminate the need for approximately 18,000 Mid-South individual members to find
replacement coverage. As of September 30, 1999 Mid-South covered 93,000
members. The Company excluded all Mid-South enrollment from its reported
December 31, 1999 membership.
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 ("BCBSA") and the
U.S. Office of Personnel Management ("OPM"), the Company provides health
benefits to federal employees in Virginia. FEP revenues represent the
reimbursement by OPM of medical costs incurred including the actual cost of
administering the program, as well as a performance-based share of the national
program's overall profit. As of December 31, 1999, FEP enrollment stood at
216,089 members and represents 11.6% of total enrollment. The FEP is the
Company's largest customer, representing 19.1% of total consolidated revenues
during 1999. 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
discontinued 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 during November 1999. As an administrative agent for
Medicare, the Company allocated 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 disease management programs, third-party
administration for medical and workers compensation, health promotions and
similar products, is reflected in an "all other" category.
Refer to Note 23, "Segment Information," on pages 53 and 55 of the Company's
1999 Annual Report to Shareholders, which are incorporated herein by reference,
for financial information relating to reportable segments.
The following table sets forth the data by network for the last five years:
ENROLLMENT BY NETWORK SYSTEM
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As of December 31,
1999 1998 1997 1996 1995
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Health Insurance
Commercial
HMO....................................... 274,184 255,879 255,548 219,866 166,536
PPO....................................... 378,406 297,939 263,828 230,675 212,322
PAR....................................... 151,673 165,239 192,825 236,383 296,716
Medicaid/Medicare HMO..................... 51,404 31,338 35,488 28,306 6,357
Medicare supplement....................... 119,050 121,322 125,686 128,015 129,252
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Total commercial excluding Mid-South......... 974,717 871,717 873,375 843,245 811,183
Self-funded.................................. 672,906 639,971 654,004 664,862 641,633
Processed for other Blue Cross and Blue
Shield Plans (ASO)........................ 4,639 5,545 15,728 70,330 64,558
---------------------------------------------------------------------------
Total health insurance excluding Mid-South... 1,652,262 1,517,233 1,543,107 1,578,437 1,517,374
---------------------------------------------------------------------------
Government
Federal Employee Program (PPO)............... 216,089 213,017 207,457 197,241 198,561
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Total government 216,089 213,017 207,457 197,241 198,561
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Total excluding Mid-South.................... 1,868,351 1,730,250 1,750,564 1,775,678 1,715,935
Mid-South, commercial........................ -- 105,056 64,143 49,251 19,857
Mid-South, ASO............................... -- 26,065 25,663 35,620 63,826
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Total........................................ 1,868,351 1,861,371 1,840,370 1,860,549 1,799,618
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</TABLE>
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SIGNIFICANT CUSTOMERS
Trigon's two largest customers are the FEP and the Commonwealth of Virginia
("COV"). FEP represents 19.1% of total consolidated revenues. The contract
renews automatically for a term of one year each January 1, unless either party
gives written notice at least 60 days prior to the date of renewal. Under the
program, a special FEP reserve is maintained at the national level as a
protection against adverse claims trends. However, if the contract should
terminate with a negative balance in the FEP special reserve, the losses would
be allocated to participating plans as subcontractors based on a ratio of the
Company's past five year claims experience as a percent of the total program's
experience. As of December 31, 1999, the national reserve stood at 4.3 months
of claims and administrative payments in reserve, which is above the target of a
3.0 month reserve base. Since 1972, the Company has provided health benefits to
employees and retirees of COV. The current contract, which includes both self-
funded and fully insured product offerings, represented 15.0% of premium and
premium equivalents during 1999. There are currently approximately 120,000 COV
employees in these two product offerings. On February 9, 2000, the COV awarded
the Company the next multi-year contract effective July 1, 2000 to administer
its statewide, self-funded medical/surgical health care benefits programs. These
employees also will have other health benefit plan choices since the COV's new
contract provides for selected other carriers to offer medical/surgical plans to
employees. In October 1999, the COV awarded the Company contracts to administer
the dental and prescriptions drug benefits programs for the same employees
covered by the medical/surgical contract. In addition to the self-funded
product offering, the Company currently offers the COV a fully insured HMO
product with enrollment of 23,707 members as of December 31, 1999. The Company
decided not to re-bid on this portion of the contract because the current
contract has not generated acceptable returns. The HMO portion of the current
COV contract will expire June 30, 2000.
NETWORKS
Trigon's HMO, PPO and PAR networks provide for the delivery of health care
services at reduced costs due to favorable network arrangements with health care
providers and by including members in health care decisions. The Company has
the largest membership base in Virginia, which generally allows it to negotiate
contracts with its Virginia providers that specify favorable rates and
incorporate utilization management and other cost controls. Members assume
responsibility for a portion of health care costs through copayments,
coinsurance and annual deductible contract provisions. Members may choose to
receive health care services from providers not part of the network at an
additional cost to the member. Trigon believes that the copayment, coinsurance,
annual deductible provisions and out of network costs enhance its ability to
control costs by encouraging members to take more responsibility for their
health care decisions.
Trigon established its first HMO in 1984 and now operates three separate HMOs.
HealthKeepers, Inc. ("HealthKeepers") is a state qualified HMO that operates
primarily in the central, eastern and southwestern areas of Virginia. Peninsula
Health Care, Inc. ("PHC"), a joint venture owned 51% by Trigon, is a state
qualified HMO operating primarily on the Peninsula in Eastern Virginia. The
Company owns 80% of Priority Inc. (acquired in 1995), which owns a federally
qualified HMO, Priority Health Care, Inc. ("Priority"), operating in the
Tidewater area in Eastern Virginia. As of December 31, 1999, the HMO networks
included approximately 2,300 primary care physicians, 7,700 specialist
physicians and 53 acute care hospitals throughout Virginia. Members choose a
primary care physician who is responsible for coordinating health care services
for the member. The HMO product portfolio is presented to customers as a stand-
alone HMO offering, or through "Blue Advantage," a program which includes HMO
and PPO options administered and priced as a single program and which can only
be utilized by groups that contract with Trigon on an exclusive basis. The
Company's PPO network is a statewide PPO network which, as of December 31, 1999,
included approximately 14,500 physicians and 89 acute care hospitals within
Virginia. Members may seek care from any PPO network physician depending on
services required. Trigon's PAR network provides more traditional health
coverage and included approximately 15,300 physicians and 89 acute care
hospitals. The PAR network offers members more providers to choose from,
greater customization of benefit design and fewer restrictions in the use of
non-network providers than the PPO network. Trigon expects that its PAR network
and products will continue to be an important offering for groups desiring
greater flexibility and choice in networks and benefits, as well as a source of
new PPO and HMO members. Trigon also offers Medicaid HMO products to
participants in the Aid to Families with Dependent Children program and the
Aged, Blind and Disabled Individuals programs in the Peninsula and Tidewater
regions of Virginia and within the City of Richmond and five surrounding
counties in central Virginia.
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Trigon's networks have contracts with hospitals, physicians and other
professionals at reduced rates due to the volume of business it offers to health
care providers that are a part of the network. Hospital provider contracts,
typically three to five years in duration, are generally paid on the basis of
per diems (i.e., fixed fee schedules where the daily rate is based on the type
of service; primary method of in-patient reimbursement), per case per admission
(i.e., fixed fee schedules for all services during a member's hospitalization),
or a percentage of covered charges with limits on the subsequent year increases.
The average rate negotiated with hospitals under this arrangement is lower than
the hospital's average standard retail charges. Services not subject to special
per case or per diem payment arrangements are generally paid according to a fee
schedule or as a percentage of billed charges. Beginning in 1997, the Company
changed its method of reimbursing hospitals for outpatient procedures which has
led to substantial savings. Over a three-year period, the Company converted its
facility outpatient contracts from a percent of covered charges to a fixed fee
reimbursement schedule for 6,500 procedures. When considering whether to
contract with a physician, the Company conducts a credentialing program to
evaluate the applicant's professional experience, including licensure. The
Company's HMO network provides reimbursement to almost all of the primary care
physicians in the HMO network on a capitated basis. Specialists are reimbursed
based on a fee schedule or, in some cases, on a capitated basis. Some ancillary
services, lab services, behavioral health and vision services are also
capitated. PPO and PAR physician provider contracts employ fixed fee schedules,
which are below standard billing rates. Physician fee schedule payments are set
by the Company using Medicare's Resource Based Relative Value System
methodologies and are generally adjusted annually.
UTILIZATION MANAGEMENT
Trigon also manages health care costs in its networks by using utilization
management system guidelines for the networks that are intended to address
quality of care and help to ensure that only appropriate services are rendered
and that such services are provided in the most cost-effective manner. Trigon
recognizes that the right care in the right setting at the right time using the
right provider for the right price equates to quality medical care. In the HMO
network, the primary care physicians are considered to be the overall manager of
the individual's health care needs and manage and optimize care through the use
of referrals and by approving all specialty care before it is rendered. In
addition, the HMO reviews all high cost services needed by individual members
that are not provided by the primary care physician. The Company also manages
health care costs and quality by reviewing monthly cost and utilization trends
within all networks. Utilization rates and cases are reviewed in the aggregate
and by service type to identify opportunities for better quality and cost
control. In addition, the highest cost services are studied to determine if
costs can be reduced by using new, less expensive technologies or by creating
additional networks or contracts, such as networks for ambulatory care, to
reduce provider costs. The Company requires pre-admission approval of all
hospital and skilled nursing facility stays and concurrent review of length of
stay. Trigon uses the Milliman & Robertson Healthcare Management Guidelines
(M&R) complimented by InterQual(R) as its medical necessity decision support
criteria. M&R guidelines were developed based on nationwide best practices
benchmarks that maximize efficiency in health care delivery. InterQual(R) is a
nationally recognized, evidence-based criteria set developed through peer review
medical literature. The Company also modifies the decision support guidelines
based on input from its regional physician panels, thus ensuring the guidelines
are well supported by network providers. Trigon prospectively reviews the
medical necessity of home health, private duty nursing and durable medical
equipment. Also, the Company retrospectively reviews physician practice
patterns. Physicians are required to meet certain profiling criteria that
indicate cost effective and quality practice standards. All new medical
technologies are reviewed in advance in an attempt to ensure that only safe and
effective new medical procedures are covered. Additionally, the Company also
employs a comprehensive disease management program. In this program, the
Company identifies those members having certain chronic diseases, such as asthma
and diabetes, and proactively works with the member and the physician to
facilitate appropriate treatment, help to ensure compliance with recommended
therapies and educate members on lifestyle modifications to manage the disease.
The Company believes that the program promotes the delivery of efficient care
and helps to improve the quality of health care delivered.
QUALITY
Trigon's HMO quality improvement standards are modeled on those of the National
Committee on Quality Assurance ("NCQA"), an independent, nonprofit institution
that reviews and accredits health maintenance and managed care organizations.
The quality improvement program instituted by the Company's HMOs provides for
the review of quality of care service and the initial and ongoing review of the
credentials of all network providers. This
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credentialing process includes a review of whether the provider has the
necessary licenses, is qualified in the specialty indicated and meets standards
for safety, sanitation and accessibility. The HMO reviews the findings with a
quality improvement committee, which includes practicing physicians from the HMO
network. In addition, quality of care services are monitored through profiling
and data analysis, member satisfaction surveys and problem case review. During
1998, the Company obtained three-year full accreditation from the NCQA for
HealthKeepers, its largest HMO. PHC earned a three-year full accreditation from
the NCQA in December 1999. The three-year full accreditation is granted to
companies that have excellent programs for continuous quality improvement and
meet NCQA's rigorous standards.
The Company has an active program to evaluate the quality and appropriateness of
care provided by its PPO and PAR networks. Provider credentialing, profiling
and member satisfaction, along with monitoring of outcomes and clinical studies
are all performed to monitor and manage quality of care. Network physicians and
other providers participate in quality management programs overseen by medical
advisory panels. Using the Company's computerized medical information database,
these programs involve profiles of the tests, types of treatment and procedures
performed for specific diagnoses by these physicians, as well as reviews of
aggregate data. The American Accreditation Health Care Commission/URAC has
awarded Trigon Insurance a full, two-year accreditation for health utilization
management services. Trigon Insurance has been certified since 1992.
MARKETING
Trigon markets its products and services to both individuals and groups. The
individual products are marketed principally through direct marketing
initiatives and through brokers. The group market includes small, medium and
large group employers. The smaller group employers generally use insurance
brokers to assist in the selection of products and analysis of the actual cost
of competing plans. As the group size grows, employers may use consultants to
assist them in the tailoring of benefits and networks. The larger group
employers are generally more sophisticated purchasers, often engaging
consultants to work with the Trigon sales staff to tailor benefit and network
design to match their specific needs more closely. In addition, Trigon has a
direct sales staff that markets the full range of Trigon products and services.
COMPETITION
The health care industry is highly competitive both in Virginia and in other
states in the southeastern and mid-Atlantic United States into which the Company
principally intends to expand. Managed care companies, including large, well-
capitalized companies which market managed care products nationwide, have also
identified the southeastern and mid-Atlantic regions of the United States as
being favorable for expansion. In some cases, market entrants, as well as
existing health care companies, have competed with the Company for business by
offering very favorable pricing terms to customers. The Company faces this
increased competition in the areas in which it is licensed to use the Blue Cross
and Blue Shield service marks and tradenames. In areas outside of its licensed
territory, the Company's ability to successfully compete may be adversely
affected by its inability to use the Blue Cross and Blue Shield service marks
and tradenames, by the presence of competitors that are able to use such service
marks and tradenames in the areas and by the Company's lack of substantial
market share or established provider networks in these areas. The Company also
faces competition from a trend among health care providers to combine and form
their own networks in order to contract directly with employer groups and other
prospective customers to provide health care services. It is possible that such
overall increased competition will exert strong pressures upon Trigon's
profitability, its ability to increase enrollment and its ability to
successfully pursue growth in areas both within and outside of Virginia.
INVESTMENTS
The Company's investment policies are designed to provide liquidity to meet
anticipated payment obligations and preserve capital. Trigon fundamentally
believes that concentrations of investments in any one asset class are unwise
due to constantly changing interest rates as well as market and economic
conditions. Accordingly, the Company maintains a diversified investment
portfolio consisting both of fixed income and equity securities, with the
objective of producing a consistently growing income stream and maximizing risk-
adjusted total return. The fixed income portfolio includes government and
corporate securities, both domestic and international, with an average quality
rating of A as of December 31, 1999. The portfolio had an average contractual
maturity of 7.4 years as of December
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31, 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 December 31, 1999, the
Company's equity exposure, comprised of direct equity as well as equity-indexed
investments, was 11.0% of the total portfolio, as compared to 14.0% as of
December 31, 1998.
The Company utilizes internal and external investment managers. Both the
internal and external managers invest within guidelines established by the
Company designed to fit into the overall investment strategy. These guidelines
establish minimum quality and diversification requirements that, among other
things, provide limitations on the allowable investment for a single issuer as
well as currency exposure for those managers investing in international
securities.
As of December 31, 1999, the composition of the Company's fixed income
investment securities by rating is as follows (in thousands):
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ESTIMATED
FAIR PERCENT
RATING (1) VALUE OF TOTAL
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<S> <C> <C>
AAA......................................................... $ 676,708 43.5%
AA.......................................................... 63,754 4.1
A........................................................... 94,085 6.0
BBB......................................................... 151,530 9.7
BB.......................................................... 297,802 19.1
B........................................................... 240,618 15.5
CCC or lower................................................ 1,910 0.1
Not rated (principally, other fixed income investment funds) 30,709 2.0
------------------------
Total....................................................... $ 1,557,116 100.0%
------------------------
</TABLE>
(1) Ratings are assigned by Standard & Poor's Corporation, Moody's Investor
Service, Inc. or Fitch Investors Service, L.P.
Refer to Note 4, "Investment Securities," on pages 38 through 40 of the
Company's 1999 Annual Report to Shareholders, which are incorporated herein by
reference, for financial information relating to the Company's investment
securities.
Other than currently or formerly occupied Company property or through mortgage-
backed securities, the Company has no investment in real estate or mortgage
loans.
INFORMATION SYSTEMS
The Company develops and maintains its own information systems. Information
systems have played and will continue to play a key role in ongoing plans to
continually improve quality, lower costs and improve service for the Company's
customers. Trigon's centralized common database and analytical technologies
allow for increasingly more sophisticated methods of managing costs and quality
of care. The database includes comprehensive information on virtually all
physicians and hospitals and approximately one third of the population in
Virginia, which assists Trigon in analyzing the medical and economic performance
of providers and the medical and economic experience of specific customer groups
and individuals. The Company believes that its information systems are a
competitive advantage and are sufficient to meet its current needs and future
expansion plans.
The Company uses an integrated set of applications software to support marketing
and underwriting, eligibility and billing, electronic claims submission, claims
administration, managed care programs and corporate financial management. A
combination of custom developed and licensed systems is used to meet the unique
needs of different products and markets. An overall systems architecture is
maintained to promote consistency of data, processing rules and flexibility.
Different systems serving the unique products or markets feed data to a
corporate information and decision support system. This decision support system
provides a single source of information for
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all of the Company's data reporting and analytic needs. This includes
operational and financial performance, underwriting and marketing analysis,
utilization management and actuarial reporting.
Refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Readiness Disclosure" on page 26 of the
Company's 1999 Annual Report to Shareholders, which is incorporated herein by
reference, for a discussion of the Year 2000 issue, the steps taken by the
Company to address it and the effects on the Company.
REGULATION
HEALTH CARE REFORM - FEDERAL and VIRGINIA. 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:
. efforts to expand tort liability of health plans;
. proposed class action lawsuits targeting the health care industry's efforts
to deliver quality care at affordable costs; and
. 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 has passed the House of Representatives would expand tort liability
for health plans and change the practices for defining medical necessity. The
corresponding bill that 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. Moreover, there can be no assurance that additional
legislative and regulatory initiatives will not be undertaken in the future, to
address "patient protection," to engage in structural reform of the health care
industry in order to reduce the escalation in health care costs or to make
health care more accessible. Such reform, if it occurs, could adversely affect
Trigon's results of operations or financial condition.
At the state level, the Virginia General Assembly, in its 2000 Session, did not
pass legislation that would substantially increase health care costs, restrict
choice or drive up the number of uninsured Virginians. At this time, the health
care legislation that did pass is not expected to have a material effect on the
Company's results of operations or financial condition.
Several major companies in the health care industry 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.
INSURANCE COMPANY AND HMO REGULATION. Trigon Insurance, Trigon Health and Life
Insurance Company ("Trigon Health and Life"), a health and life company, and the
three HMO subsidiaries are subject to the insurance laws and regulations of the
Commonwealth of Virginia, the domiciliary state of these companies. Mid-South
is domiciled in North Carolina and is subject to the laws and regulations of
that state. In addition, Trigon Health and Life and Mid-South are subject to
the insurance laws and regulations of the other jurisdictions in which they are
licensed or authorized to do business. These insurance laws and regulations
generally give state regulatory authorities broad supervisory, regulatory and
administrative powers over insurance companies and insurance holding companies
with respect to most aspects of their businesses. This regulation is intended
primarily for the benefit of the policyholders and enrollees and not investors.
Regulatory authorities exercise extensive supervisory power over health and life
insurance companies and HMOs with respect to licensing; the approval of policy
forms and policies used; the nature of, and limitations on, a company's
investments; the periodic examination of the operations of the companies; the
form and content of annual statements and other reports required to be filed on
the financial condition of the companies; the establishment of minimum capital
or net worth requirements for these companies and other requirements.
Additionally, the HMOs are subject to regulation regarding quality assurance,
covered benefits, contracts between the HMO and its health care providers, the
accessibility of providers in the service area of an HMO and other requirements.
State regulatory authorities require the insurance companies and the HMOs to
7
<PAGE>
maintain restricted investments represented by interest-bearing investment
securities, which are held by trustees or the state regulatory agencies as a
special fund for the policyholders and enrollees if the company fails to meet
its obligations in that state.
Trigon Insurance, the HMO subsidiaries, Trigon Health and Life and Mid-South are
required to file periodic statutory financial statements in each jurisdiction in
which they are licensed. Trigon has one federally qualified HMO that is also
subject to regulation and review by the OPM and certain other federal
authorities, with which it must file periodic reports. Areas covered by federal
law are similar to those covered by state law and regulation. In addition, one
of the Company's HMOs offered a Medicare risk product through December 31, 1999
that subjected that HMO to regulation and review by the U.S. Department of
Health and Human Services and certain other federal authorities as well. Trigon
Insurance, the HMO subsidiaries, Trigon Health and Life and Mid-South are
periodically examined by the insurance departments of the jurisdictions in which
they are licensed to do business.
INSURANCE HOLDING COMPANY REGULATION. Trigon Healthcare, Inc. is not regulated
as an insurance company but, as the direct or indirect owner of all the capital
stock of Trigon Insurance, the three HMOs, Trigon Health and Life and Mid-South,
is regulated as an insurance holding company and subject to the insurance
holding company acts of Virginia and North Carolina, the states in which the
subsidiaries are domiciled. These acts contain certain reporting requirements
as well as restrictions on transactions between an insurer or HMO and its
affiliates. The Virginia insurance holding company laws and regulations
generally require insurance companies and HMOs within an insurance holding
company system to register with the State Corporation Commission and to file
with the State Corporation Commission certain reports describing capital
structure, ownership, financial condition, certain intercompany transactions and
general business operations. In addition, various notice and reporting
requirements generally apply to transactions between insurance companies and
HMOs and their affiliates within an insurance holding company system, depending
on the size and nature of the transactions. Virginia insurance holding company
laws and regulations require prior regulatory approval or, in certain
circumstances, prior notice of, certain material intercompany transfers of
assets as well as certain transactions between insurance companies, HMOs, their
parent holding companies and affiliates.
Additionally, holding company acts (including those of Virginia and North
Carolina) restrict the ability of any person to obtain control of an insurance
company or HMO without prior regulatory approval. Without such approval (or an
exemption), no person may acquire any voting security of an insurance holding
company which controls a Virginia insurance company or HMO, or merge with such a
holding company, if as a result of such transaction such person would "control"
the insurance holding company. "Control" is defined as the direct or indirect
power to direct or cause the direction of the management and policies of a
person and is presumed to exist if a person directly or indirectly owns or
controls 10% or more of the voting securities of another person.
RISK-BASED CAPITAL REQUIREMENTS. Virginia and North Carolina have statutory
risk-based capital ("RBC") requirements for health and other insurance
companies. Such requirements are intended to assess the capital adequacy of
life and health insurers, taking into account the risk characteristics of an
insurer's investments and products. The formula for calculating such RBC
requirements, set forth in instructions adopted by the NAIC, is designed to take
into account asset risks, insurance risks, interest rate risks and other
relevant risks with respect to an individual insurance company's business.
Under these laws, an insurance company must submit a report of its RBC level to
the Virginia State Corporation Commission or Insurance Commissioner of North
Carolina, as appropriate, as of the end of the previous calendar year.
The RBC requirements categorize insurance companies according to the extent to
which they meet or exceed certain RBC thresholds. The law requires increasing
degrees of regulatory oversight and intervention as an insurance company's RBC
declines. The level of regulatory oversight ranges from requiring the insurance
company to inform and obtain approval from the domiciliary Insurance
Commissioner of a comprehensive financial plan for increasing its RBC to
mandatory regulatory intervention requiring an insurance company to be placed
under regulatory control in a rehabilitation or liquidation proceeding.
As of December 31, 1999, the RBC levels of Trigon Insurance, Trigon Health and
Life and Mid-South, as calculated in accordance with the NAIC RBC instructions,
exceeded all RBC thresholds.
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<PAGE>
The NAIC has proposed that states adopt RBC standards for HMOs. On March 10,
2000, the Governor of Virginia signed into law the RBC standards for HMOs that
become effective January 1, 2001 and include interim monitoring provisions
between July 1, and December 31, 2000. The Company has determined that, as of
December 31, 1999, the RBC levels for each of its HMOs exceed all RBC thresholds
under the new law.
RESTRICTIONS ON DIVIDENDS. In the event the Company determines to pay
dividends, the principal source of funds to pay dividends to stockholders would
be dividends received by the Company from its subsidiaries, including Trigon
Insurance. Virginia insurance laws and regulations restrict the payment of
extraordinary dividends declared by insurance companies, including health care
insurers such as Trigon Insurance, in a holding company system. An insurance
company is prohibited from paying an extraordinary dividend unless it obtains
the approval of the State Corporation Commission. An extraordinary dividend is
one which, together with the amount of dividends and distributions paid by the
insurance company during the immediately preceding 12 months, exceeds the lesser
of (i) 10% of the insurance company's statutory surplus to policyholders as of
the preceding December 31 or (ii) the insurance company's statutory net income
(not including realized capital gains) for the preceding calendar year.
Further, an insurance company may not pay a dividend unless, after such payment,
its surplus to policyholders is reasonable in relation to its outstanding
liabilities and adequate to meet its financial needs. The State Corporation
Commission may bring an action to enjoin or rescind payment of any dividend or
distribution that would cause the insurance company's statutory surplus to be
unreasonable or inadequate. On January 7, 2000, the State Corporation
Commission approved Trigon Insurance's request to effect an extraordinary
dividend of $125 million to its parent, Trigon Healthcare, Inc., on February 1,
2000. As a result of this dividend, any dividend distributions by Trigon
Insurance during 2000 will require the approval of the State Corporation
Commission. During 1999, 1998 and 1997, Trigon Insurance paid dividends to its
parent, Trigon Healthcare, Inc., of $48.9 million, $227.5 million and $238.7
million, respectively. The 1999 cash dividend was effected August 1, 1999. The
1998 dividend was effected July 1, 1998 and included $200.0 million of cash and
$27.5 million of stock of a wholly-owned subsidiary. The 1997 dividend was
effected July 31, 1997 and consisted of $188.7 million of stock of a wholly-
owned subsidiary and $50.0 million of cash.
North Carolina, Mid-South's domiciliary state, similarly restricts the payment
of dividends by their domiciliary insurance companies.
ASSESSMENTS AGAINST INSURERS. Under insolvency or guaranty association laws in
most states, insurance companies can be assessed for amounts paid by guaranty
funds for policyholder losses incurred by insolvent insurance companies. Most
state insolvency or guaranty association laws, including Virginia's, currently
provide for assessments based upon the amount of premiums received on insurance
underwritten within such state (with a minimum amount payable where Mid-South is
licensed even if no premium is received). Substantially all of Trigon's
premiums are currently derived from insurance underwritten in Virginia.
Under the Virginia Life, Accident and Sickness Insurance Guaranty Association
(the "Association") Act, assessments against insurance companies which issue
policies of accident or sickness insurance, such as Trigon Insurance, are made
retrospectively and are based (up to prescribed limits) upon the ratio of (i)
the insurance company's premiums received in Virginia over the previous three
calendar years on accident and sickness insurance, to (ii) the aggregate amount
of premiums received by all assessed member insurance companies over such three
calendar years on accident and sickness insurance. The guaranty fund
assessments made under the act are administered by the Association, which has
its own board of directors selected by member insurers with the approval of the
State Corporation Commission. An assessment may be abated or deferred by the
Association if, in the opinion of the board, payment would endanger the ability
of the member to fulfill its contractual obligations, but the other member
insurers may be assessed for the amount of such abatement or deferral. Any such
assessment paid by a member insurance company may be offset against its premium
tax liability to the Commonwealth of Virginia over the ten calendar years
following the year of the payment, in amounts equal to ten percent of the amount
paid. The amount and timing of any future assessments, however, cannot be
reasonably estimated and are beyond the control of the Company.
VIRGINIA'S OPEN ENROLLMENT PROGRAM. The Commonwealth of Virginia has an open
enrollment program pursuant to which Trigon Insurance is required to offer
comprehensive accident and sickness insurance contracts to individuals without
imposition of certain underwriting criteria that would deny coverage on the
basis of medical condition, age or employment status. As an incentive for
participating in the open enrollment program,
9
<PAGE>
Trigon Insurance pays Virginia premium tax of three-fourths of one percent
(0.75%) on premiums received from individual accident and sickness insurance
rather than the general Virginia premium tax of two and one fourth percent
(2.25%). This general Virginia premium tax applies to accident and sickness
insurance premiums received by Trigon Insurance from group business. Prior to
January 1, 1998, policies issued to small employers were also part of the open
enrollment program. Subsequent to health care reform legislation in 1997, all
carriers offering coverage in the small group market are required to issue any
policy in its small group market portfolio to any small employer that wants to
purchase the product. To withdraw from the open enrollment program, Trigon
Insurance would be required to give 24 months advance notice of withdrawal to
the State Corporation Commission.
BANKRUPTCY AND INSOLVENCY. In the event of default on any debt incurred by the
Company or the bankruptcy of the Company, the creditors and stockholders of the
Company would have no right to proceed against the assets of Trigon Insurance or
any other subsidiary of the Company. If Trigon Insurance were subject to a
rehabilitation or liquidation proceeding, such proceeding would be brought by
the State Corporation Commission which would act as the receiver with respect to
such insurance company's property and business. All creditors of Trigon
Insurance, including, without limitation, members and, if applicable, the
various state guaranty associations, would be entitled to payment in full from
such assets before the Company, as a stockholder, would be entitled to receive
any distributions therefrom.
THE BLUE CROSS BLUE SHIELD LICENSE
The Company and certain of its subsidiaries have the exclusive right to use
certain Blue Cross and Blue Shield service marks and tradenames for all of their
plans and products throughout Virginia other than a small portion of the
northern Virginia suburbs adjacent to Washington, D.C. The license requires an
annual fee to be paid to BCBSA equal to total association expenses allocated to
members based upon enrollment and premium and subjects the Company to certain
other guidelines. BCBSA is a national trade association of Blue Cross and Blue
Shield licensees, the primary function of which is to promote and preserve the
integrity of the Blue Cross and Blue Shield name and service marks as well as
provide certain coordination among plan and provider services. Each BCBSA
licensee is an independent legal organization and is not responsible for
obligations of other BCBSA member organizations. The Company has no right to
use the Blue Cross and Blue Shield service marks and tradenames outside of its
designated territory within the Commonwealth of Virginia.
Under the Company's license agreement with BCBSA, an institutional investor
(generally defined as an entity identified in Rule 13d-1(b) (1) (ii) of the
rules and regulations under the Securities Exchange Act of 1934 and which makes
certifications required by item 10 of SEC Schedule 13G) may own up to 10% of the
outstanding voting securities of the Company. All other stockholders are
subject to a 5% ownership limitation. Ownership by any stockholder of voting
securities in excess of such limits would subject the Company to automatic
termination of its license.
The Company's Articles of Incorporation contain certain provisions which are
intended to prevent any holder from acquiring shares in excess of the limits set
forth in the Company's license agreement. However, there can be no assurance
that a court would enforce these provisions or that if these provisions were not
enforced that the Company would retain the license from BCBSA. If the BCBSA
license were to be terminated, there would be a material adverse effect on the
Company's business and operations, which the Company does not believe it can
meaningfully quantify.
The license agreements between BCBSA and its licensees prohibit a licensee from
entering into certain transactions which would result in an unlicensed entity
obtaining control of the licensee or acquiring a substantial portion of the
licensee's assets related to services provided under the Blue Cross or Blue
Shield service marks. The license agreements also require that a licensee pay
to BCBSA a specific amount upon termination of the license agreement, subject to
certain limited exceptions. The amount payable upon termination of the license
agreement is equal to $25 multiplied by the number of the licensee's members
receiving products or services sold or administered under the Blue Cross or Blue
Shield service marks, subject to reduction to the extent the payment of such fee
would cause such licensee to fall below certain capital requirements established
by the BCBSA.
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<PAGE>
RATING
Trigon Insurance, HealthKeepers and PHC are each presently assigned a rating of
"A" (Excellent) by A.M. Best Company. Trigon Health and Life and Priority are
each presently assigned an A.M. Best rating of "A-" (Excellent). Mid-South is
presently assigned an A.M. Best rating of "B+" (Very Good). A.M. Best's ratings
are divided into two broad categories - Secure and Vulnerable. All of the
ratings assigned to the Company's subsidiaries are classified as Secure. The
ratings of "A" and "A-" are assigned to companies which have, on balance,
excellent financial strength, operating performance and market profile when
compared to the standards established by the A.M. Best Company. It is the
opinion of A.M. Best Company that such companies have a strong ability to meet
their ongoing obligations. A "B+" rated company is considered to have a good
ability to meet its ongoing obligations. Such ratings are not directed to the
protection of investors and are subject to review and change over time. In
March 2000, Trigon Insurance received both a counterparty credit rating and an
insurer financial strength rating of "AA-" (Very Strong) from Standard &
Poor's. The counterparty credit rating is an opinion of the company's overall
creditworthiness and financial capacity to pay its financial obligations. This
rating indicated the company has a strong capacity to meet its financial
commitments. The insurer financial strength rating is a current opinion that
the financial security characteristics of the company are very strong with
respect to its ability to pay under its insurance contracts in accordance with
the contract terms.
EMPLOYEES
As of December 31, 1999, the Company had 3,711 full-time and 108 part-time
employees. The employees are primarily located in Virginia, with the majority
of the Virginia employees in the cities of Richmond and Roanoke. Employees are
also located in Georgia, Illinois, Maryland, New Jersey, North Carolina,
Oklahoma, Pennsylvania, South Carolina, Washington D.C. and West Virginia. The
Company believes that its relationship with its employees is good. No employees
are subject to collective bargaining agreements.
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Age as of
Name December 31, 1999 Position
- ------------------------------------ ---------------------- ----------------------------------------------
<S> <C> <C>
Norwood H. Davis, Jr. 59 Chairman of the Board
Thomas G. Snead, Jr. 46 President and Chief Executive Officer
William P. Bracciodieta, M.D. 54 Senior Vice President and Chief Medical
Officer
Ralph T. Bullock, Jr. 50 Senior Vice President and Chief Information
Officer
Thomas R. Byrd 42 Senior Vice President and Chief Financial
Officer
James W. Copley, Jr. 47 Senior Vice President and Chief Investment
Officer
Kathy Ashby Merry 37 Senior Vice President, Operations
Ronald M. Nash 62 Senior Vice President, Corporate Services
Paul F. Nezi 52 Senior Vice President, Virginia Group Business
Timothy P. Nolan 38 Senior Vice President, Marketing and
Corporate Development
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Age as of
Name December 31, 1999 Position
- ------------------------------------ ---------------------- ----------------------------------------------
<S> <C> <C>
Thomas A. Payne 55 Senior Vice President, Corporate Audit
Peter L. Perkins 42 Senior Vice President and Chief Actuary
David P. Wade 43 Senior Vice President, Government and
Individual Business
J. Christopher Wiltshire 45 Senior Vice President, General Counsel and
Corporate Secretary
</TABLE>
For a listing of the positions held with the Company by each executive officer
and other information, refer to "Officers," on page 58 of Trigon Healthcare
Inc.'s 1999 Annual Report to Shareholders, which is incorporated herein by
reference.
SERVICE MARKS
The Company has registered and maintains several service marks, trademarks and
tradenames at the federal level, in the Commonwealth of Virginia and in certain
other states. "Trigon," "Keycare" and "HealthKeepers" are included among these
marks. Although the Company considers its registered service marks, trademarks
and tradenames important in the operation of its business, the business of the
Company is not dependent on any individual service mark, trademark or tradename.
For a discussion of the Company's license to use certain Blue Cross and Blue
Shield service marks and tradenames, see "The Blue Cross Blue Shield License."
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the document. The Company desires to
take advantage of these safe harbor provisions. Certain information contained
in this Form 10-K is forward-looking within the meaning of the Act or Securities
and Exchange Commission rules. Words such as expects, anticipates, intends,
plans, believes, seeks or estimates, or variations of such words and similar
expressions are also intended to identify forward-looking statements. Such
forward-looking statements are subject to inherent risks and uncertainties, many
of which are beyond the control of the Company. Set forth below are certain
important factors that, in addition to general economic conditions and other
factors, some of which are discussed elsewhere in this Form 10-K, may affect
these forward-looking statements and the Company's business generally.
ESCALATING HEALTH CARE COSTS AND THE HEALTH CARE INDUSTRY. The Company's
profitability depends in large part on accurately predicting and effectively
managing health care costs. Predicting medical costs is difficult partially due
to the variability of medical inflation. Trigon continually reviews and adjusts
its premium and benefit structure to reflect its underlying claims experience
and revised actuarial data; however, several factors could adversely affect the
medical loss ratios. Certain of these factors, which include changes in health
care practices, inflation, new technologies, major epidemics, natural disasters
and malpractice litigation, are beyond any health plan's control and could
adversely affect the Company's ability to accurately predict and effectively
control health care costs.
Competitive price pressures in the health insurance and managed care industry,
which generally result from the entry and exit of health care companies in the
marketplace, historically have resulted in, or contributed to, pricing and
profitability cycles. The extent to which recent structural changes in the
managed health care and health insurance industry have altered cyclical patterns
is uncertain. There can be no assurance, however, that a continuation of the
typical cyclical pattern will not adversely affect the profitability of the
Company in the next few years.
COMPETITION. The health care industry is highly competitive both in Virginia
and in other states in the southeastern and mid-Atlantic United States into
which the Company principally intends to expand. See
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<PAGE>
"Competition." There is no assurance that the overall increased competition will
not exert strong pressures upon Trigon's profitability, its ability to increase
enrollment, or its ability to successfully pursue growth in areas both within
and outside of Virginia.
GOVERNMENT REGULATION. The Company and its subsidiaries are subject to federal
and state regulation. See "Regulation." Regulatory initiatives may be
undertaken in the future, either at the federal or state level, to engage in
structural reform of the health care industry in order to reduce the escalation
in health care costs or to make health care more accessible. Such reform, if it
occurs, could adversely affect Trigon's results of operations or financial
condition.
POTENTIAL RISKS ASSOCIATED WITH GROWTH THROUGH ACQUISITIONS. As a result of the
expansion of managed care companies into Virginia and the southeastern and mid-
Atlantic regions of the United States, the competition to purchase health care
companies has intensified, which in many instances has resulted in significant
increases in the costs of acquiring such companies, and which could affect the
availability of attractive acquisition opportunities. In addition, the Company
has no significant experience in expanding its managed health care business
outside Virginia. There can be no assurance that the Company will successfully
identify or complete acquisitions or that any acquisitions, if completed, will
perform as expected or will contribute significant revenues or profits to the
Company. The Company's ability to expand successfully outside of Virginia
through acquisitions or otherwise may be adversely affected by its inability to
use the Blue Cross and Blue Shield service marks and trademarks outside of the
Company's licensed territory in Virginia, by the Company's lack of substantial
market share or established provider networks outside of Virginia and by the
presence of competitors with strong market positions in these areas.
CONCENTRATION OF BUSINESS IN VIRGINIA. While the Company's growth strategy
includes expansion outside Virginia, for the foreseeable future a significant
portion of the Company's revenues may be subject to economic factors specific to
Virginia. Therefore, there can be no assurance that a downturn in the Virginia
economy would not adversely affect the Company.
POTENTIAL LOSS OF BLUE CROSS AND BLUE SHIELD SERVICE MARKS AND TRADENAMES.
Trigon and the BCBSA are parties to a license agreement pursuant to which the
Company and certain of its subsidiaries have the exclusive right to use certain
Blue Cross and Blue Shield service marks and tradenames for their products
throughout Virginia other than certain northern Virginia suburbs adjacent to
Washington, D.C. See "The Blue Cross Blue Shield License." If the BCBSA
license were to be terminated, there would be a material adverse effect on the
Company's business and operations, which the Company does not believe it can
meaningfully quantify. To the extent that the Company continues to use the Blue
Cross and Blue Shield service marks and tradenames in marketing its managed care
products, there can be no assurance that any negative publicity concerning BCBSA
and other BCBSA licenses will not adversely affect the sales of the Company's
managed care products and the Company's operations.
Item 2. Properties
The Company is headquartered in Richmond, Virginia, where it owns a four-story
building with 265,000 square feet. The Company also owns an office facility and
warehouse in Roanoke, Virginia with 200,900 square feet and an office facility
in Fayetteville, North Carolina with 70,800 square feet. The Company leases an
additional 427,300 square feet at various other locations in Richmond, Virginia.
The Company also leases space at two other facilities in Roanoke, Virginia
comprising 65,000 square feet. These properties are primarily used by the
health insurance segment for operations and for corporate administration.
The Company leases 72,500 square feet for regional offices throughout Virginia
and 12,000 square feet for office space in Maryland, North Carolina,
Pennsylvania and South Carolina.
Square footage utilized by segment as of December 31, 1999 was as follows:
health insurance, 896,300; government programs, 64,100; investments, 3,900; and
other reportable segments, 39,800. The remaining 109,400 square feet was used
for corporate administration.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company and certain of its subsidiaries are involved in various 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Refer to page 28, "Market Prices of Common Stock and Dividend Data," of Trigon
Healthcare Inc.'s 1999 Annual Report to Shareholders, which is incorporated
herein by reference.
Refer to "Part 1 - Business -- Regulation -- Insurance Holding Company
Regulation" and "Part 1 - Business -- Regulation -- Restrictions on Dividends"
for discussion of insurance holding company regulations and dividend
restrictions. In addition, under the terms of the Company's $300 million
revolving credit agreement and Amendment No. 1, the Company may not pay
dividends on the Company's common stock unless the aggregate of all dividends
paid by the Company plus payments to purchase, redeem or otherwise acquire
capital stock of the Company (other than the Commonwealth Payment and purchases
of Company capital stock made on or after December 1, 1999 in an aggregate
amount not to exceed $150 million) does not exceed the sum of (i) $10,000,000
plus (ii) 50% of the consolidated net income (or minus 100% of consolidated net
loss) of the Company for the period from the effectiveness of the
Demutualization through the end of the most recently completed fiscal quarter,
plus (iii) an amount (not to exceed $50,000,000) equal to 50% of the cumulative
cash dividends paid out of income of certain subsidiaries of the Company earned
prior to January 1, 1997 and received by the Company after the date of the
revolving credit agreement and before December 31, 1997.
ITEM 6. SELECTED FINANCIAL DATA
Refer to pages 18 through 19, "Selected Consolidated Financial and Operating
Data," of Trigon Healthcare Inc.'s 1999 Annual Report to Shareholders, which are
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Refer to pages 20 through 27, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," of Trigon Healthcare Inc.'s 1999 Annual
Report to Shareholders, which are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to page 28, "Quantitative And Qualitative Disclosures About Market Risk,"
of Trigon Healthcare Inc.'s 1999 Annual Report to Shareholders, which is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to pages 29 through 55, the Consolidated Financial Statements, page 56,
"Independent Auditors' Report," and page 17, "Quarterly Financial Information,"
of Trigon Healthcare Inc.'s 1999 Annual Report to Shareholders, which are
incorporated herein by reference.
14
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Refer to pages 1 through 2, "Election of Directors," and page 5, "Section 16(a)
Beneficial Ownership Reporting Compliance," of the Company's definitive Proxy
Statement dated March 24, 2000, which are incorporated herein by reference
solely as they relate to the Directors of the Company.
Pursuant to General Instruction G(3) to Form 10-K, information as to executive
officers of the Company is set forth in Part I of this Form 10-K. See "Item 1 -
Business -- Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
Refer to pages 6 through 11, "Compensation of Executive Officers," of the
Company's definitive Proxy Statement dated March 24, 2000, which are
incorporated herein by reference solely as they relate to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Refer to pages 3 and 4, "Beneficial Ownership of Securities," of the Company's
definitive Proxy Statement dated March 24, 2000, which are incorporated herein
by reference solely as they relate to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
R. Gordon Smith, a director of the Company, is a partner of McGuire, Woods,
Battle & Boothe, LLP, a law firm which serves as counsel to the Company and its
subsidiaries.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
1. Consolidated Financial Statements from Trigon Healthcare Inc.'s 1999
Annual Report to Shareholders are incorporated herein by reference in
Item 8:
-- Consolidated Balance Sheets as of December 31, 1999 and 1998 (page 29)
-- Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997 (page 30)
-- Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income for the years ended December 31, 1999, 1998 and
1997 (page 31)
-- Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997 (page 32)
-- Notes to Consolidated Financial Statements (pages 33 through 55)
-- Independent Auditors' Report (page 56)
2. Financial statement schedules
Independent Auditors' Report.....................(filed herein on page S-1)
Schedule I - Condensed Financial
Information of Registrant
(parent only) as of
December 31, 1999 and 1998 and for
the years ended December 31, 1999
and 1998 and for the period
February 5, 1997 through
December 31, 1997.......................(filed herein on pages S-2 - S-7)
15
<PAGE>
3. Exhibits. The following is a list of exhibits to this Form 10-K.
Exhibit
Number Description
- ------ -----------
2 -- Amended and Restated Plan of Demutualization. (1)
3.1 -- Amended and Restated Articles of Incorporation of Trigon Healthcare,
Inc. (1)
3.2 -- Amended and Restated Bylaws of Trigon Healthcare, Inc. dated April
28, 1999. (9)
3.3 -- Articles of Amendment to Amended and Restated Articles of
Incorporation setting forth the designation, preferences and rights
of Series A Junior Participating Preferred Stock of Trigon
Healthcare, Inc. dated July 16, 1997. (4)
4 -- Form of Stock Certificate (other Instruments Defining the Rights of
Security-Holders). (1)
4.1 -- Rights Agreement dated as of July 16, 1997 between Trigon Healthcare,
Inc. and First Chicago Trust Company of New York, as Rights Agent.
(4)
4.2 -- Form of Rights Certificate. (4)
10.1 -- License Agreement by and between the Blue Cross and Blue Shield
Association and the Company. (2)
(a) Blue Cross license
(b) Blue Shield license
10.2 -- Limited Fixed Return Plan for Certain Officers and Directors of
Trigon Insurance Company. (1) *
10.4 -- Non-Contributory Retirement Program for Certain Employees of Trigon
Insurance Company. (1) *
10.5 -- Amended and Restated Supplemental Executive Retirement Program for
Certain Employees of Trigon Insurance Company dated as of October 1,
1998. (8)*
10.6 -- Salary Deferral Plan for Norwood H. Davis, Jr. (1) *
10.7 -- Amended and Restated Employment Agreement dated September 16, 1998
by and between Trigon Insurance Company and Norwood H. Davis, Jr.
(7) *
10.9 -- Amended and Restated Employees' Thrift Plan of Trigon Insurance
Company dated as of October 1, 1998. (8)*
10.10 -- Amended and Restated Trigon Insurance Company 401(k) Restoration
Plan dated as of October 1, 1998. (8)*
10.12 -- Form of Employment Agreement dated as of December 12, 1990 by and
between Trigon Insurance Company and John C. Berry and certain other
executive officers. (1) *
10.14 -- Credit Agreement dated as of February 5, 1997 among Trigon
Healthcare, Inc., the banks party thereto and Morgan Guaranty Trust
Company of New York, as Agent. (2)
10.15 -- 1997 Stock Incentive Plan. (6) *
10.16 -- Employee Stock Purchase Plan. (6) *
10.17 -- Non-Employee Directors Stock Incentive Plan. (6) *
10.18 -- Amendment to the License Agreement by and between the Blue Cross
and Blue Shield Association and the Company. (5)
10.19 -- Amendment to the Non-Contributory Retirement Program for Certain
Employees of Trigon Insurance Company. (3) *
10.20 -- Form of Executive Continuity Agreement dated as of September 16,
1998 between Trigon Insurance Company and Thomas G. Snead, Jr. and
certain other executive officers. (7) *
10.21 -- Form of Executive Continuity Agreement dated as of September 16,
1998 between Trigon Insurance Company and John C. Berry and certain
other executive officers. (7) *
10.22 -- Amendment to the Non-Contributory Retirement Program for Certain
Employees of Trigon Insurance Company (now to be known as) The Trigon
Insurance Company Retirement Program dated as of October 1, 1998.
(8) *
10.23 -- Clarifying Amendment to the Non-Contributory Retirement Program for
Certain Employees of Trigon Insurance Company (now to be known as)
The Trigon Insurance Company Retirement Program dated as of October
1, 1998. (8) *
10.24 -- Thomas G. Snead Employment Agreement dated May 19, 1999. (10) *
10.25 -- Amendment No. 1 to Executive Continuity Agreement Between Trigon
Insurance Company and Thomas G. Snead, Jr. dated May 19, 1999. (10) *
10.26 -- Clarifying Amendment No. 2 to the Non-Contributory Retirement
Program for Certain Employees of Trigon Insurance Company (now to be
known as) The Trigon Insurance Company Retirement Program. *
16
<PAGE>
10.27 -- Clarifying Amendment No. 3 to the Non-Contributory Retirement
Program for Certain Employees of Trigon Insurance Company (now to be
known as) The Trigon Insurance Company Retirement Program. *
10.28 -- Clarifying Amendment No. 4 to The Trigon Insurance Company
Retirement Program . *
10.29 -- Amendment No. 1 dated December 14, 1999 to the Credit Agreement
dated as of February 5, 1997 among Trigon Healthcare, Inc., the banks
party thereto and Morgan Guaranty Trust Company of New York, as
Agent.
11 -- Computation of per share earnings. Refer to Note 15, "Net Income and
Pro Forma Net Income Per Share," on page 49 of Trigon Healthcare
Inc.'s 1999 Annual Report to Shareholders, which is incorporated
herein by reference.
13 -- Excerpts from the Company's Annual Report to Shareholders for the
year ended December 31, 1999.
21 -- Subsidiaries of the Registrant.
23.1 -- Consent of Independent Auditors.
27 -- Financial Data Schedule.
(1) Incorporated by reference to exhibits filed with the Company's Registration
Statement on Form S-1 (registration number 333-09773).
(2) Incorporated by reference to exhibits filed with the Company's Form 10-K
for the year ended December 31, 1996.
(3) Incorporated by reference to exhibits filed with the Company's Form 10-K
for the year ended December 31, 1997.
(4) Incorporated by reference to exhibits filed with the Company's Form 8-A/A
filed on July 16, 1997.
(5) Incorporated by reference to exhibits filed with the Company's Form 10-Q
for the period ended September 30, 1997.
(6) Incorporated by reference to exhibits filed with the Company's Proxy
Statement dated March 13, 1997.
(7) Incorporated by reference to exhibits filed with the Company's Form 10-Q
for the period ended September 30, 1998.
(8) Incorporated by reference to exhibits filed with the Company's Form 10-K
for the year ended December 31, 1998.
(9) Incorporated by reference to exhibits filed with the Company's Form 10-Q
for the period ended March 31, 1999.
(10) Incorporated by reference to exhibits filed with the Company's Form 10-Q
for the period ended June 30, 1999.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this Form
10-K.
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TRIGON HEALTHCARE, INC.
Registrant
By: /s/ THOMAS R. BYRD
-----------------------
THOMAS R. BYRD
Title: SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Date: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ THOMAS G. SNEAD, JR. President and Chief Executive Officer March 23, 2000
- --------------------------- (Principal Executive Officer)
THOMAS G. SNEAD, JR
/s/ THOMAS R. BYRD Senior Vice President and Chief March 29, 2000
- --------------------------- Financial Officer (Principal Financial
THOMAS R. BYRD and Accounting Officer)
/s/ NORWOOD H. DAVIS, JR. Chairman of the Board March 22, 2000
- ---------------------------
NORWOOD H. DAVIS, JR.
/s/ HUNTER B. ANDREWS Director March 22, 2000
- ---------------------------
HUNTER B. ANDREWS, ESQ.
/s/ LENOX D. BAKER, JR. Director March 23, 2000
- ---------------------------
LENOX D. BAKER, JR., M.D.
/s/ JAMES K. CANDLER Director March 22, 2000
- ---------------------------
JAMES K. CANDLER
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT M. FREEMAN Director March 22, 2000
- -------------------------------
ROBERT M. FREEMAN
/s/ WILLIAM R. HARVEY Director March 23, 2000
- -------------------------------
WILLIAM R. HARVEY, Ph.D.
/s/ GARY A. JOBSON Director March 25, 2000
- -------------------------------
GARY A. JOBSON
/s/ WILLIAM N. POWELL Director March 21, 2000
- -------------------------------
WILLIAM N. POWELL
/s/ J. CARSON QUARLES Director March 22, 2000
- -------------------------------
J. CARSON QUARLES
/s/ R. GORDON SMITH Director March 24, 2000
- -------------------------------
R. GORDON SMITH, ESQ.
/s/ HUBERT R. STALLARD Director March 28, 2000
- -------------------------------
HUBERT R. STALLARD
/s/ JACKIE M. WARD Director March 21, 2000
- -------------------------------
JACKIE M. WARD
/s/ STIRLING L. WILLIAMSON, JR. Director March 22, 2000
- -------------------------------
STIRLING L. WILLIAMSON, JR.
</TABLE>
<PAGE>
Independent Auditors' Report
The Board of Directors
Trigon Healthcare, Inc.:
Under date of February 11, 2000, we reported on the consolidated balance sheets
of Trigon Healthcare, Inc. and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, changes in shareholders'
equity and comprehensive income and cash flows for each of the years in the
three-year period ended December 31, 1999. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
financial statement schedule included in this annual report on Form 10-K. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Richmond, Virginia
February 11, 2000
S-1
<PAGE>
SCHEDULE I
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
Balance Sheets
December 31, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
ASSETS
<S> <C> <C>
Current assets
Cash $ -- 12
Investment securities, at estimated fair value 319,705 259,514
Other receivables 5,084 3,873
Other 43 29
--------------- ---------------
Total current assets 324,832 263,428
--------------- ---------------
Investment in subsidiaries 871,121 895,690
Deferred income taxes 947 1,240
Other assets 428 126
--------------- ---------------
Total assets $ 1,197,328 1,160,484
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 3,667 1,296
Deferred income taxes 3,615 512
Income taxes payable 5,099 1,701
Payable for investment securities 2,990 672
Payable to affiliates -- 79
--------------- ---------------
Total current liabilities 15,371 4,260
--------------- ---------------
Long-term debt 245,000 85,000
--------------- ---------------
Total liabilities 260,371 89,260
--------------- ---------------
SHAREHOLDERS' EQUITY
Common stock, $0.01 par; shares issued and outstanding
38,200, 1999; 42,300, 1998 382 423
Capital in excess of par 816,517 839,187
Retained earnings 112,896 202,554
Unearned compensation -- restricted stock (1,926) --
Accumulated other comprehensive income 9,088 29,060
--------------- ---------------
Total shareholders' equity 936,957 1,071,224
Commitments and contingencies
--------------- ---------------
Total liabilities and shareholders' equity $ 1,197,328 1,160,484
=============== ===============
</TABLE>
See accompanying independent auditors' report and notes to condensed financial
information.
S-2
<PAGE>
SCHEDULE I
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY), CONTINUED
Statements of Operations
For the years ended December 31, 1999 and 1998 and for the period
February 5, 1997 through December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- ---------------
<S> <C> <C> <C>
REVENUES
Investment income $ 19,157 12,590 4,358
Net realized gains (losses) (8,051) 614 (105)
Cash dividends from subsidiaries 48,900 200,000 50,000
---------------- --------------- ---------------
Total revenues 60,006 213,204 54,253
EXPENSES
Selling, general and administrative expenses 2,095 2,359 1,742
Interest expense 8,359 5,291 4,601
---------------- --------------- ---------------
Total expenses 10,454 7,650 6,343
---------------- --------------- ---------------
Income before income taxes and equity in undistributed net
income of subsidiaries 49,552 205,554 47,910
Income tax expenses (benefit) 106 941 (868)
---------------- --------------- ---------------
Income before equity in undistributed net income of
subsidiaries 49,446 204,613 48,778
Equity in undistributed net income of subsidiaries (28,983) (81,041) 30,204
---------------- --------------- ---------------
Net income $ 20,463 123,572 78,982
================ =============== ===============
</TABLE>
See accompanying independent auditors' report and notes to condensed financial
information.
S-3
<PAGE>
SCHEDULE I
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY), CONTINUED
Statements of Changes in Shareholders' Equity and Comprehensive Income
For the years ended December 31, 1999 and 1998 and for the period
February 5, 1997 through December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Capital Other
Common in Excess Retained Unearned Comprehensive
Stock of Par Earnings Compensation Income Total
------- ----------- -------- ------------ ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ -- -- -- -- -- --
Net income after Demutualization -- -- 78,982 -- -- 78,982
Net unrealized gains on investment
securities, net of income taxes -- -- -- -- 3,776 3,776
----------
Comprehensive income 82,758
Undistributed earnings of
subsidiaries before Demutualization -- -- 722,330 -- 33,521 755,851
and IPO
Issuance of 24,475 shares to eligible
policyholders in the Demutualization
and cash payments to eligible
policyholders in lieu of shares of
common stock 245 630,941 (722,330) -- -- (91,144)
Issuance of 17,825 shares in the
Initial Public Offering, net of 178 215,027 -- -- -- 215,205
expenses
Purchase and reissuance of common
stock under stock option and other
employee benefit plans, including
tax benefits -- (144) -- -- -- (144)
Common stock held by consolidated
grantor trusts -- (3,789) -- -- -- (3,789)
----- ------- ------- ---- ------- ------------
Balance at December 31, 1997 423 842,035 78,982 -- 37,297 958,737
Net income -- -- 123,572 -- -- 123,572
Minimum pension liability adjustment,
net of income taxes -- -- -- -- (1,149) (1,149)
Net unrealized losses on investment
securities, net of income taxes -- -- -- -- (7,088) (7,088)
----------
Comprehensive income 115,335
Adjustment to cash payments to
eligible policyholders in lieu of
shares of common stock in the
Demutualization -- (690) -- -- -- (690)
Purchase and reissuance of common
stock under stock option and other
employee benefit plans, including
tax benefits -- (1,307) -- -- -- (1,307)
Change in common stock held by
consolidated grantor trusts -- (851) -- -- -- (851)
----- ------- ------- ---- ------- ----------
Balance at December 31, 1998 423 839,187 202,554 -- 29,060 1,071,224
</TABLE>
S-4
<PAGE>
SCHEDULE I
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY), CONTINUED
Statements of Changes in Shareholders' Equity and
Comprehensive Income, Continued
For the years ended December 31, 1999 and 1998 and for the period
February 5, 1997 through December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Capital Other
Common in Excess Retained Unearned Comprehensive
Stock of Par Earnings Compensation Income Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 423 839,187 202,554 -- 29,060 1,071,224
Net income -- -- 20,463 -- - 20,463
Change in minimum pension liability,
net of income taxes -- -- -- -- 834 834
Net unrealized losses on investment
securities, net of income taxes -- -- -- -- (20,806) (20,806)
----------
Comprehensive income 491
Repurchase and retirement of common
stock (41) (20,500) (110,121) -- -- (130,662)
Purchase and reissuance of common
stock under stock option and other
employee benefit plans, including
tax benefits and net of amortization -- (767) -- (1,926) -- (2,693)
Change in common stock held by
consolidated grantor trusts -- (1,403) -- -- -- (1,403)
------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 382 816,517 112,896 (1,926) 9,088 936,957
====================================================================================
</TABLE>
See accompanying independent auditors' report and notes to condensed financial
information.
S-5
<PAGE>
SCHEDULE I
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY), CONTINUED
Statements of Cash Flows
For the years ended December 31, 1999 and 1998 and for the period February 5,
1997 through December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Net income $ 20,463 123,572 78,982
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Accretion of discounts and amortization of premiums, (1,930) (845) (129)
net
Amortization of unearned compensation 1,031 -- --
Undistributed net income of subsidiaries 28,983 81,041 (30,204)
Increase in other receivables (1,205) (1,254) (2,569)
(Increase) decrease in other assets (316) 11 (166)
Increase in accounts payable and accrued expenses 2,353 734 562
Increase in income taxes payable 3,398 1,701 --
Change in deferred income taxes 294 (1,293) 53
Decrease in obligation for Commonwealth Payment -- -- (175,000)
Increase (decrease) in payable to affiliates (79) (10) 89
Realized investment (gains) losses, net 8,051 (614) 105
--------------- --------------- ---------------
Net cash provided by (used in) operating activities 61,043 203,043 (128,277)
--------------- --------------- ---------------
Cash flows from investing activities
Investment securities purchased (972,506) (492,562) (214,562)
Proceeds from investment securities sold 693,938 227,515 77,002
Maturities of fixed income securities 223,340 89,481 57,180
Investments in subsidiaries (31,000) (25,000) --
--------------- --------------- ---------------
Net cash used in investing activities (86,228) (200,566) (80,380)
--------------- --------------- ---------------
Cash flows from financing activities
Proceeds from long-term debt 160,000 -- 85,000
Payments to members in lieu of common stock pursuant
to Plan of Demutualization -- (690) (91,144)
Net proceeds from issuance of common stock -- -- 215,205
Purchase and reissuance of common stock under
employee benefit and stock option plans (3,694) (1,307) (144)
Common stock purchased by grantor trusts (489) (469) (259)
Purchase and retirement of common stock (130,662) -- --
Change in outstanding checks in excess of bank balance 18 -- --
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 25,173 (2,466) 208,658
--------------- --------------- ---------------
Increase (decrease) in cash (12) 11 1
Cash -- beginning of year 12 1 --
--------------- --------------- ---------------
Cash -- end of year $ -- 12 1
=============== =============== ===============
Cash paid during the year for
Interest $ 7,545 5,006 4,344
=============== =============== ===============
Income taxes -- 525 --
=============== =============== ===============
</TABLE>
See accompanying independent auditors' report and notes to condensed financial
information.
S-6
<PAGE>
SCHEDULE I
TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT ONLY), CONTINUED
Notes to Condensed Financial Information of Registrant (Parent Only)
The condensed financial information provided should be read in conjunction with
the Consolidated Financial Statements of Trigon Healthcare, Inc. ("Registrant")
incorporated by reference in Part II, Section 8 of this Form 10-K and the
following notes:
(a) Basis of Presentation
The accompanying condensed financial information reflects the financial
position as of December 31, 1999 and 1998 and the results of operations,
changes in shareholders' equity and comprehensive income and cash flows for
the years ended December 31, 1999 and 1998 and for the period after the
Demutualization and Initial Public Offering, February 5, 1997 through December
31, 1997. The Registrant had no operations prior to February 5, 1997, the
date it became the holding company. Refer to note 2 to the consolidated
financial statements of the Registrant for details regarding the
Demutualization and Initial Public Offering.
(b) Investment in Subsidiary
The Registrant made a $31 million and $25 million capital contribution to its
subsidiary, Monticello Service Agency, Inc. (MSA) during 1999 and 1998,
respectively. MSA immediately made a $20 million and $25 million capital
contribution to its subsidiary, Trigon Health and Life Insurance Company, in
1999 and 1998, respectively, and entered into Certificates of Contribution
(also known as surplus notes) totaling $11 million with its subsidiary, Mid-
South Insurance Company, in 1999.
(c) Long-Term Debt
The information about long-term debt contained in note 12 of the notes to the
consolidated financial statements of the Registrant is incorporated herein by
reference.
(d) Capital Stock
The information about capital stock contained in note 14 of the notes to the
consolidated financial statements of the Registrant is incorporated herein by
reference.
(e) Cash and Stock Dividends
During 1999, 1998 and 1997, a subsidiary of the Registrant, Trigon Insurance
Company (Trigon Insurance), paid dividends to the Registrant of $48.9 million,
$227.5 million and $238.7 million, respectively. The 1999 cash dividend was
effected August 1, 1999. The 1998 dividend was effected July 1, 1998 and
included $200.0 million of cash and $27.5 million of stock of a wholly-owned
subsidiary. The 1997 dividend was effected July 31, 1997 and consisted of
$188.7 million of stock of a wholly-owned subsidiary and $50.0 million of
cash. The 1998 and 1997 dividends required prior approval from the
Commonwealth of Virginia, Bureau of Insurance ("Bureau of Insurance").
On January 7, 2000, the Bureau of Insurance approved Trigon Insurance's
request to effect a cash dividend of $125 million to the Registrant on
February 1, 2000. As a result of this dividend, any dividend distributions by
Trigon Insurance during 2000 will require the prior approval of the Bureau of
Insurance.
(f) Comprehensive Income
The information about comprehensive income contained in note 16 of the
notes to the consolidated financial statements of the Registrant is
incorporated herein by reference.
S-7
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.26 -- Clarifying Amendment No. 2 to the Non-Contributory Retirement Program
for Certain Employees of Trigon Insurance Company (now to be known
as) The Trigon Insurance Company Retirement Program.
10.27 -- Clarifying Amendment No. 3 to the Non-Contributory Retirement Program
for Certain Employees of Trigon Insurance Company (now to be known
as) The Trigon Insurance Company Retirement Program.
10.28 -- Clarifying Amendment No. 4 to The Trigon Insurance Company Retirement
Program
10.29 -- Amendment No. 1 dated December 14, 1999 to the Credit Agreement dated
as of February 5, 1997 among Trigon Healthcare, Inc., the banks
party thereto and Morgan Guaranty Trust Company of New York, as
Agent.
13 -- Excerpts from the Company's Annual Report to Shareholders for the
year ended December 31, 1999.
21 -- Subsidiaries of the Registrant.
23.1 -- Consent of Independent Auditors.
27 -- Financial Data Schedule.
<PAGE>
EXHIBIT 10.26
THE NON-CONTRIBUTORY RETIREMENT PROGRAM
FOR CERTAIN EMPLOYEES OF
TRIGON INSURANCE COMPANY
(now to be known as)
THE TRIGON INSURANCE COMPANY RETIREMENT PROGRAM
CLARIFYING AMENDMENT No. 2
--------------------------
WHEREAS, Trigon Insurance Company (herein referred to as the "Employer") has
maintained a non-contributory retirement program, known as the Non-Contributory
Retirement Program for Certain Employees of Trigon Insurance Company (herein
referred to as the "Retirement Program") pursuant to the provisions of the
National Retirement Program;
WHEREAS, pursuant to Section 7.01 of the Retirement Program, the Employer has
reserved the right to amend or modify the Retirement Program;
WHEREAS, the Employer adopted an amendment on September 10, 1998, which became
effective October 1, 1998, ("Cash Balance Amendment") to modify the Retirement
Program to adopt a new cash balance account benefit formula for the Retirement
Program, to provide for appropriate transition for Participants who previously
participated in the Retirement Program, and to change the name of the Retirement
Program to the Trigon Insurance Company Retirement Program;
WHEREAS, the Employer subsequently adopted an amendment on September 30, 1998,
to clarify the definition of "Earnings" in the Cash Balance Amendment
("Clarifying Amendment");
WHEREAS, on December 31, 1998, certain amendments were made to the National
Retirement Program provisions including an amendment relating to the definition
of Actuarial Equivalent ("Actuarial Equivalent Amendment");
<PAGE>
WHEREAS, it is desirable to further clarify certain other features of the Cash
Balance Amendment in order to provide a minimum pay credit amount for new
Participants, to clarify the application of the basic pay credit formula, and to
ensure that certain Participant who are eligible for transition benefits and who
commence benefits on or after attaining age 55 have access to the same reduction
factors as are applicable to those Participants who are eligible for transition
benefits and who commence benefits before attaining age 55;
WHEREAS, it is also desirable to clarify the application of the Actuarial
Equivalent Amendment;
NOW, THEREFORE, the Employer hereby amends the terms of the Retirement
Program, as modified by the Cash Balance Amendment, the Clarifying Amendment,
and the Actuarial Equivalent Amendment, in the following respects:
1. Section 1.01, "Actuarial Equivalent," is modified to read as follows:
--------------------
"Actuarial Equivalent" shall mean, with respect to a benefit payable
under the Program, a benefit of equivalent value thereto determined on the
basis of the following actuarial assumptions:
"(a) The interest rate shall be equal to 5%; and (b) The mortality
rates shall be unisex rates constructed based upon the 1983 Group Annuity
Mortality Table, assuming the following distribution of male and female
employees: 50 percent males and 50 percent females.
"If this box is checked `, the Program (and/or any predecessor program
qualified under (S)401 of the Internal Revenue Code) specified the
actuarial assumptions used to determined a Participant's benefits, and an
amendment(s) (including the adoption of this Program or a restated version
of the Program) changed those actuarial assumptions; accordingly, any
benefit payable under the Program to the Participant thereafter shall be no
less than the benefit otherwise payable to the Participant, determined as
of the day immediately prior to the effective date of the amendment (i.e.,
determined as of December 30, 1998) and computed on the basis of the
actuarial assumptions in effect on such date.
-2-
<PAGE>
"This paragraph shall apply in lieu of the forgoing for purposes of
determining certain equivalencies with respect to the Retirement Account,
and in certain instances, the Transition Benefit and Minimum Benefit
described in Section 4.02(b)(2) and (3). For purposes of determining the
Normal Retirement Benefit in Section 4.02(b)(1), the Early Retirement
Benefit in Section 4.04(b)(2)(i) and (ii)(cc), the Pre-Retirement Death
Benefit in Section 4.05(d), and the lump sum benefit in Section
5.03(b)(1)(ii) and 5.03(b)(3), the interest rate shall be the Applicable
Interest Rate and the mortality table shall be the Applicable Mortality
Table.
"For these purposes, "Applicable Mortality Table" shall mean the
mortality table that is prescribed by the IRS based on the prevailing
commissioners' standard table (described in (S) 807(d)(5)(A) of the
Internal Revenue Code) used to determine reserves for group annuity
contracts issued on the date as of which present value is being determined
(without regard to any other subparagraph of (S) 807(d)(5)). "Applicable
Interest Rate" shall mean, for any date within a calendar quarter, the
annual interest rate on 30-year Treasury securities as specified by the IRS
for the fifth full calendar month preceding the first day of such calendar
quarter."
2. The introductory paragraph of Section 4.02(b)(1), Retirement Account
------------------
Benefit Formula, is modified to read as follows:
- ---------------
"(1) Retirement Account Benefit Formula. The annual benefit is an
amount equal to the Actuarial Equivalent of the value of the Participant's
Retirement Account determined as of the benefit commencement date. The
Retirement Account is a nominal account maintained on behalf of each
Participant. The value of a Participant's Retirement Account is the sum of
the Participant's credits provided herein pursuant to subparagraph (i)
(Initial Balance), subparagraph (ii) (Pay Credits), subparagraph (iii)
(Interest Credits), subparagraph (iv) (Transition Benefit Credits), and
subparagraph (v) (Minimum Retirement Account Credits). For purposes of
paragraph (1), the fresh-start rule in Section 4.01(d) shall not apply."
-3-
<PAGE>
3. Subparagraph (ii), Pay Credits, in Section 4.02(b)(1), Retirement Account
Benefit Formula, is modified to read as follows:
"(ii) Pay Credits. A Participant's pay credits for the Program Year
shall be determined based on the Participant's Earnings in the Program Year
and the applicable pay credit percentage for such Earnings as follows: For
each calendar quarter ending on or after December 31, 1998, a pay credit
shall be allocated to the Retirement Account of the Participant as of the
last day of such quarter, or if the Participant receives a distribution
prior to the end of the calendar quarter, as of the first of the month in
which the distribution occurs, equal to the pay credit percentage
applicable to the Participant for pay periods ending in the Program Year
under the table set forth below, multiplied by the Participant's Earnings
for the pay periods ending in such quarter.
<TABLE>
<CAPTION>
Participant's Points as of January 1 of Pay Credit Percentage for Earnings in
Program Year Program Year
- -------------------------------------------------------------------------------------
<S> <C>
Less than 40 3%
- -------------------------------------------------------------------------------------
At least 40, but less than 50 4%
- -------------------------------------------------------------------------------------
At least 50, but less than 60 5%
- -------------------------------------------------------------------------------------
At least 60, but less than 70 6%
- -------------------------------------------------------------------------------------
At least 70, but less than 80 8%
- -------------------------------------------------------------------------------------
At least 80 10%
- -------------------------------------------------------------------------------------
</TABLE>
"For these purposes, the Participant's points shall be determined as of
January 1 of each Program Year by adding together the Participant's
attained age and Years of Vesting Service as of such date. For purposes of
determining the Participant's points, the Participant's attained age shall
be determined on the basis of years and days, with the days expressed in
the form of a decimal fraction, and the Participant's Years of Vesting
Service shall be determined, in accordance with Section 1.28, by taking
into account periods of Employment of less than a full Program Year, with
any partial year being expressed in the form of a decimal fraction.
Notwithstanding the foregoing, in no event shall a pay credit be allocated
to the Participant's Retirement Account with respect to any pay period that
ends either before the Participant's Entry Date, or after the pay period
that includes the date the Participant's Employment with the Employer
terminates, nor with respect to any pay period in a Program Year to the
extent the pay credit would be based on the Participant's Earnings in
excess of the annual limit in Section 1.06."
-4-
<PAGE>
4. Section 4.02(b)(1), Retirement Account Benefit Formula, is modified by
deleting the last four sentences of such provision (beginning with the sentence
that starts "For these purposes, the fresh-start rule...") and inserting the
following subparagraphs (iv) and (v) in their place:
"(iv) Transition Benefit Credits. In the case of an eligible
Participant as described in the next sentence of this subparagraph, the
Participant's Retirement Account shall be credited with an additional
amount as of October 1, 2003, so that as of such date it equals the present
value of the Participant's accrued benefit under paragraph (2) as of such
date. A Participant shall be eligible for such credit if (aa) the
Participant is eligible for the transition benefit described in paragraph
(2) below, (bb) the Participant has not terminated Employment with the
Employer prior to October 1, 2003, but continues as an active Participant
in the Program on such date, and (cc) the present value of the
Participant's accrued benefit under paragraph (2) as of October 1, 2003, is
greater than the Participant's Retirement Account under this paragraph (1)
(determined without regard to this subparagraph (iv)) as of such date.
Participants who are not described in the preceding sentence shall have a
credit of zero under this subparagraph (iv). For purposes of this
subparagraph (iv), the present value of the Participant's accrued benefit
under paragraph (2) shall be determined by reference to the Actuarial
Equivalent interest and mortality factors in effect on October 1, 2003
under the last paragraph of Section 1.01 of the Program, and the accrued
benefit shall be determined by reference to the benefit payable to the
Participant under paragraph (2) as if the Participant had retired on
October 1, 2003, expressed in the form of a single life annuity payable
commencing on October 1, 2003.
"(v) Minimum Retirement Account Credits. In the case of an eligible
Participant as described in the next sentence of this subparagraph, the
Participant's Retirement Account shall be credited with an additional
amount as of the benefit commencement date, so that as of such date it
equals the value of the minimum Retirement Account amount determined under
this subparagraph (v). A Participant is eligible for such credit if (aa)
the Participant is an active Participant in the Program as of October 1,
1998, or becomes an active Participant after October 1, 1998 and before
October 1, 2003, and (bb) if, as of the benefit commencement date, the
value of the Participant's Retirement Account under this paragraph (1)
(determined without regard to this subparagraph (v)) is less than the
minimum Retirement Account amount. Participants who are not described in
the preceding sentence shall have a credit of zero under this subparagraph
(v). For purposes of this subparagraph (v), the Participant's minimum
Retirement Account amount shall be determined without regard to the credits
provided by subparagraphs (i) through (iv) above, and shall instead equal
the sum of the Participant's initial dollar credit and the Participant's
interest credits on such initial dollar credit. For these purposes, the
Participant's initial dollar credit and interest credits shall be
determined and allocated as follows:
-5-
<PAGE>
"(aa) The Participant's initial dollar credit shall be a one-time
credit equal to $500, and shall be allocated to the Participant's
Retirement Account solely for purposes of this subparagraph (v) as
follows: In the case of a Participant who is an active Participant in
the Program as of October 1, 1998, the initial dollar credit shall be
allocated to the Participant's Retirement Account as of December 31,
1998. In the case of a Participant who becomes an active Participant
in the Program after October 1, 1998, and before October 1, 2003, the
initial dollar credit shall be allocated to the Participant's
Retirement Account as of the last day of the calendar quarter in which
the Participant's Entry Date occurs. Notwithstanding the foregoing, if
a Participant who is eligible under this clause (aa) for an initial
dollar credit receives a distribution prior to the end of the calendar
quarter with respect to which the initial dollar credit would be
allocated, the Participant's initial dollar credit shall be allocated
to the Participant's Retirement Account as of the first of the month
in which the distribution occurs.
"(bb) For each calendar quarter ending on or after December 31,
1998, interest shall be credited to the Participant's Retirement
Account as of the last day of such quarter in an amount equal to 25
percent of the average current yield on 30-year Treasury Constant
Maturities (as stated in the Federal Reserve Statistical Release H.15)
for the second calendar month that precedes the calendar quarter for
which interest is credited, times the value of the Participant's
Retirement Account determined pursuant to this subparagraph (v) as of
the last day of the prior calendar quarter. Notwithstanding the
foregoing, if a Participant receives a distribution prior to the end
of a calendar quarter, the Participant's Retirement Account shall be
credited for purposes of this subparagraph (v) with interest as of the
first of the month in which the distribution occurs, in accordance
with the method described in the preceding sentence, but such interest
credit shall be prorated based on the number of full months in such
calendar quarter that has elapsed. Interest credits under this
subparagraph (v) shall cease upon the first of the month in which the
Participant's benefits commence distribution under the Program."
-6-
<PAGE>
5. Paragraph (2)(ii)(cc) of Subsection 4.04(b), Early Retirement Benefit,
is modified to read as follows:
"(cc) In the case of a Participant whose Employment with the Employer
is terminated before attaining the Early Retirement Age, the following
shall apply. If the benefit commences on or after the date the Participant
attains the Early Retirement Age, the benefit will be reduced by .5% for
each calendar month (which is 6% per year), if any, by which the
commencement of the benefit precedes the first of the month coincident with
or next following the date of the Participant's Normal Retirement Age;
provided, however, that in no event shall the reduced benefit be less than
the present value of the benefit that would be payable to the Participant
under paragraph (1) above. If the benefit commences before the date the
Participant attains the Early Retirement Age, the benefit will be the
present value of the benefit that would be payable to the Participant under
paragraph (1) above. For these purposes, the present value shall be
determined by reference to the Actuarial Equivalent interest and mortality
factors in effect on that date under the last paragraph of Section 1.01 of
the Program."
-7-
<PAGE>
6. Paragraph 1 of this amendment shall take effect as if it were included
in the Actuarial Equivalent Amendment, and Paragraphs 2 through 5 shall take
effect as if included in the Cash Balance Amendment.
TRIGON INSURANCE COMPANY
By: ________________________
Authorized Officer
________________________ _____________________________
Attest Title
________________________ _____________________________
Title Date
APPROVED:
NATIONAL EMPLOYEE
BENEFITS COMMITTEE
By:_________________________
Assistant Secretary
-8-
<PAGE>
EXHIBIT 10.27
THE NON-CONTRIBUTORY RETIREMENT PROGRAM
FOR CERTAIN EMPLOYEES OF
TRIGON INSURANCE COMPANY
(now to be known as)
THE TRIGON INSURANCE COMPANY RETIREMENT PROGRAM
CLARIFYING AMENDMENT No. 3
--------------------------
WHEREAS, Trigon Insurance Company (herein referred to as the "Employer") has
maintained a non-contributory retirement program, known as the Non-Contributory
Retirement Program for Certain Employees of Trigon Insurance Company (herein
referred to as the "Retirement Program") pursuant to the provisions of the
National Retirement Program;
WHEREAS, pursuant to Section 7.01 of the Retirement Program, the Employer has
reserved the right to amend or modify the Retirement Program;
WHEREAS, the Employer adopted an amendment on September 10, 1998, which became
effective October 1, 1998, ("Cash Balance Amendment") to modify the Retirement
Program to adopt a new cash balance account benefit formula for the Retirement
Program, to provide for appropriate transition for Participants who previously
participated in the Retirement Program, and to change the name of the Retirement
Program to the Trigon Insurance Company Retirement Program;
WHEREAS, the Employer subsequently adopted an amendment on September 30, 1998,
to clarify the definition of "Earnings" in the Cash Balance Amendment
("Clarifying Amendment");
WHEREAS, the Employer adopted another amendment on August 3, 1999, to further
clarify certain other features of the Cash Balance Amendment and the application
of an amendment relating to the definition of Actuarial Equivalent ("Clarifying
Amendment No. 2);
<PAGE>
WHEREAS, it is desirable to clarify the determination of pay credits for
Employees who previously performed services for the Employer as leased employees
or performed services for the Employer in any other capacity which was not at
the time recognized and treated by the Employer as an employee;
NOW, THEREFORE, the Employer hereby amends the terms of the Retirement
Program, effective for Employees who become Participants on or after December
10, 1999, in the following respects:
1. Section 1.10 ("Employment") is modified by deleting the phrase "his pay
credit percentage under Section 4.02(b)(1)(ii)," immediately after the
phrase "Solely for purposes of determining an Employee's level of vesting"
in the first sentence of the third paragraph of such Section, and by
inserting the phrase "his pay credit percentage under Section
4.02(b)(1)(ii) to the extent provided therein," in its place.
2. Subparagraph (ii), Pay Credits, in Section 4.02(b)(1), Retirement Account
Benefit Formula, is modified to read as follows:
"(ii) Pay Credits. A Participant's pay credits for the Program Year
shall be determined based on the Participant's Earnings in the Program
Year and the applicable pay credit percentage for such Earnings as
follows: For each calendar quarter ending on or after December 31, 1998,
a pay credit shall be allocated to the Retirement Account of the
Participant as of the last day of such quarter, or if the Participant
receives a distribution prior to the end of the calendar quarter, as of
the first of the month in which the distribution occurs, equal to the pay
credit percentage applicable to the Participant for pay periods ending in
the Program Year under the table set forth below, multiplied by the
Participant's Earnings for the pay periods ending in such quarter.
<TABLE>
<CAPTION>
Participant's Points as of January 1 of Pay Credit Percentage for Earnings in
Program Year Program Year
- -------------------------------------------------------------------------------------
<S> <C>
Less than 40 3%
- -------------------------------------------------------------------------------------
At least 40, but less than 50 4%
- -------------------------------------------------------------------------------------
At least 50, but less than 60 5%
- -------------------------------------------------------------------------------------
At least 60, but less than 70 6%
- -------------------------------------------------------------------------------------
At least 70, but less than 80 8%
- -------------------------------------------------------------------------------------
At least 80 10%
- -------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
"For these purposes, the Participant's points shall be determined as of
January 1 of each Program Year by adding together the Participant's
attained age and Years of Vesting Service as of such date. For purposes of
determining the Participant's points, the Participant's attained age shall
be determined on the basis of years and days, with the days expressed in
the form of a decimal fraction, and the Participant's Years of Vesting
Service shall be determined, in accordance with Section 1.28, as modified
by this provision, by taking into account periods of Employment of less
than a full Program Year, with any partial year being expressed in the form
of a decimal fraction. Notwithstanding the foregoing, in no event shall a
pay credit be allocated to the Participant's Retirement Account with
respect to any pay period that ends either before the Participant's Entry
Date, or after the pay period that includes the date the Participant's
Employment with the Employer terminates, nor with respect to any pay period
in a Program Year to the extent the pay credit would be based on the
Participant's Earnings in excess of the annual limit in Section 1.06. For
purposes of this subparagraph (ii), the Participant's Vesting Service under
Section 1.28 shall be determined without regard to any period of service
which would otherwise be credited under Section 1.28, but during which the
Participant was not recognized and treated by the Employer as its employee,
or, to the extent the relevant services were being performed for an entity
related to the Employer under (S) 414(b), (c), or (m) of the Internal
Revenue Code, or for a Plan, was not recognized and treated by the related
entity or the Plan as its employee. Such excluded service includes, but is
not limited to, service as an independent contractor or consultant, a
temporary worker, a leased
3
<PAGE>
employee or leased worker (whether or not under (S) 414(n) of the Internal
Revenue Code), or an employee of a technical consulting firm, a staffing
firm, a leasing organization, or a payroll agency."
TRIGON INSURANCE COMPANY
By:____________________________
Authorized Officer
____________________________ _______________________________
Attest Title
____________________________ _______________________________
Title Date
APPROVED:
National Employee Benefits Committee
By:____________________________
Assistant Secretary
4
<PAGE>
EXHIBIT 10.28
TRIGON INSURANCE COMPANY RETIREMENT PROGRAM
CLARIFYING AMENDMENT No. 4
--------------------------
WHEREAS, Trigon Insurance Company (herein referred to as the "Employer") has
maintained a non-contributory retirement program, known as the Trigon Insurance
Company Retirement Program (herein referred to as the "Retirement Program")
pursuant to the provisions of the National Retirement Program;
WHEREAS, pursuant to Section 7.01 of the Retirement Program, the Employer has
reserved the right to amend or modify the Retirement Program;
WHEREAS, the Employer adopted an amendment on September 10, 1998, which became
effective October 1, 1998, ("Cash Balance Amendment") to modify the Retirement
Program to adopt a new cash balance account benefit formula for the Retirement
Program, to provide for appropriate transition for Participants who previously
participated in the Retirement Program, and to change the name of the Retirement
Program to the Trigon Insurance Company Retirement Program;
WHEREAS, the Employer subsequently adopted an amendment on September 30, 1998,
to clarify the definition of "Earnings" in the Cash Balance Amendment
("Clarifying Amendment");
WHEREAS, on December 31, 1998, certain amendments were made to the National
Retirement Program provisions including an amendment relating to the definition
of Actuarial Equivalent ("Actuarial Equivalent Amendment") and the definitions
of Earnings and Employee ("Earnings/Employee Amendments");
WHEREAS, on August 3, 1999 certain other features of the Cash Balance
Amendment were clarified in order to provide a minimum pay credit amount for new
Participants, to clarify the application of the basic pay credit formula, to
ensure that certain Participants who are eligible for transition benefits and
who commence benefits on or after attaining age 55 have access to the same
reduction factors as are applicable to those Participants who are eligible for
transition benefits and who commence benefits before attaining age 55, and to
clarify the application of the Actuarial Equivalent Amendment ("Clarifying
Amendment No. 2");
WHEREAS, on November 18, 1999, an amendment was made to the National
Retirement Program provisions relating to suspension of benefits ("Suspension
Amendment");
<PAGE>
WHEREAS, on December 9, 1999, the Cash Balance Amendment was further clarified
with regard to the determination of pay credits for Employees who previously
performed services for the Employer as leased employees or performed services
for the Employer in any other capacity which was not at the time recognized and
treated by the Employer as an employee ("Clarifying Amendment No. 3");
<PAGE>
NOW, THEREFORE, the Employer hereby amends the terms of the Retirement
Program, as modified by the Cash Balance Amendment, the Clarifying Amendment,
the Actuarial Equivalent Amendment, the Earnings/Employee Amendment, Clarifying
Amendment No. 2 and the Suspension Amendment, in the following respects:
1. Section 4.01(a)(1) shall be clarified to read as follows:
"(1) The terms of the Program as in effect as of such date (except that
effective January 1, 1989, a former Participant whose termination of Employment
by the Employer is prior to January 1, 1989, but who is in the Employment of a
Plan on or after January 1, 1989, must have only 5 Years of Vesting Service in
order to obtain a Vested Benefit). Participants who are Employees of the
Employer on or after October 1, 1998, will be entitled to a Vested Benefit to
the extent provided in Section 4.04;"
2. This amendment shall take effect as if it were included in the Cash Balance
Amendment.
TRIGON INSURANCE COMPANY
By: ________________________
Authorized Officer
_______________________ _____________________________
Attest Title
_______________________ _____________________________
Title Date
APPROVED:
NATIONAL EMPLOYEE
BENEFITS COMMITTEE
By:_________________________
Assistant Secretary
<PAGE>
EXHIBIT 10.29
EXECUTION COPY
AMENDMENT NO. 1 TO CREDIT AGREEMENT
AMENDMENT dated as of December 14, 1999 to the Credit Agreement dated as of
February 5, 1997 (the "Credit Agreement") among TRIGON HEALTHCARE, INC. (the
"Borrower"), the BANKS party thereto (the "Banks") and MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as Agent (the "Agent").
The parties hereto agree as follows:
SECTION 1. Defined Terms; References. Unless otherwise specifically defined
herein, each term used herein which is defined in the Credit Agreement has the
meaning assigned to such term in the Credit Agreement. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each similar reference and each
reference to "this Agreement" and each other similar reference contained in the
Credit Agreement shall, after this Amendment becomes effective, refer to the
Credit Agreement as amended hereby.
SECTION 2. Increase in Interest Rates. Effective March 31, 2000, the
Pricing Schedule attached to the Credit Agreement (the "Existing Pricing
Schedule") is deleted and replaced by the Pricing Schedule attached to this
Amendment (the "New Pricing Schedule"). The New Pricing Schedule shall apply to
interest accruing under the Credit Agreement on and after March 31, 2000. The
Existing Pricing Schedule shall continue to apply to interest accruing under the
Credit Agreement prior to March 31, 2000.
SECTION 3. Definition of Restricted Payment. The proviso to the definition
of Restricted Payment is amended to reach as follows:
provided that neither (i) payments by the Borrower on account of purchases
of its capital stock made on or after December 1, 1999 in an aggregate
amount not exceeding $150,000,000 nor (ii) the Commonwealth Payment shall
be deemed a Restricted Payment.
SECTION 4. Subsidiary Debt. The figure "$15,000,000" appearing in Section
5.13 is changed to "$25,000,000".
SECTION 5. Representations of Borrower. The Borrower represents and
warrants that (i) the representations and warranties of the Borrower set forth
in Article 4 of the Credit Agreement will be true on and as of the Amendment
Effective Date and (ii) no Default will have occurred and be continuing on such
date.
<PAGE>
SECTION 6. Governing Law. This Amendment shall be governed by and construed
in accordance with the laws of the State of New York.
SECTION 7. Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
SECTION 8. Effectiveness. This Amendment shall become effective in
accordance with its terms when the following conditions are met (the "Amendment
Effective Date"):
(a) the Agent shall have received from each of the Borrower and the
Required Banks a counterpart hereof signed by such party or facsimile or
other written confirmation (in form satisfactory to the Agent) that such
party has signed a counterpart hereof; and
(b) the Agent shall have received an amendment fee for the account of
each Bank from which an executed counterpart hereof shall have been
received on or prior to the deadline communicated to the Banks by the
Agent, in an amount equal to 0.10% of such Bank's Commitment.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
TRIGON HEALTHCARE, INC.
By:_________________________
Name:
Title:
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By:__________________________
Name:
Title:
THE BANK OF NEW YORK
By:___________________________
Name:
Title:
BANK ONE, NA
(Main Office - Chicago)
(f/k/a The First National Bank of Chicago)
By:____________________________
Name:
Title:
<PAGE>
THE FUJI BANK, LIMITED
By:____________________________
Name:
Title:
WACHOVIA BANK OF NORTH
CAROLINA, N.A.
By:____________________________
Name:
Title:
THE ASAHI BANK, LTD.
By:___________________________
Name:
Title:
CRESTAR BANK
By:__________________________
Name:
Title:
<PAGE>
BANQUE NATIONALE DE PARIS
By:__________________________
Name:
Title:
FIRST UNION NATIONAL BANK
By:___________________________
Name:
Title:
THE SANWA BANK, LIMITED
By:___________________________
Name:
Title:
<PAGE>
PRICING SCHEDULE
Each of the "Facility Fee Rate", "Euro-Dollar Margin" and "CD Margin"
means, for any day, the rate set forth below in the row opposite such term and
in the column corresponding to the Pricing Level that applied on such day:
<TABLE>
<CAPTION>
Pricing Level Level I Level II Level III Level IV
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Facility Fee
Rate .075% .10% .125% .175%
- ------------------------------------------------------------------------------------------
Euro-Dollar
Margin .475% .50% .625% .925%
- ------------------------------------------------------------------------------------------
CD Margin .60% .625% .75% 1.05%
- ------------------------------------------------------------------------------------------
</TABLE>
For purposes of this Schedule, the following terms have the following
meanings:
"Applicable Leverage Ratio" for purposes of determining what Pricing Level
exists at any date means (a) if at least three Domestic Business Days prior to
such date the Borrower has delivered all financial statements and certificates
required to be delivered on or before such date pursuant to subsections (a), (b)
and (e) of Section 5.1, the ratio of Consolidated Debt to Consolidated Total
Capitalization as of the last day of the period covered by such financial
statements and (b) in all other cases, a ratio greater than 0.35; provided
that Level I Pricing shall apply on any date after the Effective Date and before
the initial delivery by the Borrower of all financial statements and
certificates required to be delivered pursuant to subsections (a), (b) and (e)
of Section 5.1 or the date such financial statements are first required to be
delivered.
"Level I Pricing" applies at any date if the Applicable Leverage Ratio is
less than or equal to 0.10.
"Level II Pricing" applies at any date if the Applicable Leverage Ratio is
greater than 0.10 and less than or equal to 0.25.
"Level III Pricing" applies at any date if the Applicable Leverage Ratio is
greater than 0.25 and less than or equal to 0.35.
"Level IV Pricing" applies at any date if no other Pricing Level applies
for such date.
<PAGE>
Quarterly
Financial Information
Trigon Healthcare, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Quarters ended
(in thousands, except per share data) March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Total revenues $556,510 587,892 590,407 611,619
Operating income (loss)(1)(3) 8,120 9,898 (67,965) 14,650
Income (loss) before income taxes and minority interest(3) 18,962 27,972 (57,661) 42,245
Net income (loss)(3) 12,079 18,302 (37,552) 27,634
Earnings per share
Basic net income (loss) 0.29 0.43 (0.91) 0.71
Diluted net income (loss) 0.28 0.43 (0.91) 0.70
Basic net income excluding realized gains (losses) and
nonrecurring charge(4) 0.44 0.50 0.55 0.62
Diluted net income excluding realized gains (losses)
and nonrecurring charge(4) 0.43 0.49 0.54 0.62
- -----------------------------------------------------------------------------------------------------------------------
1998
Total revenues $551,741 542,315 545,006 597,290
Operating income(1) 2,518 6,829 9,780 12,429
Income before income taxes and minority interest 51,917 31,483 31,154 74,758
Net income 34,049 20,711 20,213 48,599
Earnings per share
Basic net income 0.80 0.49 0.48 1.15
Diluted net income 0.80 0.48 0.47 1.13
Basic net income excluding realized gains(2) 0.35 0.42 0.47 0.49
Diluted net income excluding realized gains(2) 0.35 0.41 0.46 0.49
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Operating income (loss) is defined as premium and fee revenues and other
revenues less medical and other benefit costs and selling, general and
administrative expenses.
(2) Net income excluding realized gains per share is calculated as net income
per share excluding the after-tax amounts for net realized gains.
(3) For the quarter ended September 30, 1999 operating income (loss), income
(loss) before income taxes and minority interest, and net income (loss)
include the nonrecurring pretax charge of $79.9 million or $51.9 million
net of taxes. See note 20 to the consolidated financial statements for an
analysis of the nonrecurring charge.
(4) Net income excluding realized gains (losses) and nonrecurring charge per
share is calculated as net income per share excluding the after-tax amounts
for net realized gains (losses) and the third quarter 1999 nonrecurring
charge.
17 Trigon Healthcare, Inc.
<PAGE>
Selected Consolidated
Financial & Operating Data
Trigon Healthcare, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31,
(in thousands, except per share data and operating statistics) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues
Premium and fee revenues
Commercial $ 1,664,261 1,531,107 1,431,114 1,320,596 1,157,899
Federal Employee Program 448,676 407,136 377,722 356,741 329,243
Amounts attributable to self-funded arrangements 1,216,427 1,090,638 1,062,101 1,077,478 981,741
Less: amounts attributable to claims under
self-funded arrangements (1,082,328) (979,535) (961,588) (988,353) (897,954)
- -----------------------------------------------------------------------------------------------------------------------------
2,247,036 2,049,346 1,909,349 1,766,462 1,570,929
Investment income 97,131 85,540 74,684 47,312 45,861
Net realized gains (losses) (21,957) 77,507 54,063 59,410 52,976
Other revenues 24,218 23,959 24,376 49,356 53,242
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues 2,346,428 2,236,352 2,062,472 1,922,540 1,723,008
- -----------------------------------------------------------------------------------------------------------------------------
Expenses
Medical and other benefit costs
Commercial 1,374,843 1,263,765 1,194,641 1,086,388 959,328
Federal Employee Program 429,519 388,513 359,915 339,143 312,222
- -----------------------------------------------------------------------------------------------------------------------------
1,804,362 1,652,278 1,554,556 1,425,531 1,271,550
Selling, general and administrative expenses 502,189 389,471 357,921 376,039 346,353
Interest expense 8,359 5,291 4,602 -- --
Copayment refund program -- -- -- -- 47,073
- -----------------------------------------------------------------------------------------------------------------------------
Total expenses 2,314,910 2,047,040 1,917,079 1,801,570 1,664,976
- -----------------------------------------------------------------------------------------------------------------------------
Income before gain on sale of subsidiary, income taxes,
minority interest and extraordinary items 31,518 189,312 145,393 120,970 58,032
Gain on sale of subsidiary -- -- -- 62,253 --
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes, minority interest and
extraordinary items 31,518 189,312 145,393 183,223 58,032
Income tax expense (benefit) 8,345 63,237 49,617 (13,626) 8,264
- -----------------------------------------------------------------------------------------------------------------------------
Income before minority interest and extraordinary items 23,173 126,075 95,776 196,849 49,768
Minority interest (2,710) (2,503) (723) (335) 1,934
Extraordinary items, net of income taxes -- -- -- (190,820) (4,707)
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 20,463 123,572 95,053 5,694 46,995
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
18 Trigon Healthcare, Inc.
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income after Demutualization and IPO(1) $ 20,463 123,572 78,982 -- --
Earnings per share(1)
Basic net income after Demutualization
and IPO $ 0.50 2.92 1.87 -- --
Diluted net income after Demutualization
and IPO $ 0.49 2.88 1.86 -- --
Basic net income excluding realized gains
(losses) and nonrecurring charge(6) $ 2.12 1.73 -- -- --
Diluted net income excluding realized gains
(losses) and nonrecurring charge(6) $ 2.09 1.71 -- -- --
Pro forma earnings per share(2)
Basic and diluted pro forma income before
extraordinary items $ -- -- 2.23 2.73 0.84
Basic and diluted pro forma net income (loss) $ -- -- 2.23 (1.77) 0.73
Basic and diluted pro forma net
income excluding realized gains
and extraordinary items(3) $ -- -- 1.40 0.87 0.75
OPERATING STATISTICS
Medical loss ratio
Commercial(6) 81.4% 82.5% 83.5% 82.3% 82.9%
Federal Employee Program 95.7% 95.4% 95.3% 95.1% 94.8%
Selling, general and administrative
expense ratio(4)(6) 13.2% 12.8% 12.4% 13.4% 13.7%
Operating margin(5)(6) 2.0% 1.5% 1.1% 0.8% 0.4%
<CAPTION>
December 31, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Cash and investments $ 1,741,045 1,590,022 1,370,868 1,213,902 1,119,652
Total assets 2,314,115 2,174,225 1,928,820 1,833,148 1,565,331
Obligation for Commonwealth Payment -- -- -- 175,000 --
Long-term debt 248,039 89,339 90,147 4,880 4,145
Total shareholders' equity 936,957 1,071,224 958,737 -- --
Total surplus -- -- -- 739,780 740,071
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects net income and net income per share for the period after February
5, 1997, the effective date of the Demutualization and Initial Public
Offering (IPO).
(2) Pro forma per share data gives effect to the Demutualization and IPO as if
they had taken place on January 1, 1995. See note 2 to the consolidated
financial statements for the pro forma assumptions used.
(3) Pro forma net income excluding realized gains and extraordinary items per
share is calculated as pro forma net income per share excluding the pro
forma after-tax amounts for net realized gains, extraordinary items, the
gain on sale of a subsidiary in 1996 and the costs incurred under the 1995
Copayment Program.
(4) The selling, general and administrative expense ratio is calculated as a
percentage of total revenues excluding amounts attributable to claims under
self-funded arrangements, investment income and net realized gains
(losses).
(5) The operating margin ratio is calculated by dividing operating income by
premium and fee revenues and other revenues. Operating income is defined as
premium and fee revenues and other revenues less medical and other benefit
costs and selling, general and administrative expenses.
(6) The 1999 basic and diluted net income excluding realized gains (losses) and
nonrecurring charge and the 1999 operating statistics exclude the
nonrecurring pretax charge of $79.9 million or $51.9 million net of tax.
See note 20 to the consolidated financial statements for an analysis of the
nonrecurring charge. The 1999 operating statistics including the
nonrecurring charge were as follows: commercial medical loss ratio, 82.6%;
selling, general and administrative ratio, 15.0%; and operating margin,
(1.6)%.
19 Trigon Healthcare, Inc.
<PAGE>
Management's
Discussion & 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 discontinued 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 through November 1999. As an
administrative agent for Medicare, the Company allocated 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 disease management programs, third-
party administration for medical and workers' compensation, health promotion and
similar products, is 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.
ENROLLMENT
The following table sets forth the Company's enrollment data by network:
As of December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Health Insurance
Commercial
HMO 274,184 255,879 255,548
PPO 378,406 297,939 263,828
PAR 151,673 165,239 192,825
Medicaid/Medicare HMO 51,404 31,338 35,488
Medicare supplement 119,050 121,322 125,686
- --------------------------------------------------------------------------------
Total commercial excluding
Mid-South 974,717 871,717 873,375
Self-funded 672,906 639,971 654,004
Processed for other
Blue Cross and
Blue Shield Plans (ASO) 4,639 5,545 15,728
- --------------------------------------------------------------------------------
Total health insurance
excluding Mid-South 1,652,262 1,517,233 1,543,107
- --------------------------------------------------------------------------------
Government
Federal Employee
Program (PPO) 216,089 213,017 207,457
- --------------------------------------------------------------------------------
Total government 216,089 213,017 207,457
- --------------------------------------------------------------------------------
Total excluding Mid-South 1,868,351 1,730,250 1,750,564
Mid-South, commercial -- 105,056 64,143
Mid-South, ASO -- 26,065 25,663
- --------------------------------------------------------------------------------
Total 1,868,351 1,861,371 1,840,370
- --------------------------------------------------------------------------------
20 Trigon Healthcare, Inc.
<PAGE>
PREMIUM AND PREMIUM EQUIVALENTS
BY NETWORK SYSTEM
The following table sets forth the Company's premium and premium equivalents by
network (in thousands):
Years ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
Health Insurance
Commercial
HMO $ 397,715 383,850 353,059
PPO 550,407 428,564 380,534
PAR 284,587 310,971 352,630
Medicaid/Medicare HMO 104,604 60,696 57,664
Medicare supplement 229,824 222,231 212,516
- -------------------------------------------------------------------------------
Total commercial excluding
Mid-South 1,567,137 1,406,312 1,356,403
Self-funded 1,216,427 1,090,638 1,062,101
- -------------------------------------------------------------------------------
Total health insurance
excluding Mid-South 2,783,564 2,496,950 2,418,504
- -------------------------------------------------------------------------------
Government
Federal Employee
Program (PPO) 448,676 407,136 377,722
- -------------------------------------------------------------------------------
Total government 448,676 407,136 377,722
- -------------------------------------------------------------------------------
Total excluding Mid-South 3,232,240 2,904,086 2,796,226
Mid-South, commercial 97,124 124,795 74,711
- -------------------------------------------------------------------------------
Total $3,329,364 3,028,881 2,870,937
- -------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Trigon Healthcare, Inc. announced on October 5, 1999 that Mid-South Insurance
Company (Mid-South), a subsidiary, intended to exit the health insurance market
effective April 30, 2000. The Company's 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 growing the successful
Virginia business and the pursuit of other growth opportunities. The Company's
action resulted in a third quarter nonrecurring after-tax charge of $51.9
million including $36.3 million for intangibles, $13.4 million increase to claim
reserves and $2.2 million for other costs.
Premium and fee revenues increased 9.6% to $2.247 billion in 1999 from
$2.049 billion in 1998. The $197.7 million increase is due to a combination of
rate increases and enrollment growth in the Company's health insurance segment's
HMO and PPO networks, offset by expected declines in the segment's PAR network
enrollment and the third quarter 1999 Mid-South market exit. Specifically,
commercial HMO revenues increased 13.0% to $502.3 million in 1999 from $444.5
million in 1998. The $57.8 million increase in commercial HMO revenues is the
result of a 5.6% increase in the average revenue per member and a 7.0% increase
in member months. Total commercial PPO revenues grew to $550.4 million in 1999
from $428.6 million last year, a 28.4% increase, driven by average revenue per
member increases of 5.4% and a 21.9% increase in member months. Commercial PAR
revenues declined to $284.6 million from $311.0 million in 1998 as a result of
the continued transition of members to the more tightly managed HMO and PPO
networks offset by a 3.7% increase in the average revenue per member. The Mid-
South market exit resulted in a $27.7 million decrease in commercial revenue.
Overall, premium revenues on a per member per month basis for the Company's
commercial business increased 4.1% to $138.94 for 1999 from $133.50 for 1998.
Self-funded margins increased $23.0 million or 20.7% due to a 16.3% increase in
margin per member per month. The government segment's FEP revenues increased
10.2% to $448.7 million from $407.1 million last year. The increase is due to
increased medical costs to be reimbursed by OPM and a 1.4% increase in
enrollment.
Total enrollment increased to 1,868,351 as of December 31, 1999 from
1,861,371 as of December 31, 1998. The increase was a result of a 3,908 increase
in the Company's health insurance segment, reflecting an increase of 135,029
members in the Virginia enrollment offset by a decrease of 131,121 members due
to the Mid- South market exit, and a 3,072 increase in the government segment.
The Virginia enrollment increase was the result of a 103,000 increase in
commercial enrollment, an 11.8% increase, and a 32,029 increase in self-funded
enrollment. Enrollment in the HMO network increased by 13.4% over the prior
year, aided by the one-time increase of about 17,000 Medicaid members announced
in the second quarter and accounts for 33.4% of the total commercial
21 Trigon Healthcare, Inc.
<PAGE>
Management's
Discussion & Analysis
of Financial Condition and Results of Operations
(continued)
enrollment. Enrollment in the PPO network as of December 31, 1999 increased
27.0% over December 31, 1998 and accounts for 38.8% of the Company's commercial
enrollment. Growth in PPO was offset by an expected decline of 8.2% in the
Company's PAR network as members migrate into more tightly managed networks. The
PAR network enrollment represents 15.6% of the Company's commercial enrollment.
The 5.0% increase in self-funded enrollment is primarily the result of the
addition of large national groups on January 1, 1999.
Investment income increased 13.6% to $97.1 million in 1999 from $85.5
million in 1998. Net realized gains and losses decreased to a loss of $22.0
million in 1999 from a gain of $77.5 million in 1998. The increase in investment
income is due to a shift in the portfolio mix, positive cash flow from
operations, lengthened duration for portions of the bond portfolio and reduced
investment expenses. The net realized losses for 1999 reflected the Company's
repositioning of the investment portfolio in an environment of rising interest
rates by reducing treasury holdings and increasing investments in municipal and
corporate bonds and mortgage-backed securities.
Medical costs increased 9.2% to $1.804 billion in 1999 from $1.652 billion
in 1998. The $152.1 million increase included $20.6 million for the increase to
claim reserves related to the Mid-South announcement. The remaining $131.5
million increase is a result of growth in the Virginia health insurance
segment's commercial enrollment partially offset by Mid-South's market exit in
the fourth quarter of 1999, expected levels of medical cost inflation 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 $113.06 in 1999 from $110.19 in
1998. Combined with a 4.1% increase in commercial premium revenues per member
per month, the loss ratio on commercial business, excluding the Mid-South
charge, improved to 81.4% from 82.5% in 1998. 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 December 31, 1999, commercial
Virginia pharmacy cost and utilization trends declined to 7.4% in 1999 from
11.4% in 1998 as a result of converting group members to a "three-tier" co-pay
benefit design at renewal. Outpatient cost per member increased by only 0.5% 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 28.9% to
$502.2 million in 1999 from $389.5 million in 1998. The nonrecurring SG&A charge
of $59.3 million for the Mid-South market exit represents 53% of the increase.
The SG&A ratio, exclusive of this charge increased to 13.2% in 1999 from 12.8%
in 1998. This increase is attributed to strong growth in commission-based
individual and small group business, the incremental cost of marketing and sales
efforts and the cost of additional investments being made to support future
performance.
Interest expense in 1999 was $8.4 million compared to $5.3 million in 1998.
Interest expense is the result of the $245 million outstanding on the revolving
credit agreement used to fund a portion of the payment made to the Commonwealth
of Virginia in February 1997 (Commonwealth Payment) in accordance with the Plan
of Demutualization (Demutualization) and the Initial Public Offering (IPO) and
to fund the stock buyback program initiated in 1999.
Income before income taxes and minority interest decreased $157.8 million
to $31.5 million in 1999 from $189.3 million in 1998. The decrease is a result
of the Mid-South charge of $79.9 million, reduced net realized gains of $99.5
million, higher interest expense of $3.0 million, offset by higher investment
income of $11.6 million and a $13.0 million increase in operating income
(defined as premium and fee revenues and other revenues less medical and other
benefit costs and selling, general and administrative expenses). Operating
income increased primarily due to improving margins in the health insurance
segment resulting from pricing and medical cost management efforts.
22 Trigon Healthcare, Inc.
<PAGE>
The effective tax rate on income before income taxes and minority interest,
exclusive of the third quarter Mid-South charge, for 1999 and 1998 was 32.6% and
33.4%, 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.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Premium and fee revenues increased 7.3% to $2.049 billion in 1998 from $1.909
billion in 1997. The $140.0 million increase is due to a combination of rate
increases and enrollment growth in the Company's health insurance segment HMO,
PPO and Non-Virginia networks, offset by expected declines in the segment's PAR
network enrollment. Specifically, commercial HMO revenues increased 8.2% to
$444.5 million in 1998 from $410.7 million in 1997. The $33.8 million increase
in commercial HMO revenues is the result of a 6.1% increase in the average
revenue per member and a 2.0% increase in member months. Total commercial PPO
revenues grew to $428.6 million in 1998 from $380.5 million last year, a 12.6%
increase, driven by a 12.0% increase in member months. Commercial PAR revenues
declined to $311.0 million from $352.6 million in 1997 as a result of the
continued transition of members to the more tightly managed HMO and PPO networks
offset by a 5.9% increase in the average revenue per member. Finally, non-
Virginia revenues increased 67.0% to $124.8 million up from $74.7 million last
year. Overall, premium revenues on a per member per month basis for the
Company's commercial business increased 3.6% to $133.50 for 1998 from $128.84
for 1997. The government segment's FEP revenues increased 7.8% to $407.1 million
from $377.7 million last year. The increase is due to increased medical costs to
be reimbursed by OPM and a 2.7% increase in enrollment.
Total enrollment increased to 1,861,371 as of December 31, 1998 from
1,840,370 as of December 31, 1997. Including Mid-South, the increase was the
result of a 15,441 increase in the Company's health insurance segment and a
5,560 increase in the government segment. The health insurance segment increase
was the result of a 39,255 increase in commercial enrollment offset by a decline
in self-funded members of 23,814. Total commercial enrollment increased 4.2% to
976,773 members as of December 31, 1998 from 937,518 members as of December 31,
1997. Enrollment in the HMO network decreased by 1.3% over the prior year and
accounts for 29.4% of total commercial enrollment. The decline in enrollment can
be attributed to the loss of certain large unprofitable groups that left as a
result of pricing increases, groups lost as a result of mergers and the
Company's decision to withdraw from the Medicaid HMO program in the Richmond,
Virginia area. Excluding these events, the HMO enrollment grew more than 10%.
Enrollment in the PPO network as of December 31, 1998 increased 12.9% over
December 31, 1997 and accounts for 30.5% of the Company's commercial enrollment.
Non-Virginia enrollment increased 63.8% over the prior year and now accounts for
10.8% of total commercial enrollment. Growth in PPO and Non-Virginia enrollment
was offset by an expected decline of 14.3% in the Company's PAR network as
members migrate into more tightly managed networks. The PAR network enrollment
represents 16.9% of the Company's total commercial enrollment. The decline in
self-funded enrollment of 23,814 members partially reflects the Company's
efforts to increase fees to levels that appropriately reflect the value
delivered through the Company's network design and medical management
techniques. The decline also reflects the migration of approximately 10,200
national account members (ASO only) from the Company's systems to an interplan
system where the Company continues to process claims for other Blue Cross and
Blue Shield Plans.
Investment income increased 14.5% to $85.5 million in 1998 from $74.7
million in 1997. Net realized gains increased to $77.5 million in 1998 from
$54.1 million in 1997. The increase in investment income is due to a shift in
the portfolio mix from direct equity securities to fixed income securities,
increased cash flows from realized gains, positive cash flow from operations,
lengthened duration for portions of the bond portfolio and reduced investment
expenses. The increase in net realized gains was primarily a result of favorable
realized gains on bonds offset by lower gains on equity securities.
23 Trigon Healthcare, Inc.
<PAGE>
Management's
Discussion & Analysis
of Financial Condition and Results of Operations
(continued)
Other revenue decreased by 1.7% to $24.0 million in 1998 from $24.4 million
in 1997. The $0.4 million decrease reflects the Company's strategy of
redirecting the health and wellness subsidiary's efforts toward providing its
product offerings and services to the Company instead of selling these services
to third parties. In addition, 1998 revenues are reduced for revenues associated
with the Company's network development subsidiary which ceased operations as of
the end of 1997.
Medical costs increased 6.3% to $1.652 billion in 1998 from $1.555 billion
in 1997. The $97.7 million increase is 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.
The medical cost per member per month for the Company's commercial business
increased 2.5% to $110.19 in 1998 from $107.55 in 1997. Combined with a 3.6%
increase in commercial premium revenues per member per month, the loss ratio on
commercial business improved to 82.5% in 1998 from 83.5% for the same period
last year. The loss ratio improvement can be attributed to a combination of
factors including, the favorable impact on 1998 of a number of medical cost
management initiatives, pricing discipline, improved processing controls at one
of the Company's HMO subsidiaries partially offset by deterioration in the loss
ratio at the Mid-South Insurance Company subsidiary. Regarding medical cost
management initiatives, the Company continues to diligently work at negotiating
lower reimbursement rates with facilities and to better manage utilization.
During 1998, commercial Virginia inpatient days per thousand were down 4.9% and
inpatient facility costs per member decreased 3.6% over 1997. By the end of the
fourth quarter, 88% of acute care facilities in the Company's service area have
been converted to a fixed fee schedule for outpatient services. In addition, the
Company is taking a more active role in working with physicians, primarily
specialists, to manage medical costs, continuing to implement national medical
management guidelines and further refine a recently piloted program to improve
both quality and costs by strengthening the Company's pre-certification
requirements for hospital admissions. To address the under-performing Mid-South
business unit, stricter underwriting and pricing standards have been applied and
the Company is taking steps to improve product distribution channels and reduce
administrative costs. The Company continues to review a variety of options to
address this under-performing book of business.
Selling, general and administrative expenses increased by 8.8% to $389.5
million in 1998 from $357.9 million in 1997. The increase is a result of higher
volumes and the incremental cost of certain initiatives. SG&A expenses increased
by $22.3 million as a result of increased Non-Virginia volume and as a result of
a higher broker commission scale for business sold in Virginia. Medicare HMO
start-up costs, development of customer service "call center" technology and
incremental costs associated with preparing systems for the Year 2000 have
increased expenses by $6.2 million in 1998 compared to 1997. In the first
quarter of 1998 the Company adopted AICPA Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. The SOP requires the capitalization and amortization of certain costs
related to internal-use software but may not be applied to the costs associated
with the Year 2000 conversion. The adoption of the SOP resulted in a $4.4
million reduction to SG&A in 1998. In the fourth quarter of 1997, the Company
eliminated the postretirement medical benefit program for a substantial portion
of its employees. The elimination of this benefit resulted in a one-time
curtailment gain of nearly $4.0 million, which was recorded as a reduction to
SG&A expenses. Overall, the SG&A ratio was 12.8% for the current year as
compared to 12.4% for 1997.
Interest expense in 1998 was $5.3 million compared to $4.6 million in 1997.
Interest expense is the result of the $85 million outstanding on the revolving
credit agreement used to fund a portion of the payment made to the Commonwealth
of Virginia in February 1997 (Commonwealth Payment) in accordance with the Plan
of Demutualization (Demutualization) and the Initial Public Offering (IPO).
Income before income taxes and minority interest increased $43.9 million to
$189.3 million in 1998 from $145.4 million in 1997. The increase is a result of
higher net realized gains on the sale of investments of $23.4 million, higher
investment income of $10.8 million and an $10.3 million increase in operating
income (defined as premium and fee revenues and
24 Trigon Healthcare, Inc.
<PAGE>
other revenues less medical and other benefit costs and selling, general and
administrative expenses). 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 for 1998 decreased to 33.4% from 34.1% in 1997.
During 1998, the Company increased its investment in tax-exempt municipal bonds
thereby increasing the amount of tax-exempt investment income earned.
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 December 31, 1999. The portfolio had an average contractual
maturity of 7.4 years as of December 31, 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 December 31, 1999, the Company's equity exposure, comprised of
direct equity as well as equity-indexed investments, was 11% 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 1999 increasing the total
borrowed and outstanding under this agreement to $245 million as of December 31,
1999. The additional borrowings were used in part to provide funding for the
stock repurchase program.
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 1999,
the Company purchased 4.1 million shares of its common stock at a cost of
approximately $130.7 million. The excess of the cost of the acquired shares over
par value is charged on a pro rata basis to capital in excess of par and
retained earnings. On February 7, 2000, the Company announced that its Board of
Directors had authorized the Company to purchase another ten percent of its
common stock, or approximately 3.8 million shares.
Cash provided by operating activities for the years ended December 31, 1999
and 1998 was $188.8 million and $151.6 million, respectively. The increase in
cash provided by operations in 1999 is primarily due to the timing of premium
receipts and claims and other operating liability payments between years.
Net cash used in investing activities increased to $213.3 million for the
year ended December 31, 1999 from $144.8 million for 1998. This increase is
primarily due to investment purchases made with the proceeds from long-term debt
that was obtained to help fund the stock repurchase program, the reinvestment of
investment income and cash flows from operations.
Cash provided by (used in) financing activities increased to $19.5 million
for 1999 from $(6.3) million for 1998. The increase is primarily due to the
proceeds from long-term debt offset by the costs associated with the repurchase
of the Company's common stock.
The Company believes that cash flow generated by operations and its cash
and investment balances will be sufficient to
25 Trigon Healthcare, Inc.
<PAGE>
Management's
Discussion & Analysis
of Financial Condition and Results of Operations
(continued)
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.
The Company announced on July 2, 1999 that it would withdraw its
Medicare+Choice HMO product effective January 1, 2000 due to concerns about
reduced government reimbursements for such plans. The Company expects that the
decision will not have a material impact on the financial condition and results
of operations of the Company.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 computer date change 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 began its Year 2000 project in late 1994. As of December 31,
1999, the Company completed all planned efforts to prepare its critical computer
systems and application software and key business functions for the Year 2000.
The Company's Year 2000 project involved four phases: inventory/ assessment,
remediation, testing and implementation. Uniform project management techniques
were used with overall oversight responsibility residing with the Company's
Senior Vice President and Chief Information Officer. Those plans addressed
hardware and software maintained by the Company, software products licensed from
external vendors and functions outsourced to external vendors. The plan also
included "infrastructure systems" and non-IT systems and equipment, which
contain date-sensitive imbedded hardware or software. In addition, comprehensive
contingency and business resumption plans were developed for critical systems
and functions. The Company also developed extensive millennium crossover plans,
which covered the actions to be executed in the days immediately before and
after December 31, 1999. The Company used both external and internal resources
for the project.
The incremental costs for the Year 2000 project were $19.4 million through
December 31, 1999, including $3.8 million incurred during 1999. The costs have
been expensed as incurred and were funded through operating cash flows. The
Company does not anticipate any additional incremental costs after December 31,
1999.
The Company experienced no significant Year 2000-related problems with any
of its critical computer systems, application software and key business
functions. Additionally, the Company has not experienced material disruptions as
a result of noncompliance by its critical outsourcing vendors and business
partners. As part of the ongoing production monitoring process, the Company will
continue to monitor its critical computer systems, application software,
outsourcing vendors and business partners for possible problems related to the
Year 2000 computer date change.
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:
. efforts to expand tort liability of health plans;
. proposed class action lawsuits targeting the health care industry's efforts
to deliver quality care at affordable costs; and
. 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 has passed the House of Representatives would expand tort liability
for health plans and change the practices for defining medical necessity. The
corresponding bill that passed the Senate lacks similar provisions. Given these
differences between the House and Senate bills
26 Trigon Healthcare, Inc.
<PAGE>
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 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.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133. The Statement defers
the effective date to fiscal years beginning after June 15, 2000. SFAS Statement
No. 133 requires companies to record derivatives on the balance sheet as assets
or liabilities, measured at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting. The Company is
presently evaluating the effect of SFAS No. 133 on its financial statements.
FORWARD-LOOKING INFORMATION
This item, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, including,
among other things, statements concerning financial condition, results of
operations and business of the Company and its subsidiaries. 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.
27 Trigon Healthcare, Inc.
<PAGE>
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
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 December 31, 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 $45.5
million increase in fair value, whereas a corresponding 100 basis point decrease
in interest rates would result in an approximate $217.4 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 $25.4 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 $25.4 million. The majority of the $109.4
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 December 31, 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.
Market Prices of
Common Stock
and Dividend Data
The Class A common stock, par value $0.01 per share, is traded on the New York
Stock Exchange under the symbol TGH. The reported high and low closing prices by
quarter during 1999 and 1998 were as follows:
1999 High Low
- ------------------------------------
First quarter $37 7/16 31 15/16
Second quarter 39 29 15/16
Third quarter 38 5/8 29 1/4
Fourth quarter 31 1/2 23
- ------------------------------------
1998 High Low
- ------------------------------------
First quarter $32 23 7/8
Second quarter 36 9/16 28 13/16
Third quarter 35 5/16 26 1/2
Fourth quarter 38 3/16 25 1/4
- ------------------------------------
The Company has never paid dividends on its common stock and anticipates
that all earnings in the foreseeable future will be retained to finance the
continuing development of its business. The payment of any future dividends will
be at the discretion of the Company's Board of Directors and will depend upon
the Company's earnings, financial condition, capital requirements, the revolving
credit agreement restrictions on dividends and such other factors as the
Company's Board of Directors deems relevant.
To the extent that the Company determines to pay dividends in the future,
the principal source of funds to pay dividends to shareholders would be
dividends received by the Company from its subsidiaries. The Company is a
holding company and insurance laws and regulations restrict the payment of
dividends by health care insurance companies, such as Trigon Insurance Company,
in a holding company structure.
As of February 22, 2000, there were 86,190 shareholders of record of the
Company's Class A common stock.
28 Trigon Healthcare, Inc.
<PAGE>
Consolidated
Balance Sheets
Trigon Healthcare, Inc. and Subsidiaries
December 31, 1999 and 1998
(in thousands, except per share data) 1999 1998
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 2,530 7,500
Investment securities, at estimated fair value (note 4) 1,738,515 1,582,522
Premiums and other receivables (note 5) 397,499 378,436
Deferred income taxes (note 11) 16,827 --
Other 14,099 10,891
- --------------------------------------------------------------------------------
Total current assets 2,169,470 1,979,349
- --------------------------------------------------------------------------------
Property and equipment, net (note 6) 51,238 47,890
Deferred income taxes (note 11) 59,499 55,841
Goodwill and other intangibles, net 14,561 62,999
Restricted investments, at estimated fair value (note 4) 9,887 10,347
Other assets 9,460 17,799
- --------------------------------------------------------------------------------
Total assets $2,314,115 2,174,225
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Medical and other benefits payable (note 7) $ 544,120 468,455
Unearned premiums 120,290 99,464
Accounts payable and accrued expenses 81,867 67,971
Deferred income taxes (note 11) -- 8,022
Other liabilities (note 9) 257,231 231,151
- --------------------------------------------------------------------------------
Total current liabilities 1,003,508 875,063
- --------------------------------------------------------------------------------
Obligations for employee benefits, noncurrent (note 13) 49,287 55,022
Medical and other benefits payable, noncurrent (note 7) 65,929 75,212
Long-term debt (note 12) 248,039 89,339
Minority interest in subsidiary 10,395 8,365
- --------------------------------------------------------------------------------
Total liabilities 1,377,158 1,103,001
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $0.01 par; shares issued and outstanding:
38,200, 1999; 42,300, 1998 (notes 2 and 14) 382 423
Capital in excess of par (note 2) 816,517 839,187
Retained earnings (note 2) 112,896 202,554
Unearned compensation--restricted stock (note 14) (1,926) --
Accumulated other comprehensive income (note 16) 9,088 29,060
- --------------------------------------------------------------------------------
Total shareholders' equity 936,957 1,071,224
Commitments and contingencies (notes 8 and 22)
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,314,115 2,174,225
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Trigon Healthcare, Inc. 29
<PAGE>
Consolidated
Statements of Operations
Trigon Healthcare, Inc. and Subsidiaries
Years ended December 31, 1999, 1998 and 1997
(in thousands, except per share data) 1999 1998 1997
- --------------------------------------------------------------------------------
REVENUES
Premium and fee revenues
Commercial $ 1,664,261 1,531,107 1,431,114
Federal Employee Program 448,676 407,136 377,722
Amounts attributable to self-funded
arrangements 1,216,427 1,090,638 1,062,101
Less: amounts attributable to claims
under self-funded arrangements (1,082,328) (979,535) (961,588)
- --------------------------------------------------------------------------------
2,247,036 2,049,346 1,909,349
Investment income (note 4) 97,131 85,540 74,684
Net realized gains (losses) (note 4) (21,957) 77,507 54,063
Other revenues (note 10) 24,218 23,959 24,376
- --------------------------------------------------------------------------------
Total revenues 2,346,428 2,236,352 2,062,472
- --------------------------------------------------------------------------------
EXPENSES
Medical and other benefit costs (notes 7
and 20)
Commercial 1,374,843 1,263,765 1,194,641
Federal Employee Program 429,519 388,513 359,915
- --------------------------------------------------------------------------------
1,804,362 1,652,278 1,554,556
Selling, general and administrative
expenses (notes 3, 13 and 20) 502,189 389,471 357,921
Interest expense (note 12) 8,359 5,291 4,602
- --------------------------------------------------------------------------------
Total expenses 2,314,910 2,047,040 1,917,079
- --------------------------------------------------------------------------------
Income before income taxes and minority
interest 31,518 189,312 145,393
Income tax expense (note 11) 8,345 63,237 49,617
- --------------------------------------------------------------------------------
Income before minority interest 23,173 126,075 95,776
Minority interest 2,710 2,503 723
- --------------------------------------------------------------------------------
Net income $ 20,463 123,572 95,053
- --------------------------------------------------------------------------------
Net income after Demutualization and IPO
(notes 2 and 15) $ 20,463 123,572 78,982
- --------------------------------------------------------------------------------
Earnings per share (notes 2 and 15)
Basic net income after Demutualization
and IPO $0.50 2.92 1.87
- --------------------------------------------------------------------------------
Diluted net income after Demutualization
and IPO $0.49 2.88 1.86
- --------------------------------------------------------------------------------
Pro forma earnings per share (notes 2 and 15)
Basic and diluted pro forma net income $2.23
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
30 Trigon Healthcare, Inc.
<PAGE>
Consolidated Statements of Changes in
Shareholders' Equity and Comprehensive Income
Trigon Healthcare, Inc. and Subsidiaries
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Capital other Total
Common in excess Retained Unearned comprehensive shareholders'
(in thousands) stock of par earnings Compensation income equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AS OF JANUARY 1, 1997 $ -- -- 706,259 -- 33,521 739,780
Net income before Demutualization -- -- 16,071 -- -- 16,071
Net income after Demutualization -- -- 78,982 -- -- 78,982
Net unrealized gains on investment securities, net
of income taxes (notes 4 and 16) -- -- -- -- 3,776 3,776
----------
Comprehensive income 98,829
Issuance of 24,475 shares to eligible policyholders
in the
Demutualization and cash payments to eligible
policyholders in lieu of shares of common stock 245 630,941 (722,330) -- -- (91,144)
Issuance of 17,825 shares in the Initial Public
Offering, net of expenses 178 215,027 -- -- -- 215,205
Purchase and reissuance of common stock under stock
option and other employee benefit plans, including
tax benefits -- (144) -- -- -- (144)
Common stock held by consolidated grantor trusts
(note 14) -- (3,789) -- -- -- (3,789)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 1997 423 842,035 78,982 -- 37,297 958,737
Net income -- -- 123,572 -- -- 123,572
Minimum pension liability adjustment, net of income
taxes (notes 13 and 16) -- -- -- -- (1,149) (1,149)
Net unrealized losses on investment securities, net
of income taxes (notes 4 and 16) -- -- -- -- (7,088) (7,088)
----------
Comprehensive income 115,335
Adjustment to cash payments to eligible
policyholders in lieu of shares of common stock
in the Demutualization -- (690) -- -- -- (690)
Purchase and reissuance of common stock under stock
option and other employee benefit plans, including
tax benefits -- (1,307) -- -- -- (1,307)
Change in common stock held by consolidated grantor
trusts (note 14) -- (851) -- -- -- (851)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 1998 423 839,187 202,554 -- 29,060 1,071,224
Net income -- -- 20,463 -- -- 20,463
Change in minimum pension liability, net of income
taxes (notes 13 and 16) -- -- -- -- 834 834
Net unrealized losses on investment securities, net
of income taxes (notes 4 and 16) -- -- -- -- (20,806) (20,806)
----------
Comprehensive income 491
Repurchase and retirement of common stock (41) (20,500) (110,121) -- -- (130,662)
Purchase and reissuance of common stock under stock
option and other employee benefit plans, including tax
benefits and net of amortization -- (767) -- (1,926) -- (2,693)
Change in common stock held by consolidated grantor
trusts (note 14) -- (1,403) -- -- -- (1,403)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 1999 $382 816,517 112,896 (1,926) 9,088 936,957
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
Trigon Healthcare, Inc. 31
<PAGE>
Consolidated
Statements of Cash Flows
Trigon Healthcare, Inc. and Subsidiaries
Years ended December 31, 1999, 1998 and 1997
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (note 19) $ 188,823 151,580 (116,982)
- --------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from sale of property and
equipment and other assets 342 13 790
Capital expenditures (17,827) (16,857) (8,226)
Investment securities purchased (4,293,560) (3,797,307) (4,784,150)
Proceeds from investment securities sold 3,347,933 2,845,399 3,897,611
Maturities of fixed income securities 749,828 823,942 777,626
- --------------------------------------------------------------------------------
Net cash used in investing activities (213,284) (144,810) (116,349)
- --------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from long-term debt 160,000 -- 85,439
Payments on long-term debt -- (808) (172)
Payments to members in lieu of common
stock pursuant to Plan of Demutualization -- (690) (91,144)
Net proceeds from issuance of common stock -- -- 215,205
Purchase and reissuance of common stock
under employee benefit and stock option
plans (3,694) (1,307) (144)
Common stock purchased by consolidated
grantor trusts (1,403) (851) (3,789)
Purchase and retirement of common stock (130,662) -- --
Change in outstanding checks in excess
of bank balance (4,750) (2,624) 3,464
- --------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 19,491 (6,280) 208,859
- --------------------------------------------------------------------------------
Increase (decrease) in cash (4,970) 490 (24,472)
Cash--beginning of year 7,500 7,010 31,482
- --------------------------------------------------------------------------------
Cash--end of year $ 2,530 7,500 7,010
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
32 Trigon Healthcare, Inc.
<PAGE>
Notes
to Consolidated Financial Statements
Trigon Healthcare, Inc. and Subsidiaries
December 31, 1999, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Trigon Healthcare, Inc., a stock holding company, was formed in 1996 as a
wholly-owned subsidiary of Blue Cross and Blue Shield of Virginia (dba Trigon
Blue Cross Blue Shield) (Virginia BCBS) for the purpose of becoming the parent
company of Virginia BCBS under a Plan of Demutualization (Demutualization). In
accordance with the Demutualization, effective February 5, 1997, Virginia BCBS
completed its conversion from a mutual insurance company to a stock insurance
company, changed its name to Trigon Insurance Company (dba Trigon Blue Cross
Blue Shield) and became a wholly-owned subsidiary of Trigon Healthcare, Inc.
(Trigon Healthcare, Inc. and subsidiaries herein collectively referred to as the
Company) (note 2).
Trigon Healthcare, Inc. owns 100% of Trigon Insurance Company,
HealthKeepers, Inc., Mid-South Insurance Company (Mid-South), Trigon Health and
Life Insurance Company, Trigon Services, Inc., Consolidated Holdings
Corporation, Trigon Administrators, Inc., Trigon Disability Services Company,
Health Management Corporation and Monticello Service Agency, Inc. Additionally,
Trigon Healthcare, Inc. owns 80% of Priority, Inc. and 51% of Peninsula Health
Care, Inc. Through its subsidiary, Trigon Insurance Company, and its health
maintenance organization (HMO) subsidiaries, the Company is the largest managed
health care company in Virginia, providing nearly 1.9 million customers with a
comprehensive spectrum of managed care products and services provided primarily
through three provider network systems. Trigon Insurance Company participates in
a national contract between the Blue Cross and Blue Shield Association and the
U.S. Office of Personnel Management to provide benefits to Federal employees
within Virginia through the Federal Employee Program (FEP). The various
subsidiaries provide complementary products and services to customers and
non-customers of Trigon Insurance Company including disease management programs,
third-party administration for medical and workers' compensation, health
promotion and similar products.
The significant accounting policies and practices followed by the Company
are as follows:
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. The Company follows
Statement of Financial Accounting Standards (SFAS) No. 60, Accounting and
Reporting by Insurance Enterprises, as it relates to its insurance business and
AICPA Statement of Position 89-5, Financial Accounting and Reporting by
Providers of Prepaid Healthcare Services, as it relates to its HMO business. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The consolidated financial statements include the accounts of Trigon Healthcare,
Inc. and its majority-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation. Investments in other
companies in which less than a majority interest is held and where the Company
has significant influence over the operating and financial policies of the
investee are accounted for under the equity method.
Risks and Uncertainties
The Company's profitability depends in large part on accurately predicting and
effectively managing health care costs. The Company continually reviews its
premium and benefit structure to reflect its underlying claims experience and
revised actuarial data; however, several factors could adversely affect the
medical loss ratios. Certain of these factors, which include changes in health
care practices, inflation, new technologies, major epidemics, natural disasters
and malpractice litigation, are beyond any health plan's control and could
adversely affect the Company's ability to accurately predict and effectively
control health care costs. Costs in excess of those anticipated could have a
material adverse effect on the Company's results of operations.
Trigon Healthcare, Inc. 33
<PAGE>
Notes
to Consolidated Financial Statements
Trigon Healthcare, Inc. and Subsidiaries
December 31, 1999, 1998 and 1997
(continued)
In addition, the managed care industry is highly competitive in both
Virginia and in other states in the Southeastern and Mid-Atlantic regions where
the Company principally intends to expand. There is no assurance that such
competition will not exert strong pressures on the Company's profitability, its
ability to increase enrollment, or its ability to successfully attain its
expansion plans. Also, there can be no assurance that regulatory initiatives
will not be undertaken at the state or federal level to reform the health care
industry in order to reduce the escalation in health care costs or to make
health care more accessible. Such reform could adversely affect the Company's
profitability.
Investment Securities
Investment securities are accounted for in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. All investment
securities are considered available-for-sale and are recorded at estimated fair
value, based on quoted market prices. The net unrealized gain or loss on
investment securities, net of deferred income taxes, is included in accumulated
other comprehensive income in shareholders' equity. A decline in the fair value
of any investment security below cost, that is deemed other than temporary, is
recorded as a realized loss resulting in a new cost basis for the security.
Costs of investments sold are determined on the first in, first out basis.
Certain of the Company's investment securities are denominated in foreign
currencies. The Company utilizes forward currency contracts and foreign currency
options to hedge exposure to fluctuations in foreign currency exchange rates.
The forward contracts and options are reflected as investment securities on the
consolidated balance sheets at fair value. Unrealized gains and losses on these
contracts are recorded in accumulated other comprehensive income in
shareholders' equity along with the unrealized gains and losses on the
securities being hedged. When the securities hedged by these contracts are sold,
gains or losses on these contracts are reflected in the consolidated statements
of operations as net realized gains (losses).
The Company enters into financial futures contracts for portfolio
strategies such as minimizing interest rate risk and managing portfolio
duration. The notional amount of the futures contracts is limited to that of the
market value of the underlying portfolios. Should this limitation be exceeded,
futures contracts are immediately terminated in order to comply with this
restriction. Initial margins in the form of securities are maintained with the
counterparties for these transactions. Changes in fair value of financial
futures, determined on a daily basis, are recorded as realized gains or losses
in the consolidated statements of operations. Terminations of contracts are
accounted for in the same manner.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets, which are 40 to 50 years
for buildings and 3 to 10 years for furniture and equipment. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or estimated useful life of the asset. Any gain or loss realized
upon retirement or disposal is reflected in selling, general and administrative
expenses.
Certain costs related to the development or purchase of internal-use
software are capitalized and amortized over the estimated useful life of the
software in accordance with AICPA Statement of Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use.
Goodwill and Other Intangibles
Costs in excess of fair value of net tangible and identified intangible assets
of businesses acquired are amortized using the straight-line method over periods
from 15 to 25 years. Recoverability is reviewed annually or sooner if events or
changes in circumstances indicate that the carrying amount may exceed fair
value. Recoverability is then determined by comparing the undiscounted net cash
flows of the assets to which the goodwill applies to the net book value
including goodwill of those assets.
34 Trigon Healthcare, Inc.
<PAGE>
Amortization was $5,812,000, $5,355,000 and $7,689,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. Accumulated amortization as of
December 31, 1999 and 1998 was $7,866,000 and $19,076,000, respectively.
Goodwill and other intangibles related to Mid-South in the amount of $42,626,000
were written-off during 1999 (note 20).
Medical and Other Benefits Payable
The Company establishes liabilities for claims in process of review and claims
incurred but not reported. These liabilities are based on historical payment
patterns using actuarial techniques. In addition, processing costs are accrued
as operating expenses based on an estimate of the costs necessary to process
these claims. The methods for making these estimates and for establishing the
resulting liabilities are continually reviewed and updated, and any adjustments
resulting therefrom are reflected in current operations. While the ultimate
amount of claims and the related expenses paid are dependent on future
developments, management is of the opinion that the liabilities for claims and
claims processing costs are adequate to cover such claims and expenses.
Revenues
All of the Company's individual and certain of the Company's group contracts
provide for the individual or the group to be fully insured. Premiums for these
contracts are billed in advance of the respective coverage periods and are
initially recorded as premiums receivable and as unearned income. Unearned
premiums are recognized as earned in the period of coverage.
Certain other groups have contracts that provide for the group to be at
risk for all or a portion of their claims experience. Most of these self-funded
groups purchase aggregate and/or specific stop-loss coverage. In exchange for a
premium, the group's aggregate liability or the group's liability on any one
episode of care is capped for the year. The Company charges self-funded groups
an administrative fee which is based on the number of members in a group or the
group's claims experience. Under the Company's self-funded arrangements, amounts
due are recognized based on incurred claims plus administrative and other fees
and any stop-loss premiums. In addition, accounts for certain self-funded groups
are charged or credited with interest expense or income as provided by the
groups' contracts.
Agency Contracts
As fiscal intermediary for Medicare through August 31, 1999 and administrative
agent for other plans, the Company allocates operating expenses to these lines
of business to determine reimbursement due for services rendered in accordance
with the contracts in force. Claims processed under these arrangements are not
included in the accompanying 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.
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
discontinued 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.
Postretirement/Postemployment Benefits
Pension costs are accrued in accordance with SFAS No. 87, Employers' Accounting
for Pensions, and are funded based on the minimum contribution requirements of
the Employee Retirement Income Security Act of 1974. The actuarial cost method
used is the projected unit credit method.
The Company provides certain health and life insurance benefits to retired
employees. These benefits are accrued in accordance with SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions.
Trigon Healthcare, Inc. 35
<PAGE>
Notes
to Consolidated Financial Statements
Trigon Healthcare, Inc. and Subsidiaries
December 31, 1999, 1998 and 1997
(continued)
The Company also provides certain disability related post-employment
benefits. These benefits are accrued in accordance with SFAS No. 112, Employers'
Accounting for Postemployment Benefits. The Company accrues the benefits when it
becomes probable that such benefits will be paid and when sufficient information
exists to make reasonable estimates of the amounts to be paid.
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
stock-based compensation plans. Accordingly, no compensation expense has been
recognized for the stock options granted and employee stock purchases. The
Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting
for Stock-Based Compensation.
Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109, Accounting for
Income Taxes. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Earnings Per Share
The Company calculates and presents earnings per share in accordance with SFAS
No. 128, Earnings per Share. Basic earnings per share excludes dilution and is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if all stock options and
other stock-based awards, as well as convertible securities, were exercised and
converted into common stock.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
2. DEMUTUALIZATION AND IPO AND PRO FORMA FINANCIAL INFORMATION
Effective February 5, 1997, Virginia BCBS completed its conversion from a mutual
insurance company to a stock insurance company in accordance with the
Demutualization. In accordance with the Demutualization, Virginia BCBS changed
its name to Trigon Insurance Company (dba Trigon Blue Cross Blue Shield) and
became a wholly-owned subsidiary of Trigon Healthcare, Inc. The membership
interests of Virginia BCBS's eligible members were converted into Class A common
stock of Trigon Healthcare, Inc., or, in certain circumstances, cash. The
Demutualization also required the Company to complete an Initial Public Offering
(IPO) of stock simultaneously with the conversion. Accordingly, Trigon
Healthcare, Inc. issued 17.8 million shares of Class A common stock at $13 per
share in the IPO, generating net proceeds of $215.2 million. In connection with
the Demutualization, the Company was required to make a payment of $175 million
to the Commonwealth of Virginia (Commonwealth Payment) in February 1997. The
Commonwealth Payment was accrued and reflected as an extraordinary charge in the
consolidated financial statements for 1996. The Company used approximately $90
million of the net proceeds and $85 million in borrowings under a revolving
credit agreement to fund this payment (note 12). The Company also used
approximately $91.1 million of the offering proceeds to pay certain eligible
members cash in lieu of shares of common stock that would otherwise be issued to
such eligible members pursuant to the Demutualization. The statements of changes
in shareholders' equity and comprehensive income and the statements of cash
flows reflect the consolidated capitalization effects of the Demutualization and
IPO for 1997.
36 Trigon Healthcare, Inc.
<PAGE>
The following pro forma information for the year ended December 31, 1997
gives effect to the Demutualization and IPO as if they had occurred on January
1, 1997 consistent with the Company's pro forma presentation in its Form S-1
filed on January 29, 1997 in connection with its IPO (in thousands):
1997
- -----------------------------------------
As reported
Income before income taxes
and minority interest $145,393
Income tax expense 49,617
Minority interest 723
Pro forma adjustments
Pro forma interest expense 634
Pro forma income tax benefit (217)
- -----------------------------------------
Pro forma net income $ 94,636
- -----------------------------------------
The pro forma information assumes:
. interest expense at 5.675% per annum for the year ended December 31, 1997
on borrowings used to fund a portion of the Commonwealth Payment. The pro
forma interest expense reflected for the year ended December 31, 1997
represents interest expense for the period prior to the actual borrowing of
funds used to make a portion of the Commonwealth Payment using the actual
weighted average rate in effect during the first quarter of 1997. Actual
interest expense for the period subsequent to the borrowings is included in
income before income taxes and minority interest. Actual interest rates can
vary on the current borrowings. A 1/8 percent change in the interest rate
of the current outstanding borrowings would have changed interest expense
by approximately $106,000 per annum.
. the actual effective income tax rate of 34.1% for 1997. The pro forma
income tax benefit for the year ended December 31, 1997 represents the
income tax benefit associated with the pro forma interest expense
adjustment.
The preceding pro forma financial information is used to present
comparative earnings per share amounts for the year ended December 31, 1997 on
the consolidated statements of operations (note 15). Net income and net income
per share after Demutualization and IPO on the consolidated statements of
operations reflect net income and net income per share for the period after
February 5, 1997, the effective date of the Demutualization and IPO.
3. AGENCY CONTRACTS
The Company acts as an administrative agent for processing claims for certain
agencies and other plans (note 1). Claims processed for others and the related
reimbursed operating expenses, which are subject to their audit, were as follows
for the years ended December 31, 1999, 1998 and 1997 (in thousands):
1999 1998 1997
- --------------------------------------------------------
Claims processed for
Medicare $2,098,418 3,154,118 3,257,532
Other plans 207,649 156,352 106,486
- --------------------------------------------------------
$2,306,067 3,310,470 3,364,018
- --------------------------------------------------------
Operating expenses
reimbursed by
Medicare $ 18,284 16,579 12,535
Other plan 7,470 5,243 3,025
- --------------------------------------------------------
$25,754 21,822 15,560
- --------------------------------------------------------
Trigon Healthcare, Inc. 37
<PAGE>
Notes
to Consolidated Financial Statements
Trigon Healthcare, Inc. and Subsidiaries
December 31, 1999, 1998 and 1997
(continued)
4. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair value
of investment securities as of December 31, 1999 and 1998 were as follows (in
thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized Fair
1999 cost gains losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed income
Domestic
U.S. Treasury securities and obligations of U.S. government agencies $ 288,070 -- 8,813 279,257
Mortgage-backed obligations of U.S. government agencies 89,051 19 1,122 87,948
States and political subdivision securities 299,705 176 11,943 287,938
Other mortgage-backed and asset-backed securities 62,495 18 1,473 61,040
Domestic corporate bonds 615,470 4,250 25,955 593,765
Other fixed income investment funds 23,855 -- 1,258 22,597
Short-term debt securities with maturities of less than one year 76,148 -- 249 75,899
Foreign
Debt securities issued by foreign governments 48,211 2,196 174 50,233
Foreign corporate bonds 96,643 879 3,878 93,644
Short-term debt securities with maturities of less than one year 4,798 -- 3 4,795
- -----------------------------------------------------------------------------------------------------------------------------------
Total fixed income 1,604,446 7,538 54,868 1,557,116
- -----------------------------------------------------------------------------------------------------------------------------------
Equities
Domestic 57,307 27,190 5,288 79,209
Foreign 72,183 46,225 6,130 112,278
- -----------------------------------------------------------------------------------------------------------------------------------
Total equities 129,490 73,415 11,418 191,487
- -----------------------------------------------------------------------------------------------------------------------------------
Derivative instruments -- -- 201 (201)
- -----------------------------------------------------------------------------------------------------------------------------------
$1,733,936 80,953 66,487 1,748,402
- -----------------------------------------------------------------------------------------------------------------------------------
Unrestricted $1,723,905 80,953 66,343 1,738,515
Restricted 10,031 -- 144 9,887
- -----------------------------------------------------------------------------------------------------------------------------------
$1,733,936 80,953 66,487 1,748,402
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38 Trigon Healthcare, Inc.
<PAGE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized Fair
1998 cost gains losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed income
Domestic
U.S. Treasury securities and obligations of U.S. government agencies $ 485,483 29,331 522 514,292
Mortgage-backed obligations of U.S. government agencies 19,401 51 47 19,405
States and political subdivision securities 241,945 4,804 342 246,407
Other mortgage-backed and asset-backed securities 122,557 467 940 122,084
Domestic corporate bonds 451,355 8,033 7,887 451,501
Short-term debt securities with maturities of less than one year 83,018 -- -- 83,018
Foreign
Debt securities issued by foreign governments 18,181 131 220 18,092
Foreign corporate bonds 26,419 138 767 25,790
Short-term debt securities with maturities of less than one year 29 1 -- 30
- ------------------------------------------------------------------------------------------------------------------------------------
Total fixed income 1,448,388 42,956 10,725 1,480,619
- ------------------------------------------------------------------------------------------------------------------------------------
Equities
Domestic 49,456 14,291 2,591 61,156
Foreign 48,551 5,289 2,734 51,106
- ------------------------------------------------------------------------------------------------------------------------------------
Total equities 98,007 19,580 5,325 112,262
- ------------------------------------------------------------------------------------------------------------------------------------
Derivative instruments -- -- 12 (12)
- ------------------------------------------------------------------------------------------------------------------------------------
$1,546,395 62,536 16,062 1,592,869
- ------------------------------------------------------------------------------------------------------------------------------------
Unrestricted $1,536,689 61,886 16,053 1,582,522
Restricted 9,706 650 9 10,347
- ------------------------------------------------------------------------------------------------------------------------------------
$1,546,395 62,536 16,062 1,592,869
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Short-term investments consist principally of commercial paper and money
market investments.
Derivative instruments consist of foreign currency forward contracts and
foreign currency options. The Company enters into foreign currency derivative
instruments to hedge exposure to fluctuations in foreign currency exchange
rates. Company policy only permits utilization of these instruments in its
foreign denominated bond and equity portfolios. The counter-parties to these
transactions are major financial institutions. The Company may incur a loss with
respect to these transactions to the extent that a counterparty fails to perform
under a contract and exchange rates have changed unfavorably since the inception
of the contract. The Company anticipates that the counterparties will be able to
fully satisfy their obligations under the agreements. The forward contracts
involve the exchange of one currency for another at a future date and typically
have maturities of one year or less. As of December 31, 1999, the Company had
forward contracts outstanding to purchase approximately $10.7 million in foreign
currencies and to sell approximately $10.3 million in foreign currencies
(primarily the Euro and Japanese Yen). The gross unrealized gains and losses
related to these contracts as of December 31, 1999 aggregated $95,000 and
$296,000, respectively. Foreign currency options are contracts that give the
option purchaser the right, but not the obligation, to buy or sell, within a
specific period of time, a financial instrument at a specified price. These
options generally expire within twelve months. There were no foreign currency
options outstanding as of December 31, 1999.
The Company enters into financial futures contracts for portfolio
strategies such as minimizing interest rate risk and managing portfolio
duration. The notional amount of the futures contracts, $63.1 million as of
December 31, 1999, is limited to that of the market value of the underlying
portfolios.
The amortized cost and estimated fair value of fixed income securities as
of December 31, 1999, by contractual maturity, were as follows (in thousands).
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Trigon Healthcare, Inc. 39
<PAGE>
Notes
to Consolidated Financial Statements
Trigon Healthcare, Inc. and Subsidiaries
December 31, 1999, 1998 and 1997
(continued)
Amortized Estimated
cost fair value
- --------------------------------------------------------------------------------
Due in one year or less $ 82,647 82,396
Due after one year through five years 240,382 231,482
Due after five years through ten years 599,735 583,111
Due after ten years 500,364 480,429
Mortgage-backed, asset-backed and
other securities 181,318 179,698
- --------------------------------------------------------------------------------
$1,604,446 1,557,116
- --------------------------------------------------------------------------------
Included in investment securities as of December 31, 1999 are $9.9 million,
at estimated fair value, of U.S. Treasury securities held by various states to
meet security deposit requirements related to Trigon Insurance Company, the HMO
subsidiaries, Trigon Health and Life Insurance Company and Mid-South Insurance
Company.
The major components of investment income for the years ended December 31,
1999, 1998 and 1997 were as follows (in thousands):
1999 1998 1997
- --------------------------------------------------------------------------------
Interest on fixed income securities $ 95,957 84,776 73,940
Interest on short-term investments 6,703 7,573 4,450
Dividends 2,884 2,405 5,340
- --------------------------------------------------------------------------------
105,544 94,754 83,730
Investment expenses 5,758 6,541 6,141
Group interest credits 2,655 2,673 2,905
- --------------------------------------------------------------------------------
Investment income $97,131 85,540 74,684
- --------------------------------------------------------------------------------
Gross realized gains and losses for the years ended December 31, 1999, 1998
and 1997 were as follows (in thousands):
1999 1998 1997
- --------------------------------------------------------------------------------
Gross realized gains
Fixed income securities $ 14,527 48,880 21,177
Equity securities 13,401 29,370 65,837
Derivative instruments 64,456 64,015 14,689
- --------------------------------------------------------------------------------
92,384 142,265 101,703
- --------------------------------------------------------------------------------
Gross realized losses
Fixed income securities 45,740 10,540 20,514
Equity securities 7,448 17,935 20,461
Derivative instruments 61,153 36,283 6,665
- --------------------------------------------------------------------------------
114,341 64,758 47,640
- --------------------------------------------------------------------------------
Net realized gains (losses) $ (21,957) 77,507 54,063
- --------------------------------------------------------------------------------
Proceeds from the sale of investment securities were $3.3 billion, $2.8
billion and $3.9 billion during 1999, 1998 and 1997, respectively.
Unrealized gains (losses) are computed as the difference between estimated
fair value and amortized cost for fixed income securities or cost for equity
securities. A summary of the change in unrealized gains (losses), net of income
taxes, for the years ended December 31, 1999, 1998 and 1997 is as follows (in
thousands):
1999 1998 1997
- --------------------------------------------------------------------------------
Fixed income securities $(79,561) (5,450) 36,904
Equity securities 47,742 (3,624) (32,380)
Derivative instruments (189) (1,832) 1,303
Provision for income taxes 11,202 3,818 (2,051)
- --------------------------------------------------------------------------------
$(20,806) (7,088) 3,776
- --------------------------------------------------------------------------------
5. PREMIUMS AND OTHER RECEIVABLES
Premiums and other receivables as of December
31, 1999 and 1998 were as follows (in
thousands):
1999 1998
- --------------------------------------------------------------------------------
Premiums $ 70,170 74,039
Self-funded group receivables 149,686 136,409
Federal Employee Program 142,787 129,730
Investment income receivable 23,723 17,564
Other 11,133 20,694
- --------------------------------------------------------------------------------
$397,499 378,436
- --------------------------------------------------------------------------------
6. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1999 and 1998 were as follows (in
thousands):
1999 1998
- --------------------------------------------------------------------------------
Land and improvements $ 2,971 2,971
Buildings and improvements 35,764 35,501
Furniture and equipment 71,524 71,797
Computer software 29,705 25,611
- --------------------------------------------------------------------------------
139,964 135,880
Less accumulated depreciation
and amortization 88,726 87,990
- --------------------------------------------------------------------------------
$51,238 47,890
- --------------------------------------------------------------------------------
40 Trigon Healthcare, Inc.
<PAGE>
7. MEDICAL AND OTHER BENEFITS PAYABLE
Medical and other benefits payable as of December 31, 1999 and 1998 were as
follows (in thousands):
1999 1998
- --------------------------------------------------------------------------------
Medical and other benefits
payable--current
Commercial and FEP
Claims reported but not paid $ 30,765 31,079
Claims incurred but not reported 320,994 265,021
- --------------------------------------------------------------------------------
351,759 296,100
Self-funded
Claims reported but not paid 10,271 15,829
Claims incurred but not reported 159,090 140,879
- --------------------------------------------------------------------------------
169,361 156,708
Medical and other benefits payable--
noncurrent (all commercial) 65,929 75,212
- --------------------------------------------------------------------------------
587,049 528,020
Liability for claims processing costs 17,886 17,729
Advance amounts due to (from) providers 5,114 (2,082)
- --------------------------------------------------------------------------------
610,049 543,667
Less medical and other benefits
payable--noncurrent 65,929 75,212
- --------------------------------------------------------------------------------
$544,120 468,455
- --------------------------------------------------------------------------------
A summary of the activity for commercial and FEP medical and other benefits
payable for the years ended December 31, 1999, 1998 and 1997 is as follows (in
thousands):
1999 1998 1997
- --------------------------------------------------------------------------------
Medical and other benefits
payable at beginning
of year $ 528,020 473,087 476,253
Self-funded at beginning
of year (156,708) (148,213) (166,848)
- --------------------------------------------------------------------------------
Balance at beginning
of year 371,312 324,874 309,405
- --------------------------------------------------------------------------------
Incurred related to
Current year 1,821,681 1,656,713 1,559,402
Prior years (17,319) (4,435) (4,846)
- --------------------------------------------------------------------------------
Total incurred 1,804,362 1,652,278 1,554,556
- --------------------------------------------------------------------------------
Paid related to
Current year 1,517,098 1,381,781 1,333,880
Prior years 240,888 224,059 205,207
- --------------------------------------------------------------------------------
Total paid 1,757,986 1,605,840 1,539,087
- --------------------------------------------------------------------------------
Balance at end of year 417,688 371,312 324,874
Self-funded at end of year 169,361 156,708 148,213
- --------------------------------------------------------------------------------
Medical and other benefits
payable at end of year $ 587,049 528,020 473,087
- --------------------------------------------------------------------------------
The Company uses paid claims and completion factors based on historical
payment patterns to estimate incurred claims. Changes in payment patterns and
claims trends can result in changes to prior years' claims estimates.
8. LEASES
The Company has noncancelable operating leases for real estate and equipment
that expire over the next seven years and provide for purchase or renewal
options. Future minimum lease payments under noncancelable operating leases as
of December 31, 1999 were (in thousands):
Years ending December 31,
- --------------------------------------------------------------------------------
2000 $12,070
2001 9,627
2002 9,185
2003 7,295
2004 2,643
Later years through 2006 1,388
- --------------------------------------------------------------------------------
Total minimum lease payments $42,208
- --------------------------------------------------------------------------------
Total rental expense for operating leases for the years ended December 31, 1999,
1998 and 1997 was $17,114,000, $15,213,000 and $14,221,000, respectively.
9. OTHER LIABILITIES
Other liabilities as of December 31, 1999 and 1998 were as follows (in
thousands):
1999 1998
- --------------------------------------------------------------------------------
Outstanding checks in excess
of bank balance $ 36,441 41,191
Member related liabilities 5,956 9,900
Unearned premium reserve--
Federal Employee Program 89,444 79,153
Self-funded group deposits 20,605 18,665
Current income taxes payable 54,716 55,105
Other 50,069 27,137
- --------------------------------------------------------------------------------
$257,231 231,151
- --------------------------------------------------------------------------------
The FEP unearned premium reserve represents the Company's share of the FEP
premium stabilization reserve. These funds are actually held by the Blue Cross
and Blue Shield Association on
Trigon Healthcare, Inc. 41
<PAGE>
Notes
to Consolidated Financial Statements
Trigon Healthcare, Inc. and Subsidiaries
December 31, 1999, 1998 and 1997
(continued)
behalf of each Blue Cross and Blue Shield Plan participating in the Federal
Employee Program. A receivable in the same amount is recorded in premiums and
other receivables.
10. OTHER REVENUES
Other revenues include those revenues earned by non-core subsidiaries. A summary
by type of revenue for the years ended December 31, 1999, 1998 and 1997 is as
follows (in thousands):
1999 1998 1997
- --------------------------------------------------------------------------------
Employee benefits administration $ 3,769 3,953 4,346
Workers' compensation
administration 9,319 9,108 8,877
Health management services 6,227 6,093 8,709
Other 4,903 4,805 2,444
- --------------------------------------------------------------------------------
$24,218 23,959 24,376
- --------------------------------------------------------------------------------
11. INCOME TAXES
Income tax expense (benefit) attributable to income before income taxes and
minority interest, substantially all of which is federal, for the years ended
December 31, 1999, 1998 and 1997 consists of (in thousands):
1999 1998 1997
- --------------------------------------------------------------------------------
Current $ 26,129 65,544 28,074
Deferred (17,784) (2,307) 21,543
- --------------------------------------------------------------------------------
$ 8,345 63,237 49,617
- --------------------------------------------------------------------------------
The differences between the statutory federal income tax rate and the
actual tax rate applied to income before income taxes and minority interest for
the years ended December 31, 1999, 1998 and 1997 were as follows:
1999 1998 1997
- --------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0 35.0
Tax exempt investment income (13.7) (1.3) (0.6)
Non-deductible amortization 3.4 -- --
Other, net 1.8 (.3) (.3)
- --------------------------------------------------------------------------------
Effective tax rate 26.5% 33.4 34.1
- --------------------------------------------------------------------------------
The components of the deferred tax assets and deferred tax liabilities as
of December 31, 1999 and 1998 were as follows (in thousands):
1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets
Employee benefit plans $28,073 25,995
Insurance reserves 36,959 27,811
Investment in subsidiary 13,722 --
Property and equipment 2,930 5,264
Other 383 5,614
- --------------------------------------------------------------------------------
Gross deferred tax assets 82,067 64,684
- --------------------------------------------------------------------------------
Deferred tax liabilities
Investment securities 5,063 16,265
Other 678 600
- --------------------------------------------------------------------------------
Gross deferred tax liabilities 5,741 16,865
- --------------------------------------------------------------------------------
Net deferred tax asset $76,326 47,819
- --------------------------------------------------------------------------------
Deferred tax assets and liabilities as of December 31, 1999 and 1998 are
presented on the accompanying consolidated balance sheets as follows (in
thousands):
1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets--current $16,827 --
Deferred tax assets--noncurrent 59,499 55,841
Deferred tax liabilities--current -- 8,022
- --------------------------------------------------------------------------------
Net deferred tax asset $76,326 47,819
- --------------------------------------------------------------------------------
In conjunction with the Demutualization (note 2), the Company made the
Commonwealth Payment which was expensed and paid in prior years. The Company
claimed 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 for 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.
42 Trigon Healthcare, Inc.
<PAGE>
12. LONG-TERM DEBT
Long-term debt as of December 31, 1999 and 1998 is summarized as follows (in
thousands):
1999 1998
- --------------------------------------------------------------------------------
Revolving credit agreement $245,000 85,000
Promissory note, 5%, due June 30, 2000 1,300 1,300
Notes payable, at prime plus 1% 3,039 3,039
- --------------------------------------------------------------------------------
249,339 89,339
Less current portion 1,300 --
- --------------------------------------------------------------------------------
$248,039 89,339
- --------------------------------------------------------------------------------
Simultaneous with the Demutualization and IPO in February 1997, the Company
entered into 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 current borrowing terms require a facility fee of .075% per
annum based on the $300 million commitment and bears interest at LIBOR plus a
margin, adjusted monthly. The credit agreement also contains certain financial
covenants and restrictions including minimum net worth requirements as well as
limitations on dividend payments. As of December 31, 1999, $245 million was
outstanding under the credit agreement. The proceeds were used to make a portion
of the payment to the Commonwealth of Virginia in accordance with the
Demutualization and to provide additional funding for the stock repurchase
program (note 14). The weighted average interest rate for the period the
borrowings were outstanding during the years ended December 31, 1999 and 1998
was 5.441% and 5.809%, respectively.
The promissory note originated in 1995 in connection with the purchase of a
subsidiary. The promissory note requires payment of the principal on June 30,
2000 and bears interest at 5%, payable annually. In 1999 this amount is included
in other liabilities.
Priority, Inc. entered into notes payable with its minority shareholder for
purposes of maintaining regulatory minimum net worth requirements. Interest on
the notes payable is at the prime lending rate plus one percent (9.50% and 8.75%
as of December 31, 1999 and 1998, respectively). The notes have no scheduled
maturity date and repayment of the notes is subject to approval by state
regulatory authorities. Peninsula Health Care, Inc. entered into a line of
credit agreement with its minority shareholder for purposes of maintaining
regulatory minimum net worth requirements. There were no amounts outstanding
under this line of credit as of December 31, 1999 and 1998.
13. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan which is
qualified under IRC 401(a). The plan is funded through the Blue Cross National
Retirement Trust (Trust), a collective investment trust for the retirement
programs of its participating employers. Assets in the Trust are primarily
domestic and international equity securities, domestic bonds, real estate funds
and short-term investments. The Company also has a nonqualified supplemental
executive retirement plan (SERP) which provides for pension benefits in excess
of qualified plan limits imposed by IRC limits and restrictions on participation
by highly compensated employees. The plan serves to restore the combined pension
amount to original benefit levels. The plan is unfunded, however, the Company
has established a grantor trust to fund future obligations under the plan. The
grantor trust is consolidated with the Company for financial reporting purposes.
Effective October 1, 1998, the Company amended its defined benefit pension
plan. The amendment reduced the Company's projected benefit obligation by
$10,200,000 which is being amortized as a reduction to net periodic pension
expense over the average remaining years of service to full eligibility for
benefits of the active plan participants of approximately 14.5 years.
In addition to providing pension benefits, the Company provides certain
health and life insurance benefits for retired employees. In October 1997, the
Company amended its postretirement benefit plan by terminating benefits for
substantially all future eligible retirees except those employees who had at
least 20 years of service and those employees between the ages of 40 and 45 with
age plus years of service equal to 55 or more as of January 1, 1998. The changes
in this plan resulted in a curtailment gain of $3,997,000 in the fourth quarter
of 1997 which is included in selling, general and administrative expenses in the
Company's consolidated statements of operations. The plan amendment also reduced
the Company's accumulated postretirement benefit obligation by $4,589,000 which
is being amortized as a reduction to net periodic postretirement benefit expense
over approximately 7.5 years. This postretirement benefit plan is also funded
through the Trust.
Trigon Healthcare, Inc. 43
<PAGE>
Notes
to Consolidated Financial Statements
Trigon Healthcare, Inc. and Subsidiaries
December 31, 1999, 1998 and 1997
(continued)
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets for the years ended December 31,
1999 and 1998 and a statement of the funded status as of December 31, 1999 and
1998 (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reconciliation of benefit obligation
Obligation as of January 1 $139,262 136,825 31,896 27,729
Service cost 7,842 7,505 1,412 1,277
Interest cost 8,725 8,740 2,200 2,113
Participant contributions -- -- 69 77
Benefit payments (14,200) (6,625) (948) (935)
Actuarial (gain) loss (19,016) 2,307 (3,943) 5,712
Plan amendments -- (9,490) (1,964) (4,077)
- -----------------------------------------------------------------------------------------------------------------------------------
Obligation as of December 31 122,613 139,262 28,722 31,896
- -----------------------------------------------------------------------------------------------------------------------------------
Reconciliation of fair value of plan assets
Fair value of plan assets as of January 1 141,930 118,344 16,208 14,134
Actual return on plan assets 22,817 17,810 2,628 2,932
Participant contributions -- -- 69 77
Employer contributions -- 12,281 415 --
Benefit payments (13,875) (6,505) (948) (935)
- -----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets as of December 31 150,872 141,930 18,372 16,208
- -----------------------------------------------------------------------------------------------------------------------------------
Funded status
Funded status as of December 31 28,259 2,668 (10,350) (15,688)
Unrecognized transition asset (236) (306) -- --
Unrecognized prior service cost (8,260) (8,806) (9,782) (9,205)
Unrecognized gain (37,822) (7,056) (6,945) (1,927)
- -----------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $(18,059) (13,500) (27,077) (26,820)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table provides the amounts recognized in the consolidated
balance sheets as of December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accrued benefit liability (included in obligations for employee benefits,
noncurrent) $(19,393) (16,219) (27,077) (26,820)
Intangible asset (included in other assets) 850 951 -- --
Accumulated other comprehensive income 484 1,768 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $(18,059) (13,500) (27,077) (26,820)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's nonqualified SERP was the only pension plan with a benefit
obligation and an accumulated benefit obligation in excess of plan assets. The
plan's benefit obligation was $12,043,000 and $12,942,000 as of December 31,
1999 and 1998, respectively. The plan's accumulated benefit obligation was
$11,062,000 and $11,425,000 as of December 31, 1999 and 1998, respectively.
There are no plan assets in the nonqualified SERP.
44 Trigon Healthcare, Inc.
<PAGE>
The following table provides the components of net periodic expense
(benefit) for the plans for the years ended December 31, 1999, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 7,842 7,505 7,695 1,412 1,277 1,948
Interest cost 8,725 8,740 8,719 2,200 2,113 2,003
Expected return on plan assets (11,224) (9,461) (8,147) (1,553) (1,374) (1,167)
Amortization of transition asset (70) (70) (70) -- -- --
Amortization of prior service cost (547) (72) 87 (1,387) (804) (697)
Amortization of net (gain) loss 157 (271) 109 -- (273) (440)
- ------------------------------------------------------------------------------------------------------------------------------------
Net periodic expense 4,883 6,371 8,393 672 939 1,647
Curtailment gain -- -- -- -- -- (3,977)
- ------------------------------------------------------------------------------------------------------------------------------------
Net periodic expense (benefit) after curtailment gain $ 4,883 6,371 8,393 672 939 (2,330)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The gross amount included within other comprehensive income arising from an
increase (decrease) in the additional minimum pension liability was $(1,284,000)
and $1,768,000 for the years ended December 31, 1999 and 1998, respectively.
There were no amounts in 1997.
The prior service costs of the pension plans and the postretirement benefit
plan are amortized on a straight-line basis over the average remaining years of
service to full eligibility for benefits of the active plan participants. Gains
and losses for the qualified pension plan are amortized on a straight-line basis
over the average remaining service period of active participants using the
minimum basis outlined under SFAS No. 87. Gains and losses for the nonqualified
SERP are amortized on a straight-line basis over the average remaining service
period of active participants based on the entire unrecognized net gain or loss
without applying the applicable corridor that is based on 10% of the greater of
the projected benefit obligation or the market-related value of plan assets.
The weighted average assumptions used in the measurement of the Company's
benefit obligations as of December 31, 1999 and 1998 were as follows:
Pension Benefits Postretirement Benefits
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Discount rate 7.75% 6.75% 7.75% 6.75%
Expected return on plan
assets 9.0 9.0 9.0 9.0
Rate of compensation
increases 3.0 to 6.5 3.0 to 6.5 4.5 4.5
- --------------------------------------------------------------------------------
For measurement purposes, a 6% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999 and subsequent years.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one percent change in assumed
health care cost trend rates would have the following effects (in thousands):
1% Increase 1% Decrease
- --------------------------------------------------------------------------------
Aggregate of service and interest
cost components of net periodic
postretirement health care
benefit cost $ 553 (454)
- --------------------------------------------------------------------------------
Health care component of the
accumulated postretirement
benefit obligation $4,188 (3,553)
- --------------------------------------------------------------------------------
The Company also has the Employees' Thrift Plan of Trigon Insurance Company
(Thrift Plan) under which substantially all employees who have completed three
months of service may elect to save up to 16% of their annual earnings on a
pretax basis, subject to certain limits, in the plan. Participants have the
option of investing in stock of Trigon Healthcare, Inc. and several
international and domestic investment funds. The Company contributes an amount
equal to 50% of the participant's contributions limited to a total of 3% of the
employee's compensation. The Company amended the Thrift Plan in October 1998.
The amendment reduced the eligibility period to three months of service and made
the Company's contributions fully vested to the participant after three years of
service. The amendment also included a provision that allows the Company to make
discretionary profit sharing contributions to
Trigon Healthcare, Inc. 45
<PAGE>
Notes
to Consolidated Financial Statements
Trigon Healthcare, Inc. and Subsidiaries
December 31, 1999, 1998 and 1997
(continued)
participants through the Trigon Healthcare, Inc. stock investment option. The
Company made a discretionary contribution of $791,000 during the year ended
December 31, 1999 and no discretionary contribution during the year ended
December 31, 1998. For the years ended December 31, 1999, 1998 and 1997, the
Company's contribution to the Thrift Plan was $3,580,000, $3,253,000 and
$3,111,000, respectively.
14. CAPITAL STOCK
The Company has authorized 300 million shares of Class A Common Stock, par value
$0.01 per share (Common Stock). Common Stock shares are entitled to one vote per
share. These shares were issued in February 1997 when the Company completed the
Demutualization and IPO described in note 2.
The Company has also authorized 300 million shares of Class B non-voting
Common Stock, par value $0.01 per share (Non-Voting Common Stock). No shares of
Non- Voting Common Stock were issued and outstanding as of December 31, 1999 and
1998. The Non-Voting Common Stock has been authorized in connection with certain
ownership and transfer restrictions included in the Company's amended and
restated articles of incorporation. Non-Voting Common Stock shares are not
entitled to vote on any matter except as otherwise required by law.
The Company is authorized to issue up to 50 million shares of preferred
stock, no par value per share, in one or more series and to provide the
designations, preferences, limitations and rights of each series.
Shareholder Rights Plan
On July 16, 1997, the Board of Directors adopted a Shareholder Rights Plan
(Rights Plan). Under the Rights Plan, the Board of Directors authorized three
million preferred shares, the Series A Junior Participating Preferred Shares,
and declared a dividend of one preferred share purchase right (Right) on each
outstanding share of Trigon Class A Common Stock. Each Right entitles
shareholders to purchase one one-hundredth of a Series A Junior Participating
Preferred Share at an exercise price of $100, subject to adjustment. Subject to
certain exceptions, the Right will be exercisable only if a person or group
acquires 10% or more of the Company's Common Stock or announces a tender offer
for 10% or more of the Company's outstanding Common Stock. Each holder of a
Right (other than those held by the acquiring person) will then be entitled to
purchase, at the Right's then current exercise price, a number of shares of
Trigon Common Stock having a market value of twice the Right's exercise price.
If the Company is acquired in a merger or other business combination transaction
which has not been approved by the Board of Directors, each Right will entitle
its holder to purchase, at the Right's then current exercise price, a number of
shares of the acquiring company's Common Stock having a market value of twice
the Right's exercise price.
The date of record for the dividend distribution was July 29, 1997. The
Rights will expire in 2007 and are redeemable by action of the Board of
Directors at a price of $.001 per Right at any time prior to becoming
exercisable.
Common Stock Held by Grantor Trusts
The Company has several grantor trusts which were established to fund future
obligations under certain compensation and benefit plans. These grantor trusts
are consolidated for financial reporting purposes with the Company. Beginning in
the third quarter of 1997, shares of the Company's Common Stock were purchased
in the open market by these grantor trusts. The purchase price of the shares
held by the grantor trusts is shown as a reduction to capital in excess of par
in the consolidated balance sheets.
Stock Option Plans, Restricted Stock Awards and Stock Purchase Plan
The 1997 Stock Incentive Plan (Incentive Plan), as approved by the Company's
shareholders, provides for the granting of stock options, restricted stock
awards, performance stock awards, stock appreciation rights and cash performance
awards to employees. The Company has reserved 3.55 million shares of its common
stock for issuance under the Incentive Plan. Awards are granted by the Human
Resources Compensation and Employee Benefits Committee of the Board of
Directors. Options vest and expire over terms as set by the committee at the
time of grant. In accordance with the Incentive Plan, options to purchase shares
at an amount equal to the fair market value of the stock at the date of grant
were granted to eligible employees during 1999, 1998 and 1997. These options
46 Trigon Healthcare, Inc.
<PAGE>
generally vest on a pro-rata basis over three years, with certain grants vesting
at the end of one or three years depending on an employee's years of service,
and in all cases expire 10 years from date of grant.
In addition, the shareholders of the Company approved the 1997 Non-Employee
Directors Stock Incentive Plan (Non-Employee Plan). In accordance with the terms
of the Non-Employee Plan, options to purchase 10,000 shares at an amount equal
to the fair market value of the stock on April 16, 1997, the date of grant, were
granted to each of the Company's non-employee directors upon adoption of the
Non-Employee Plan. Under the Non-Employee Plan, newly-elected non-employee
directors are granted nonqualified stock options to purchase 10,000 shares of
common stock on the date of the first annual meeting of shareholders at which
the director is elected. In addition, each eligible director will automatically
be granted options to purchase 5,000 shares of common stock as of the date of
each subsequent annual meeting of shareholders. All options are granted at the
fair market value on the date of grant and become exercisable on a pro-rata
basis over a three-year period. All options expire 10 years from the date of
grant. The Company has reserved 550,000 shares of its common stock for issuance
under the Non-Employee Plan.
A summary of the activity in the stock option plans for the years ended
December 31, 1999, 1998 and 1997 is as follows:
Weighted
Number of Average
Options Exercise Price
- --------------------------------------------------------------------------------
Balance at January 1, 1997 -- --
Granted 2,180,982 $21.96
Exercised -- --
Forfeited (108,628) 22.13
- --------------------------------------------------------------------------------
Balance at December 31, 1997 2,072,354 21.95
Granted 1,184,675 26.70
Exercised (133,228) 22.13
Forfeited (162,776) 22.91
- --------------------------------------------------------------------------------
Balance at December 31, 1998 2,961,025 23.79
Granted 509,430 35.80
Exercised (140,854) 23.72
Forfeited (82,077) 27.11
- --------------------------------------------------------------------------------
Balance at December 31, 1999 3,247,524 $25.59
- --------------------------------------------------------------------------------
Options exercisable at:
December 31, 1999 1,590,510 $23.42
December 31, 1998 720,655 21.95
December 31, 1997 -- --
- --------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
and exercisable as of December 31, 1999:
Options Outstanding Options Exercisable
- ------------------------------------------------------ ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------------
$18.125-25.50 2,469,359 7.6 years $23.07 1,405,182 $22.59
$27.75 -37.31 778,165 8.8 years $33.58 185,328 $29.66
- --------------------------------------------------------------------------------
As of December 31, 1999, 563,854 shares were available for future grants.
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 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 was $1,031,000 for the year ended December 31,
1999.
Trigon Healthcare, Inc. 47
<PAGE>
Notes
to Consolidated Financial Statements
Trigon Healthcare, Inc. and Subsidiaries
December 31, 1999, 1998 and 1997
(continued)
The Company's shareholders approved the Company's 1997 Employee Stock
Purchase Plan (Stock Purchase Plan). The Stock Purchase Plan provides employees
of the Company an opportunity to purchase the Company's common stock through
payroll deductions. The Company has reserved one million shares of its common
stock for issuance under the Stock Purchase Plan. Shares needed to satisfy the
needs of the Stock Purchase Plan may be newly issued by the Company or acquired
by purchase at the expense of the Company on the open market or in private
transactions. Eligible employees may purchase up to $25,000 in fair value based
on the grant date price, annually of the Company's common stock at 85% of the
lower of the fair value on the first or last trading day of each calendar
quarter. Employee purchases under the Stock Purchase Plan were $1,588,000,
$1,511,000 and $749,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. Pursuant to the Stock Purchase Plan, shares of the Company's stock
were purchased on the open market and issued to employees totaling 60,735,
65,801 and 23,971 during 1999, 1998 and 1997, respectively. In addition, 16,629
shares were pending purchase as of December 31, 1999. As of December 31, 1999,
832,864 shares of common stock were available for issuance under the Stock
Purchase Plan.
The pro forma information regarding net income and earnings per share as
required by SFAS No. 123 has been determined as if the Company had accounted for
its stock-based compensation under the fair value method of that Statement. The
fair value for the stock options was estimated at the date of grant using a
Black-Scholes option-pricing model with the following weighted average
assumptions for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997
- --------------------------------------------------------------------------------
Risk-free interest rate 6.78% 4.62% 5.54%
Volatility factor 42.36% 38.41% 37.40%
Dividend yield -- -- --
Weighted average expected life 5 years 5 years 5 years
- --------------------------------------------------------------------------------
The Black-Scholes option-valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock option grants have characteristics
significantly different from those traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock option grants.
- --------------------------------------------------------------------------------
For purposes of pro forma disclosures, compensation expense is increased
for the estimated fair value of the options amortized over the options' vesting
periods and for the difference between the market price of the stock and the
discounted purchase price of the shares on the purchase date for the employee
stock purchases. The Company's pro forma information for 1999, 1998 and 1997 is
as follows (in thousands, except per share data and weighted average fair
value):
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $20,463 12,486 123,572 116,193 95,053 91,372
Net income after Demutualization and IPO 20,463 12,486 123,572 116,193 78,982 75,718
Earnings per share
Basic net income after Demutualization and IPO 0.50 0.31 2.92 2.75 1.87 1.79
Diluted net income after Demutualization and IPO 0.49 0.30 2.88 2.73 1.86 1.79
Pro forma earnings per share
Basic and diluted pro forma net income -- -- -- -- 2.23 2.16
Weighted average fair value of options granted during the year -- 16.87 -- 10.95 -- 9.16
Weighted average fair value of employee stock purchases during the year -- 6.30 -- 8.81 -- 5.82
Weighted average fair value of restricted stock awards granted during year -- 32.88 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
48 Trigon Healthcare, Inc.
<PAGE>
Stock Repurchase Program
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 1999, the
Company purchased 4,100,000 shares of its common stock at a cost of
approximately $130.7 million. The excess of the cost of the acquired shares over
par value is charged on a pro rata basis to capital in excess of par and
retained earnings.
On February 7, 2000, the Company announced that its Board of Directors
authorized a second stock repurchase program for the repurchase of up to ten
percent in additional shares. Under the second repurchase program, stock
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 will be subject to restrictions relating to volume, price
and timing.
15. NET INCOME AND PRO FORMA NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the years ended December 31, 1999 and 1998, and for the period after
the Demutualization and IPO, February 5, 1997 through December 31, 1997 (in
thousands, except per share data):
For the Period
February 5, 1997
through December 31,
1999 1998 1997
- --------------------------------------------------------------------------------
Numerator for basic and
diluted earnings per
share--net income $ 20,463 123,572 78,982
- --------------------------------------------------------------------------------
Denominator
Denominator for basic
earnings per
share--weighted average
shares 40,826 42,300 42,300
Effect of dilutive
securities--employee and
director stock options and
nonvested restricted stock
awards 594 472 80
- --------------------------------------------------------------------------------
Denominator for diluted
earnings per share 41,420 42,772 42,380
- --------------------------------------------------------------------------------
Basic net income per share $ 0.50 2.92 1.87
- --------------------------------------------------------------------------------
Diluted net income per
share $ 0.49 2.88 1.86
- --------------------------------------------------------------------------------
The following table sets forth the computation of basic and diluted pro
forma earnings per share for the year ended December 31, 1997 (in thousands,
except per share data):
1997
- --------------------------------------------------------------------------------
Numerator for basic and diluted pro forma
earnings per share (note 2)--Pro forma net income $94,636
- --------------------------------------------------------------------------------
Denominator
Denominator for basic pro forma earnings per
share--weighted average shares 42,300
Effect of dilutive securities--employee and
director stock options 73
- --------------------------------------------------------------------------------
Denominator for diluted pro forma earnings per
share 42,373
- --------------------------------------------------------------------------------
Basic and diluted earnings per share
Pro forma net income $ 2.23
- --------------------------------------------------------------------------------
The pro forma weighted average shares outstanding gives effect to the
Demutualization and IPO as if they had occurred on January 1, 1997, consistent
with the Company's pro forma presentation in its Form S-1 filed on January 29,
1997, in connection with its IPO (note 2).
Trigon Healthcare, Inc. 49
<PAGE>
Notes
to Consolidated Financial Statements
Trigon Healthcare, Inc. and Subsidiaries
December 31, 1999, 1998 and 1997
(continued)
16. COMPREHENSIVE INCOME
The reclassification entries under SFAS No. 130, Reporting Comprehensive Income,
for the years ended December 31, 1999, 1998 and 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net unrealized gains (losses) on investment securities, net of income taxes
Net unrealized holding gains (losses) arising during the year, net of income tax
expense (benefit) of $(18,887), $23,309 and $20,973 $(35,078) 43,292 38,917
Less: reclassification adjustment for net gains (losses) included in net income,
net of income tax expense (benefit) of $(7,685), $27,127 and $18,922 14,272 (50,380) (35,141)
- --------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on investment securities, net of income taxes $(20,806) (7,088) 3,776
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The components of accumulated other comprehensive income as of December 31,
1999, 1998 and 1997 were as follows (in thousands):
1999 1998 1997
- --------------------------------------------------------------------------------
Net unrealized gain on investment
securities, net of income
taxes of $5,063, $16,265
and $20,083 $9,403 30,209 37,297
Minimum pension liability,
net of income taxes
of $169 and $619 (315) (1,149) --
- --------------------------------------------------------------------------------
Accumulated other
comprehensive income $9,088 29,060 37,297
- --------------------------------------------------------------------------------
17. STATUTORY FINANCIAL INFORMATION
Trigon Insurance Company is required to file financial statements with, and is
subject to audit by, the Commonwealth of Virginia, Bureau of Insurance (Bureau
of Insurance). Such financial statements are prepared in accordance with
statutory accounting practices prescribed or permitted by the Bureau of
Insurance which differ from generally accepted accounting principles under which
the accompanying consolidated financial statements have been prepared.
Significant differences resulting from these accounting practices include
certain investment valuation reserves and certain claim reserves recognized
under statutory accounting as well as certain assets (primarily property and
equipment), certain employee benefit liabilities and deferred income taxes not
recognized under statutory accounting practices. While the Bureau of Insurance
has the authority to permit insurers to deviate from prescribed statutory
accounting practices, Trigon Insurance Company has not received, nor requested,
approval to adopt any such deviations.
Trigon Insurance Company's statutory surplus and net income were (in
thousands):
Statutory surplus as of:
December 31, 1999 (unaudited) $534,241
December 31, 1998 489,003
Statutory net income for the years ended:
December 31, 1999 (unaudited) $ 92,301
December 31, 1998 93,125
December 31, 1997 123,272
Trigon Insurance Company is required by the Bureau of Insurance to maintain
statutory capital and surplus of at least $4.0 million.
Under the Code of Virginia, an insurance company may pay a dividend without
prior permission of the Bureau of Insurance to the extent that such dividend
together with other dividends or distributions within the preceding 12 months
does not exceed the lesser of: (i) 10% of the insurer's statutory surplus as of
the immediately preceding December 31, or (ii) the net statutory gain from
operations (excluding realized gains on investments) for the 12-month period
ended the immediately preceding December 31. On January 7, 2000, the Bureau of
Insurance approved Trigon Insurance Company's request to effect an extraordinary
dividend of $125 million to its parent, Trigon Healthcare, Inc., on February 1,
2000. As a result of this dividend, any dividend distributions by Trigon
Insurance during 2000 will require the approval of the Bureau of Insurance.
During 1999, 1998 and 1997, Trigon Insurance Company paid
50 Trigon Healthcare, Inc.
<PAGE>
dividends to its parent of $48.9 million, $227.5 million and $238.7 million,
respectively. The 1999 cash dividend was effected August 1, 1999. The 1998
dividend was effected July 1, 1998 and included $200.0 million of cash and $27.5
million of stock of a wholly-owned subsidiary. The 1997 dividend was effected
July 31, 1997 and consisted of $188.7 million of stock of a wholly-owned
subsidiary and $50.0 million of cash.
The Commonwealth of Virginia adopted the National Association of Insurance
Commissioners (NAIC) Risk Based Capital Act in 1995. Under this Act, a company's
risk based capital (RBC) is calculated by applying certain factors to various
asset, premium and reserve items. If a company's calculated RBC falls below
certain thresholds, regulatory intervention or oversight is required. Trigon
Insurance Company's RBC level as calculated in accordance with the NAIC's RBC
instructions exceeded all RBC thresholds as of December 31, 1999.
In 1994, the NAIC undertook a project to codify statutory accounting in an
effort to develop a single uniform and comprehensive basis of statutory
accounting. In its March 1998 meeting, the NAIC membership adopted the
Codification of Statutory Accounting Principles Project (Codification) as the
NAIC-supported basis of accounting. The Codification was approved with a
provision allowing for commissioner discretion in determining appropriate
statutory accounting for insurers. Accordingly, such discretion will continue to
allow prescribed or permitted accounting practices that may differ from state to
state. Although the NAIC has stated that the adoption date for the Codification
is January 1, 2001, the implementation date is dependent upon an insurer's state
of domicile. Accordingly, legislation is currently pending in Virginia to adopt
Codification as of January 1, 2001. The Company is currently evaluating the
impact of Codification on its statutory financial statements.
Mid-South Insurance Company, Trigon Health and Life Insurance Company and
the Company's HMO subsidiaries are also required to file statutory financial
statements in each of the states in which they are licensed.
- --------------------------------------------------------------------------------
18. SUPPLEMENTARY FINANCIAL DATA
A reconciliation of net income--statutory basis for the years ended December 31,
1999, 1998 and 1997 and capital and surplus--statutory basis as of December 31,
1999 and 1998 as reported by Trigon Insurance Company to regulatory authorities
to net income and shareholders' equity as reported in the accompanying
consolidated financial statements is as follows (in thousands):
Unaudited
1999 1998 1997
- --------------------------------------------------------------------------------
Trigon Insurance Company net
income--statutory basis $ 92,301 93,125 123,272
Add (deduct)
Parent operations (52,733) (3,104) (4,248)
Differences in investment carrying values 52 (7,073) (10,808)
Interest maintenance reserve (15,128) 24,164 4,149
Deferred income taxes (524) 2,927 (19,155)
Adjustments to claim reserves 659 2,522 7,177
Other (4,164) 11,011 (5,334)
- --------------------------------------------------------------------------------
Net income $ 20,463 123,572 95,053
- --------------------------------------------------------------------------------
Unaudited
1999 1998
- --------------------------------------------------------------------------------
Trigon Insurance Company capital and
surplus--statutory basis $534,241 489,003
Add (deduct)
Parent equity 266,450 403,249
Differences in investment carrying values (27,744) 42,476
Asset valuation reserve 69,051 43,472
Interest maintenance reserve 26,639 41,767
Additional claim reserves 22,851 22,192
Non-admitted assets 40,817 31,737
Deferred income taxes 51,343 40,493
Employee benefit liabilities (38,664) (31,230)
Other (8,027) (11,935)
- --------------------------------------------------------------------------------
Shareholders' equity $936,957 1,071,224
- --------------------------------------------------------------------------------
Trigon Healthcare, Inc. 51
<PAGE>
Notes
to Consolidated Financial Statements
Trigon Healthcare, Inc. and Subsidiaries
December 31, 1999, 1998 and 1997
(continued)
The differences between statutory and GAAP for Mid-South Insurance Company,
Trigon Health and Life Insurance Company and the Company's HMO subsidiaries were
not significant to the consolidated totals above. The differences for these
subsidiaries relate primarily to differences in investment carrying values,
asset valuation reserve, deferred income taxes and non-admitted assets.
19. ADDITIONAL CASH FLOW INFORMATION
The reconciliation of net income to net cash provided by (used in) operating
activities and supplemental disclosures of cash flow information for the years
ended December 31, 1999, 1998 and 1997 is as follows (in thousands):
1999 1998 1997
- --------------------------------------------------------------------------------
Net income $ 20,463 123,572 95,053
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities
Depreciation and amortization 18,655 21,260 20,242
Mid-South write-off (note 20) 55,927 -- --
Amortization of unearned compensation 1,031 -- --
Accretion of discounts and amortization of
premiums, net (13,267) (20,893) (11,819)
Change in allowance for doubtful accounts
receivable 2,839 (1,127) 826
(Increase) decrease in premiums and other
receivables (22,238) (14,959) 30,385
Increase in other assets (9,208) (5,507) (3,882)
Increase in medical and other benefits payable 66,382 64,416 2,208
Increase in unearned premiums 20,826 6,307 1,993
Increase (decrease) in accounts payable and
accrued expenses 13,896 14,731 (26,734)
Increase (decrease) in other liabilities 30,807 47,346 (20,384)
Change in deferred income taxes (17,784) (2,496) 21,804
Decrease in obligation for Commonwealth Payment -- -- (175,000)
Increase in minority interest 2,710 2,503 723
Increase (decrease) in obligations for
employee benefits (4,450) (6,213) 1,788
(Gain) loss on disposal of property and
equipment and other assets 277 147 (122)
Realized investment (gains) losses, net 21,957 (77,507) (54,063)
- --------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities $188,823 151,580 (116,982)
- --------------------------------------------------------------------------------
Cash paid during the year for
Interest $ 12,847 9,381 9,014
Income taxes 25,855 26,098 40,137
- --------------------------------------------------------------------------------
20. 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, intended to exit the
health insurance market with a targeted effective date of April 30, 2000 for
group business and with targeted or actual effective dates for the exit of
individual business to vary depending upon the regulations of each affected
state. The announcement followed the development and board of directors 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.
Cancellation notices were sent on the group business and the exit of this
business will be complete by April 30, 2000. The Company pursued options other
than cancellation of the individual business and, subsequent to December 31,
1999, signed a definitive agreement to sell Mid-South to another carrier. The
Company expects to close the sale in early summer, subject to approval by
regulatory authorities.
52 Trigon Healthcare, Inc.
<PAGE>
The announcement in October resulted in a nonrecurring pretax charge to
operations during the third quarter of 1999 of $79.9 million or $51.9 million
net of tax. The charge included costs associated with the write-off of goodwill,
other intangibles and deferred acquisition costs determined not to be
recoverable of $55.9 million, a $20.6 million increase to claim reserves for
anticipated future claims and maintenance costs in excess of the related
premiums and certain other costs associated with the exit of $3.4 million. The
Company recognized the charge for goodwill, other intangibles and deferred
acquisition costs and certain other costs associated with the exit in selling,
general and administrative expenses and recognized the charge to increase the
claim reserves in medical and other benefit costs in the accompanying statements
of operations. During the fourth quarter of 1999, the Company charged $4.9
million against the claim reserves for future losses and charged nothing against
the accrual of certain other exit costs. No other adjustments were made to these
accruals in the fourth quarter of 1999.
21. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF
CREDIT RISK
The carrying amounts of cash, premiums and other receivables, other current
assets, medical and other benefits payable, unearned premiums, accounts payable
and accrued expenses, and other current liabilities approximate fair value
because of the short-term nature of these instruments. The carrying amount of
long-term debt with variable interest rates approximates fair value. The fair
values of investment securities are estimated based on quoted market prices.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of investment securities and
premiums receivable. All of the investment securities are managed within
established guidelines which limit the amounts which may be invested with one
issuer. The Company primarily conducts business within the Commonwealth of
Virginia; therefore, premiums receivable are concentrated with companies and
individuals within Virginia.
22. LEGAL AND REGULATORY PROCEEDINGS
The Company and certain of its subsidiaries are involved in various 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.
23. SEGMENT INFORMATION
The Company has four reportable segments: health insurance, government programs,
investments and all other. Its health insurance segment offers several network
products, including HMO, PPO and PAR as well as medicare supplement plans. The
government programs segment includes the FEP and claims processing for Medicare.
Through its participation in the FEP, the Company provides health benefits to
federal employees in Virginia. The FEP is the Company's largest customer,
representing 19.1%, 18.2% and 18.3% of total consolidated revenues during 1999,
1998 and 1997, respectively. Through August 1999 the Company processed Medicare
Part A claims for beneficiaries in Virginia and West Virginia. Additionally, the
Company provided computer processing capabilities for Medicare Part A claims
processing to certain other Blue Cross and Blue Shield plans through November
1999 (notes 1 and 3). 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 disease
management programs, third-party administration for medical and workers'
compensation, health promotion and similar products, is reflected in an "all
other" category. The reportable segments follow the Company's method of internal
reporting by products and services.
Trigon Healthcare, Inc. 53
<PAGE>
Notes
to Consolidated Financial Statements
Trigon Healthcare, Inc. and Subsidiaries
December 31, 1999, 1998 and 1997
(continued)
The financial results of the Company's segments are presented consistent
with the accounting policies described in note 1. The Company evaluates the
performance of its segments and allocates resources based on income before
income taxes and minority interest, except for the investments segment which is
evaluated using investment income and net realized gains and losses.
Intersegment sales and expense transfers are recorded at cost.
The following table presents information by reportable segment for the
years ended December 31, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Health Government All
Insurance Programs Investments Other Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Revenues from external customers $1,798,956 448,676 -- 21,657 2,269,289
Investment income and net realized losses -- -- 75,174 -- 75,174
Intersegment revenues 11,885 -- -- 6,546 18,431
Depreciation and amortization expense 17,667 261 19 1,681 19,628
Income (loss) before income taxes and minority interest (4,441) (1,731) 75,174 1,791 70,793
1998
Revenues from external customers $1,643,619 407,136 -- 21,735 2,072,490
Investment income and net realized gains -- -- 163,047 -- 163,047
Intersegment revenues 11,017 -- -- 6,057 17,074
Depreciation and amortization expense 15,512 249 18 1,683 17,462
Income before income taxes and minority interest 59,432 3,174 163,047 2,083 227,736
1997
Revenues from external customers $1,526,123 377,722 -- 27,244 1,931,089
Investment income and net realized gains -- -- 128,747 -- 128,747
Intersegment revenues 2,216 -- -- 3,538 5,754
Depreciation and amortization expense 16,899 244 62 3,382 20,587
Income (loss) before income taxes and minority interest 47,663 6,700 128,747 (819) 182,291
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Asset information by reportable segment has not been disclosed as it is not
prepared internally by the Company. However, depreciation and amortization
expense for property and equipment purchased is charged to the reportable
segment responsible for the purchase.
54 Trigon Healthcare, Inc.
<PAGE>
A reconciliation of reportable segment total revenues, income before income
taxes and minority interest and depreciation and amortization expense to the
corresponding amounts included in the consolidated statements of operations for
the years ended December 31, 1999, 1998 and 1997 is as follows (in thousands):
1999 1998 1997
- --------------------------------------------------------------------------------
Revenues
Reportable segments
External revenues $2,269,289 2,072,490 1,931,089
Investment revenues 75,174 163,047 128,747
Intersegment revenues 18,431 17,074 5,754
Other corporate revenues 1,965 815 2,636
Elimination of intersegment revenues (18,431) (17,074) (5,754)
- --------------------------------------------------------------------------------
Total revenues $2,346,428 2,236,352 2,062,472
- --------------------------------------------------------------------------------
Profit or Loss
Reportable segments $ 70,793 227,736 182,291
Corporate expenses not allocated to
segments (30,916) (33,133) (32,296)
Unallocated amounts:
Interest expense (8,359) (5,291) (4,602)
- --------------------------------------------------------------------------------
Income before income taxes and minority
interest $ 31,518 189,312 145,393
- --------------------------------------------------------------------------------
Depreciation and amortization expense
Reportable segments $ 19,628 17,462 20,587
Not allocated to segments (973) 3,798 (345)
- --------------------------------------------------------------------------------
Depreciation and amortization expense $ 18,655 21,260 20,242
- --------------------------------------------------------------------------------
Trigon Healthcare, Inc. 55
<PAGE>
Independent
Auditors' Report
The Board of Directors
Trigon Healthcare, Inc.:
We have audited the accompanying consolidated balance sheets of Trigon
Healthcare, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in shareholders' equity
and comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Trigon
Healthcare, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Richmond, Virginia
February 11, 2000
56 Trigon Healthcare, Inc.
<PAGE>
Management
Report
Trigon Healthcare, Inc. and Subsidiaries
The management of Trigon Healthcare, Inc. has prepared the consolidated
financial statements and other data included in this annual report and has
primary responsibility for the integrity and objectivity of the financial
information. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include some
amounts that are based on management's best estimates and judgment.
The accounting systems and controls of the Company are designed to provide
reasonable assurance that financial records are reliable for use in preparing
financial statements and that assets are safeguarded. Management believes that
the Company's system of internal controls for the year ended December 31, 1999
was effective and adequate to accomplish the above described objectives.
The Board of Directors appoints to the Audit Committee members who are
neither officers nor employees of the Company. The committee meets periodically
with management, the internal auditors and the independent auditors to review
financial reports, internal accounting controls and the scope and results of
audit efforts. Both the internal auditors and the independent auditors have full
and free access to the Audit Committee, with and without management
representation.
/s/ Thomas G. Snead, Jr.
Thomas G. Snead, Jr.
President and Chief Executive Officer
/s/ Thomas R. Byrd
Thomas R. Byrd
Senior Vice President and Chief Financial Officer
Trigon Healthcare, Inc. 57
<PAGE>
Officers
Norwood H. Davis, Jr.
Chairman of the Board
Served as Chairman and CEO from 1981 to
1999; joined TRIGON in 1968; prior, law
firm McGuire, Woods, Battle & Boothe LLP;
J.D., University of Virginia
Thomas G. Snead, Jr.
President and Chief Executive Officer
Elected current position 1999; elected
President and Chief Operating Officer in
1997; appointed Senior Vice President and
Chief Financial Officer 1990; joined TRIGON
in 1985; prior, KPMG LLP; BS, Accounting,
Virginia Commonwealth University
William P. Bracciodieta, M.D.
Senior Vice President and
Chief Medical Officer
Joined TRIGON in 1998; prior, Vice
President and Chief Medical Director of
Medical Affairs for the South Florida
Market, Humana, Inc.; M.B.A., Pacific
Western University
Ralph T. Bullock, Jr.
Senior Vice President and
Chief Information Officer
Previously, Director, Operations, Information
Systems Division; joined TRIGON in 1989;
prior, Commonwealth of Virginia; Philip
Morris USA; University of Richmond
Thomas R. Byrd
Senior Vice President and
Chief Financial Officer
Elected current position 1997; previously
Vice President, Financial Planning and
Analysis; Vice President and Controller;
Director, Financial Analysis; joined TRIGON
in 1991; prior KPMG LLP; BS, Business,
Virginia Polytechnic Institute
James W. Copley, Jr.
Senior Vice President and
Chief Investment Officer
Previously, Coordinator, Director and Vice
President, Funds Management; President,
Consolidated Investment Corporation;
joined TRIGON in 1975; M.B.A., University
of Richmond; Chartered Financial Analyst
Kathy Ashby Merry
Senior Vice President, Operations
Previously Assistant to the Chief Operating
Officer, Government and Individual Business
Unit; Quality Programs Director; Vice
President and General Manager, Individual
Markets; joined TRIGON in 1991; prior,
Executive Director, Blue Ridge Regional
Health Care Coalition; BS, Consumer
Studies, University of Kentucky
Ronald M. Nash
Senior Vice President, Corporate Services
Previously, Vice President, Corporate
Services and Vice President, Personnel and
Administrative Services; joined TRIGON in
1971; BS, Psychology, University of Virginia
Paul F. Nezi
Senior Vice President,
Virginia Group Business
Previously, Senior Vice President of
Marketing and Sales; joined TRIGON in
1996; prior, ChoiceCare Executive Vice
President and Chief Marketing Officer;
Vice President of Marketing and Sales Lexis-
Nexis; Marketing and Sales IBM and Xerox;
M.B.A., Corporate Finance, Wharton
Graduate School, University of Pennsylvania
Timothy P. Nolan
Senior Vice President, Marketing and
Corporate Development
Joined TRIGON in 1996; prior, McKinsey &
Company; venture capital and investment
banking; M.B.A., Harvard University,
Graduate School of Business Administration
Thomas A. Payne
Senior Vice President, Corporate Audit
Previously, Director and Vice President,
Corporate Audit; joined TRIGON in 1976;
M.B.A., University of Richmond
Peter L. Perkins
Senior Vice President, and Chief Actuary
Previously, Director and Chief Actuary;
joined TRIGON in 1983; Fellow, Society of
Actuaries; BS, Actuarial Science, University
of Illinois
David P. Wade
Senior Vice President, Government and
Individual Business
Previously Senior Vice President,
Trigon HMO's; joined TRIGON
in 1991; prior, KPMG LLP;
M.B.A., University of Virginia;
BS Physics, Carnegie-Mellon University
J. Christopher Wiltshire
Senior Vice President, General Counsel
and Corporate Secretary
Joined TRIGON in 1996; prior, partner,
McGuire, Woods, Battle & Boothe LLP;
J.D., University of Virginia
58 Trigon Healthcare, Inc.
<PAGE>
Board of Directors
(Age on December 31, 1999) Year elected to Board
Norwood H. Davis, Jr.
(59) 1981
Chairman of the Board,
Trigon Healthcare, Inc.
Richmond
Thomas G. Snead, Jr.
(46) 1999
President and Chief Executive Officer
Trigon Healthcare, Inc.
Richmond
Hunter B. Andrews, Esq.
(78) 1997
Attorney at Law, Former Majority
Leader, Senate of Virginia
Hampton
Lenox D. Baker, Jr., M.D.
(58) 1985
Mid-Atlantic Cardiothoracic, Surgeons, Ltd.
Norfolk
James K. Candler
(64) 1984
President, Candler Oil Co.
Lynchburg
Robert M. Freeman
(58) 1993
Retired Chairman of the Board
and Chief Executive Officer,
Signet Banking Corp.
Richmond
William R. Harvey, Ph.D.
(58) 1992
President, Hampton University
Hampton
Gary A. Jobson
(49) 1987
President, Maritime Productions, Inc.
Annapolis
Donald B. Nolan, M.D.
(59) 1983
Roanoke Neurological Center
Roanoke
William N. Powell
(55) 1980
President, Salem Tools, Inc.
Salem
J. Carson Quarles
(63) 1977
Chairman of the Board,
Friendship Manor, Inc.
Roanoke
R. Gordon Smith, Esq.
(61) 1995
Partner, McGuire, Woods,
Battle & Boothe LLP
Richmond
Hubert R. Stallard
(62) 1997
Retired President and Chief Executive
Officer, Bell Atlantic of Virginia
Richmond
Jackie M. Ward
(61) 1993
President and Chief Executive Officer,
Computer Generation Incorporated
Atlanta
Stirling L. Williamson, Jr.
(64) 1979
President, S.L. Williamson Co., Inc.
Charlottesville
Trigon Healthcare, Inc. 59
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Company (1) Jurisdiction
- ----------- ------------
Trigon Insurance Company (dba Trigon Blue Cross Blue Shield).....Virginia
Primary Care First, L.L.C. (2)..................................Virginia
Trigon Administrators, Inc.......................................Virginia
HealthKeepers, Inc..............................................Virginia
Peninsula Health Care, Inc. (3).................................Virginia
Trigon Disability Services Company..............................Virginia
Trigon Services, Inc............................................Virginia
Priority, Inc. (4)..............................................Virginia
Priority Health Care, Inc.....................................Virginia
Priority Insurance Agency, Inc................................Virginia
Monticello Service Agency, Inc...................................Virginia
Consolidated Holdings Corporation...............................Delaware
Trigon Health and Life Insurance Company........................Virginia
Health Management Corporation...................................Virginia
Healthy Homecomings, Inc......................................Missouri
Healthy Homecomings Incorporated of St. Louis.................Missouri
Mid-South Insurance Company.....................................North Carolina
(1) Unless otherwise indicated, subsidiaries are 100% owned by the Registrant
or the indicated parent company.
(2) 50% owned
(3) 51% owned
(4) 80% owned
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
The Board of Directors
Trigon Healthcare, Inc.:
We consent to incorporation by reference in registration statements
(Nos. 333-22463, 333-26187, 333-26189 and 333-26191) on Form S-8 of Trigon
Healthcare, Inc. of our report dated February 11, 2000, relating to the
consolidated balance sheets of Trigon Healthcare, Inc. and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, changes in shareholders' equity and comprehensive income and cash
flows for each of the years in the three-year period ended December 31, 1999,
which report is incorporated by reference in this Form 10-K. We also consent to
the incorporation by reference in the aforementioned registration statements of
our report dated February 11, 2000, relating to the financial statement schedule
of Trigon Healthcare, Inc., which report appears in this Form 10-K.
/s/KPMG LLP
Richmond, Virginia
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<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-K FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,530
<SECURITIES> 1,738,515
<RECEIVABLES> 397,499
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,169,470
<PP&E> 139,964
<DEPRECIATION> 88,726
<TOTAL-ASSETS> 2,314,115
<CURRENT-LIABILITIES> 1,003,508
<BONDS> 248,039
0
0
<COMMON> 382
<OTHER-SE> 936,575
<TOTAL-LIABILITY-AND-EQUITY> 2,314,115
<SALES> 2,271,254
<TOTAL-REVENUES> 2,346,428
<CGS> 1,804,362
<TOTAL-COSTS> 2,306,551
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,359
<INCOME-PRETAX> 31,518
<INCOME-TAX> 8,345
<INCOME-CONTINUING> 20,463
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,463
<EPS-BASIC> 0.50
<EPS-DILUTED> 0.49
</TABLE>
