UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 2000
COMMISSION FILE NUMBER 1-14177
UNITED WISCONSIN SERVICES, INC.
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1931212
(State of incorporation) (I.R.S. Employer
Identification No.)
401 WEST MICHIGAN STREET, MILWAUKEE, WISCONSIN 53203-2896
(Address of principal executive offices) (Zip Code)
(414) 226-6900
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all documents and
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.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common stock outstanding as of April 30, 2000 was 16,939,682.
UNITED WISCONSIN SERVICES, INC.
INDEX TO
QUARTERLY REPORT ON FORM 10-Q
For the Period Ended March 31, 2000
PART I
Financial Statements and Supplementary Data................................... 3
Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................10
Quantitative and Qualitative Disclosures about Market Risk....................15
PART II
Other Information.............................................................16
Signature Page................................................................17
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
------------------------------------
(UNAUDITED) (NOTE A)
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 17,197 $ 16,254
Investments--available-for-sale, at fair value 120,296 120,721
Premium receivables 31,009 24,215
Due from clinics and providers 13,172 16,629
Other receivables 35,551 30,731
Prepaid expenses and other current assets 28,818 29,438
------------------------------------
Total current assets 246,043 237,988
Investments--held-to-maturity, at amortized cost 9,389 9,153
Property and equipment, net 10,205 9,938
Goodwill and other intangible, net 10,230 10,492
Other noncurrent assets 30,705 29,583
------------------------------------
Total assets $ 306,572 $ 297,154
====================================
See Notes to Interim Consolidated Financial Statements.
3
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
---------------------------------
(UNAUDITED) (NOTE A)
(IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical and other benefits payable $ 86,343 $ 74,238
Advance premiums 32,985 36,248
Due to affiliates - other 11,088 13,037
Payables and accrued expenses 14,931 15,033
Other current liabilities 24,878 22,164
---------------------------------
Total current liabilities 170,225 160,720
Noncurrent Liabilities:
Notes payable to affiliates 70,000 70,000
Medical and other benefits payable 26,216 24,104
Other noncurrent liabilities 11,458 11,298
---------------------------------
Total noncurrent liabilities 107,674 105,402
---------------------------------
Total liabilities 277,899 266,122
Shareholders' equity:
Preferred stock (no par value, 1,000,000 shares authorized) -- --
Common stock (no par value, no stated value,
50,000,000 shares authorized, 16,939,682
issued and outstanding at March 31, 2000
and December 31, 1999.) 14,052 14,052
Retained earnings 17,676 20,242
Accumulated other comprehensive deficit (3,055) (3,262)
---------------------------------
Total shareholders' equity 28,673 31,032
---------------------------------
Total liabilities and shareholders' equity $ 306,572 $ 297,154
=================================
See Notes to Interim Consolidated Financial Statements.
4
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended
March 31,
2000 1999
----------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Revenues:
Health services revenue:
Premium revenue $ 192,890 $ 160,321
Other revenue 10,527 9,325
Investment results 2,136 3,363
----------------------------------
Total revenues 205,553 173,009
Expenses:
Medical and other benefits 175,594 138,936
Selling, general and administrative expenses 32,247 28,696
Loss sharing on provider arrangements (86) (130)
Interest 1,487 1,184
Amortization of goodwill and other intangibles 225 165
----------------------------------
Total expenses 209,467 168,851
----------------------------------
Pre-tax income (loss) (3,914) 4,158
Income tax expense (benefit) (1,348) 1,486
----------------------------------
Net income (loss) $ (2,566) $ 2,672
==================================
Basic and diluted earnings (loss) per common share $ (0.15) $ 0.16
==================================
See Notes to Interim Consolidated Financial Statements.
5
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended
March 31,
2000 1999
--------------------------
(IN THOUSANDS)
Operating activities:
Net income (loss) $ (2,566) $ 2,672
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,212 833
Realized investment (gains) losses 60 (968)
Deferred income tax expense (benefit) (1,083) 705
Changes in operating accounts:
Premium receivables (6,794) (7,756)
Other receivables (4,206) 2,629
Due from clinics and providers 3,457 (839)
Medical and other benefits payable 14,254 (7,059)
Advance premiums (3,263) (1,253)
Due to/from affiliates (3,232) 2,157
Prepaid taxes - current 1,284 (767)
Other, net (396) (5,502)
--------------------------
Net cash used in operating activities (1,273) (15,148)
Investing activities:
Purchases of available-for-sale investments (6,508) (54,457)
Proceeds from sale of available-for-sale investments 5,865 42,532
Proceeds from maturity of available-for-sale investments 1,460 8,650
Purchases of held-to-maturity investments (1,756) (204)
Proceeds from maturity of held-to-maturity investments 1,535 -
Additions to property and equipment (1,170) (540)
--------------------------
Net cash used in investing activities (574) (4,019)
Financing activities:
Issuances of common stock - 1
Proceeds from line of credit 2,750 490
Proceeds from notes payable 80 -
Repayment of debt (40) (53)
--------------------------
Net cash provided by financing activities 2,790 438
Cash and cash equivalents:
Increase (decrease) during period 943 (18,729)
Balance at beginning of year 16,254 26,385
--------------------------
Balance at end of period $ 17,197 $ 7,656
==========================
See Notes to Interim Consolidated Financial Statements.
6
UNITED WISCONSIN SERVICES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2000
Note A. Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with accounting principles generally accepted for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of only normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for the
three-month period ended March 31, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000. These
interim consolidated financial statements should be read in conjunction with the
audited consolidated financial statements for the year ended December 31, 1999
and footnotes thereto included in United Wisconsin Services, Inc. ("the
Company") Form 10-K, as filed with the Securities and Exchange Commission.
Note B. Net Income (Loss) Per Share
Basic earnings per common share are computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted earnings per
common share are computed by dividing net income by the weighted average number
of common shares outstanding, adjusted for the effect of dilutive securities for
employee and board of director stock options. When the Company reports a net
loss, potentially dilutive securities are not included in the calculation of
Earnings Per Share ("EPS") because their inclusion would have an antidilutive
effect.
The weighted average number of common shares outstanding used in the calculation
of both basic and diluted EPS are 16,939,682 for the three months ended March
31, 2000.
Options to purchase 2,697,767 common shares during the three months ended
March 31, 2000 were not included in the computation of diluted earnings per
common share since the options' exercise prices were greater than the average
market price of the outstanding common shares. In addition, 927,300
potentially dilutive common shares for the three months ended March 31, 2000
were not included because the Company had a net loss and their inclusion
would have been antidilutive.
7
Note C. Related Party
Blue Cross & Blue Shield United of Wisconsin's ("BCBSUW") Board of Directors
announced in June of 1999 its intention to convert BCBSUW from a service
insurance corporation to a stockholder owned corporation. BCBSUW owns
approximately 46% of the outstanding common stock of the Company. On March 28,
2000 the Wisconsin Commissioner of Insurance approved this conversion. In
conjunction with the planned change in corporate structure of BCBSUW, the
Company plans to investigate the possible merger or other business combination
with BCBSUW, although no decision has been reached.
Note D. Comprehensive Income (loss)
A reconciliation from net income (loss) reported in the Consolidated Statements
of Operations to comprehensive income (loss) is stated below:
Three months ended
March 31,
2000 1999
------------------------
(IN THOUSANDS)
Net income (loss) per Consolidated Statements of Operations $ (2,566) $ 2,672
Unrealized gains (losses) on investments, net of taxes 207 (1,234)
------------------------
Comprehensive income (loss) $ (2,359) $ 1,438
========================
Comprehensive income (loss) is defined as all changes in equity during the
period except those resulting from shareholder equity contributions and
distributions. The accumulated effect of comprehensive income (loss) was a
reduction of equity of $3.1 million and $3.3 million as of March 31, 2000 and
December 31, 1999, respectively.
Note E. Segment Reporting
The Company has two reportable business segments: Health Maintenance
Organization ("HMO") products sold primarily in Wisconsin, and specialty managed
care products and services, including dental, life, disability and workers'
compensation products, managed care consulting, electronic claim submission
services, pharmaceutical management, managed behavioral health services, case
management and receivables management services, sold throughout the United
States.
"Other Operations" includes operations not directly related to the business
segments, unallocated corporate items (i.e. interest expense on corporate debt,
amortization of goodwill and intangibles and unallocated overhead expenses) and
intercompany eliminations. The Company evaluates segment performance based on
profit or loss from operations before income taxes. The accounting policies of
the reportable segments are the same as those described in the December 31, 1999
audited financial statements in the summary of significant accounting policies.
8
Financial data by segment is as follows:
Three months ended March 31,
2000 1999
------------ ----------
(IN THOUSANDS)
Health services revenue:
HMO products $164,175 $136,898
Specialty managed care products and services 44,711 36,709
Other operations (5,469) (3,961)
-------- --------
Total consolidated $203,417 $169,646
======== ========
Investment results:
HMO products $ 842 $ 1,982
Specialty managed care products and services 1,190 1,363
Other operations 104 18
-------- --------
Total consolidated $ 2,136 $ 3,363
======== ========
Pre-tax income (loss):
HMO products $ (3,987) $ 2,503
Specialty managed care products and services 2,012 3,189
Other operations (1,939) (1,534)
-------- --------
Total consolidated $ (3,914) $ 4,158
======== ========
March 31, December 31,
2000 1999
------------ ----------
(IN THOUSANDS)
Total assets:
HMO products $122,706 $115,448
Specialty managed care products and services 176,781 168,993
Other operations 7,085 12,713
-------- --------
Total consolidated $306,572 $297,154
======== ========
Three months ended March 31,
2000 1999
------------ ---------
(IN THOUSANDS)
Health services revenue from transactions with other
operating segments:
HMO products $ 384 $ 460
Specialty managed care products and services 3,074 3,669
Note F. Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for 1999 to conform with the 2000 presentation.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
United Wisconsin Services, Inc. ("the Company") is a leading provider of
managed health care services and employee benefit products. The Company's two
primary product lines are: (i) Health Maintenance Organization ("HMO") products
sold primarily in Wisconsin, including Compcare Health Services Insurance
Corporation ("Compcare"), Valley Health Plan, Inc. ("Valley"), Unity Health
Plans Insurance Corporation ("Unity") and certain point-of-service ("POS") and
other related products managed by Compcare, Valley and Unity, and (ii) specialty
managed care products and services, including dental, life, disability and
workers' compensation products, managed care consulting, electronic claim
submission services, pharmaceutical management, managed behavioral health
services, case management and receivables management services, sold throughout
the United States. Operating results and statistics for these product groups are
presented below for the periods indicated.
The following Management's Discussion and Analysis should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 1999 and footnotes thereto included in the Company's 1999
Annual Report on Form 10-K.
RESULTS OF OPERATIONS
TOTAL REVENUES
Total revenues for the three months ended March 31, 2000 increased 18.8% to
$205.6 million from $173.0 million for the three months ended March 31, 1999.
These increases were due primarily to increased membership in the major product
lines, general premium and rate increases and acquisitions of specialty
businesses.
HEALTH SERVICES REVENUES -- HMO health services revenues for the three
months ended March 31, 2000 increased 19.9% to $164.2 million from $136.9
million for the three months ended March 31, 1999. The increase is primarily due
to increases in the average HMO premium revenue per member and in the average
number of HMO medical members. Average insured HMO medical premium per member
for the three months ended March 31, 2000 increased 9.5% from the same period in
the prior year. The average number of insured HMO medical members for the three
months ended March 31, 2000 increased 9.4% to 325,713 from 297,609 for the three
months ended March 31, 1999.
Health services revenues for specialty managed care products and services
for the three months ended March 31, 2000 increased 21.8% to $44.7 million from
$36.7 million for the three months ended March 31, 1999. This was the result of
increases in covered lives and premium rates on insurance products, the
acquisition of Allegro in May of 1999, along with a decrease in the percentage
of ceded reinsurance. Health services revenue for Allegro totaled $0.5 million
for the three months ended March 31, 2000.
NET INVESTMENT RESULTS -- Investment results include investment income
and realized gains and losses on investments. Investment results for the
three months ended March 31, 2000 decreased 38.2% to $2.1 million from $3.4
million for the three months ended March 31, 1999. Average annual investment
yields, excluding net realized gains, were 6.2% for the three months ended
March 31, 2000 and 5.2% for the three months ended March 31, 1999. The
decrease in investment income during the first quarter of 2000 was the result
of lower investment asset balances. The reduction in investments resulted
from the Company liquidating a portion of the bond portfolio (which were
primarily in unrealized loss positions) to generate cash to fund operations
during 1999.
Average invested assets for the three months ended March 31, 2000 decreased
21.7% to $144.9 million from $185.1 million for the three months ended March 31,
1999. Changes in the levels of average invested assets relate to ongoing
operations, including the timing and level of claim payments.
10
Investment gains and losses are realized as investments are liquidated
to fund operations and in the normal investment process in response to market
opportunities. Realized losses for the three months ended March 31, 2000 were
$0.1 million, compared to realized gains of $1.0 million for the three months
ended March 31, 1999.
EXPENSE RATIOS
LOSS RATIO -- The consolidated loss ratio represents the ratio of medical
and other benefits to premium revenue on a consolidated basis, and is therefore
a blended ratio for medical, life, dental, disability and other product lines.
The consolidated loss ratio was 91.0% for the three months ended March 31, 2000,
compared with 86.7% for the three months ended March 31, 1999. The consolidated
loss ratio is influenced by the component loss ratios for each of the Company's
primary product lines, as discussed below.
The medical loss ratio for HMO products for the three months ended March
31, 2000 was 93.6%, compared with 89.4% for the three months ended March 31,
1999. The increase is primarily due to higher claim costs, including continued
losses arising from the Medicaid business. In addition, the premium
deficiency reserve of $0.9 million that was established in the fourth quarter
of 1999, for future losses related to the Medicaid business, was reversed in
the first quarter of 2000. Effective April 1, 2000, the Company has
terminated its contract with the state of Wisconsin for Compcare's participation
in the Medicaid program, along with significantly reducing Unity and Valley's
participation in the program. In general, the medical loss ratio in any
quarter will be impacted by the development of prior period reserves which
are re-evaluated each quarter.
The loss ratio for the risk products within specialty managed care products
and services for the three months ended March 31, 2000 was 77.8%, compared with
74.1% for the three months ended March 31, 1999. The loss ratios principally
relates to the life, disability, workers' compensation and dental product lines
of business. These products represent relatively small blocks of business.
Therefore, the loss ratio can exhibit significant volatility due to varying
levels of claim frequency and severity. Generally, the anticipated aggregate
loss ratio for specialty risk products should range between 70% and 75%. The
higher loss ratio in the first quarter of 2000 is attributable to increased
claims and additional case reserves relative to the long-term disability line of
business.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE RATIO -- The selling, general
and administrative ("SGA") expense ratio includes commissions, administrative
expenses, premium taxes and other assessments. The SGA expense ratio for HMO
products for the three months ended March 31, 2000 was 9.4%, compared with 10.3%
for the three months ended March 31, 1999. This improvement was primarily due to
an increase in membership and premium rates over the prior year, along with
additional costs in 1999 for the implementation of a Year 2000 readiness
program.
The SGA expense ratio related to the risk products within specialty managed
care products and services for the three months ended March 31, 2000 was 24.1%,
compared with 23.5% for the three months ended March 31, 1999. The lower ratio
in 1999 was due to offsetting expense charges, which resulted from the Company's
participation in a reinsurance pool for the State of Wisconsin group life
insurance program.
The operating expense ratio related to the service products for the three
months ended March 31, 2000 remained stable at 89.3%, compared to 89.0% for the
three months ended March 31, 1999.
OTHER EXPENSES
Loss sharing on joint ventures was $0.1 million for the three months ended
March 31, 2000 and 1999. The Company is a party to certain provider arrangements
in conjunction with Unity and Valley, which include profit-sharing payments to
certain providers. Unity and Valley provider agreements were renegotiated at the
end of 1999 and the profit-sharing payments for Unity were eliminated starting
in 2000. In the fourth quarter of 1999 United Heartland, Inc., the Company's
workers' compensation subsidiary, formed a joint venture with Health Care
Service Corporation, a mutual legal reserve company doing business as Blue Cross
Blue Shield of Illinois ("HCSC"). The Company shares equally in all profits and
losses on this newly-formed joint venture, United Heartland of Illinois. Such
profits were immaterial for the three months ended March 31, 2000.
11
Amortization of goodwill and other intangibles for the three months ended
March 31, 2000 and 1999 was $0.2 million. For the three months ended March 31,
2000 this amount represents only goodwill, which is the excess of cost over the
fair value of net assets acquired.
Included in other operations for the three months ended March 31, 2000
is $1.5 million of interest expense, compared to $1.2 million for the three
months ended March 31, 1999. The Company assumed a $70 million debt owed to
BCBSUW as of September 11, 1998. The note has a maturity date of April 30,
2001. Interest expense related to the $70 million debt was $1.3 million for
the three months ended March 31, 2000 and $1.1 million for the three months
ended March 31, 1999. The Company also participates with BCBSUW in a bank
line-of-credit, which permits aggregate borrowings up to $30 million.
Interest expense related to the bank line-of-credit was $0.2 million for the
three months ended March 31, 2000 and $0.1 million for the three months ended
March 31, 1999.
NET INCOME FROM OPERATIONS
Consolidated net income (loss) from operations for the three months ended
March 31, 2000 decreased to $(2.6) million from $2.7 million for the three
months ended March 31, 1999. The loss in the first quarter of 2000 resulted from
higher-than-anticipated medical costs and continued losses arising from the
Medicaid business.
The Company's effective tax rate was 34.4% for the three months ended
March 31, 2000, compared with 35.7% for the three months ended March 31,
1999. This rate fluctuates based upon the relative profitability of the
Company's two reportable business segments and the differing effective tax
rates for each subsidiary within those reportable segments. The effective tax
rates by subsidiary range from 32% to 46%.
SUMMARY OF OPERATING RESULTS AND STATISTICS
Operating results and statistics for the two primary product groups are
presented below for the periods indicated.
March 31,
2000 1999
-------------------------
Members at end of period:
HMO MEMBERS BY BUSINESS UNIT:
Compcare 200,310 175,656
Valley 40,080 41,953
Unity 94,077 86,491
-------------------------
Total HMO members 334,467 304,100
=========================
HMO MEMBERS BY PRODUCT TYPE:
Commercial 200,975 184,414
Point-of-Service 81,229 73,300
Medicaid 45,782 39,894
-------------------------
Total insured members 327,986 297,608
Self-insured members 6,481 6,492
-------------------------
Total HMO members 334,467 304,100
=========================
12
March 31,
2000 1999
----------------------------
Members at end of period:
SPECIALTY MANAGED CARE PRODUCTS AND SERVICES:
UWG Life/AD&D 165,591 159,776
Dental - HMO 183,383 172,000
Behavioral Health & Medical Management 1,158,530 961,774
Workers' Compensation 58,509 54,142
Disability and other 135,835 124,752
----------------------------
Total Specialty managed care
products and services members 1,701,848 1,472,444
============================
Three months ended
March 31,
2000 1999
----------------------------
Health services revenues (as a percentage of the total):
HMO products 80.7% 80.7%
Specialty managed care products and services
Service Products 6.5 7.5
Risk Products 15.5 14.1
Intercompany eliminations (2.7) (2.3)
----------------------------
Total 100.0% 100.0%
============================
Three months ended
March 31,
2000 1999
----------------------------
Operating statistics:
HMO products:
Medical loss ratio (1) 93.6% 89.4%
Selling, general, & administrative
expense ratio (2) 9.4 10.3
Combined loss and expense ratio 103.0 99.7
Specialty managed care products and services:
Service products:
Operating expense ratio 89.3% 89.0%
Risk products:
Loss ratio (1) 77.8 74.1
Selling, general, & administrative
expense ratio (2) 24.1 23.5
Combined loss and expense ratio 101.9 97.6
Consolidated:
Loss ratio (1) 91.0% 86.7%
Net income margin (3) N/A 1.5
(1) Medical and other benefits as a percentage of premium revenue.
(2) Selling, general and administrative expenses as a percentage of premium
revenue.
(3) Net income as a percentage of total revenues.
13
The Company's revenues are derived primarily from premiums, while medical
benefits constitute the majority of expenses. Profitability is directly affected
by many factors including, among others, premium rate adequacy, estimates of
medical benefits, health care utilization, effective administration of benefit
payments, operating efficiency, investment returns and federal and state laws
and regulations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash flow consist primarily of health services
revenues and investment income. The primary uses of cash include medical and
other benefits and operating expense payments. Positive cash flows are invested
pending future payments of medical and other benefits and other operating
expenses. The Company's investment policies are designed to maximize yield,
preserve principal and provide liquidity to meet anticipated payment
obligations.
The Company's cash flow position has improved over the previous year. For
the three months ended March 31, 2000, net cash used in operating activities was
$1.3 million, compared with net cash used in operating activities of $15.1
million for the three months ended March 31, 1999. This improvement was due
primarily to increases in medical and other benefits payable resulting from
fewer capitated provider arrangements and the associated funding requirements
during the period ended March 31, 2000. Due to periodic short-term cash flow
needs of certain subsidiaries, the Company made borrowings under its bank
line-of-credit ranging up to $14.4 million during the first quarter of 2000,
compared to $8.9 million during the first quarter of 1999. The outstanding
balance on the line-of-credit at March 31, 2000 was $14.3 million, compared to
$11.6 million at December 31, 1999.
The Company's investment portfolio consists primarily of investment
grade bonds and Government securities, and has a limited exposure to equity
securities. At March 31, 2000, $104.8 million, or 80.8%, of the Company's
total investment portfolio was invested in bonds, compared with $105.0
million, or 80.9%, at December 31, 1999. The bond portfolio had an average
quality rating by Moody's Investor Service of Aa3 at March 31, 2000 and
December 31, 1999. The majority of the bond portfolio was classified as
available-for-sale. The market value of the total investment portfolio, which
includes stocks and bonds, was less than amortized cost by $4.5 million at
March 31, 2000 and was less than amortized cost by $5.0 million at December
31, 1999. As of March 31, 2000, the Company had no investments in mortgage
loans, non-publicly traded securities, real estate held for investment or
financial derivatives (except for principal-only strips of U. S. Government
securities).
From time to time, capital contributions are made to the subsidiaries to
assist them in maintaining appropriate levels of capital and surplus for
regulatory and rating purposes. Insurance subsidiaries are required to maintain
certain levels of capital and surplus under the National Association of
Insurance Commissioners ("NAIC") and the state of Wisconsin requirements. In
Wisconsin, where a large percentage of the Company's premium is written, these
levels are based upon the amount and type of premiums written and are calculated
separately for each subsidiary. As of March 31, 2000, all of the Company's
insurance subsidiaries were in compliance with Wisconsin's capital and
surplus requirements. Under the NAIC Managed Care Organization Risk Based
Capital requirements, the Company has submitted a risk based capital plan for
Compcare to the Office of the Commissioner of Insurance ("OCI"). The Company
is awaiting OCI approval of the plan.
In addition to internally generated funds and periodic borrowings on its
bank line-of-credit, the Company believes that additional financing to
facilitate long-term growth could be obtained through equity offerings, debt
offerings, financings from BCBSUW or bank borrowings, as market conditions may
permit or dictate.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under the caption
"Liquidity and Capital Resources" under Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Because of the Company's investment policies, the primary market risks
associated with the Company's portfolio are interest rate risk, credit risk, and
the risk related to fluctuations in equity prices. With respect to interest rate
risk, a reasonably near-term rise in interest rates could negatively affect the
fair value of the Company's bond portfolio; however, because the Company
considers it unlikely that the Company would need to choose to substantially
liquidate its portfolio, the Company believes that such an increase in interest
rates would not have a material impact on future earnings or cash flows. In
addition, the Company is exposed to the risk of loss related to changes in
credit spreads. Credit spread risk arises from the potential that changes in an
issuer's credit rating or credit perception may affect the value of financial
instruments.
The overall goal of the investment portfolios is to support the ongoing
operations of the Company's business units. The Company's philosophy is to
actively manage assets to maximize total return over a multiple-year time
horizon, subject to appropriate levels of risk. The Company manages these risks
by establishing gain and loss tolerances, targeting asset-class allocations,
diversifying among asset classes and segments within various asset classes, and
using performance measurement and reporting.
The Company uses a sensitivity model to assess the inherent rate risk
of its fixed income investments. The model includes all fixed income
securities held and incorporates assumptions regarding the impact of changing
interest rates on expected cash flows for certain financial assets with
prepayment features, such as callable bonds and mortgage-backed securities.
Since last reported as of December 31, 1999, no significant changes have
occurred in the determination of the reduction in the fair value of the
Company's modeled financial assets as a result of a hypothetical
instantaneous 100 basis point increase in market interest rates.
15
PART II. OTHER INFORMATION
UNITED WISCONSIN SERVICES, INC.
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Second Amended and Restated Joint Venture Agreement by and
between Blue Cross & Blue Shield United of Wisconsin, United
Wisconsin Services, Inc., Valley Health Plan, Inc. and
Midelfort Clinic, Ltd., Mayo Health System, dated January 1,
2000.
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: 5/12/00
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UNITED WISCONSIN SERVICES, INC.
/s/ Gail L. Hanson
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Gail L. Hanson
Vice President and Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
17