Best s Rating Report

Transcription

1 WELLMARK, INC. WELLMARK OF SOUTH DAKOTA, INC. WELLMARK HEALTH PLAN OF IOWA, INC. A A A Printed September 8, Page 1 of 24

2 Ultimate Parent: Wellmark Inc WELLMARK, INC Grand Avenue Des Moines, IA Web: Tel.: Fax: AMB#: NAIC#: Ultimate Parent#: FEIN#: BEST S CREDIT RATING Best s Financial Strength Rating: A Outlook: Stable Best s Financial Size Category: XIII RATING RATIONALE Rating Rationale: The ratings of Wellmark, Inc. (Wellmark), and its subsidiaries reflect the organization being a market leader in both states it operates in, strong risk-adjusted capitalization measures, and excellent operational capabilities. Partially offsetting factors are a decrease in membership, earnings negatively impacted by a trend of underwriting losses, and a concentration in a competitive commercial group market. Wellmark continues to be a leading health insurance carrier in both Iowa and South Dakota, where the organization does business as Wellmark Blue Cross and Blue Shield offering group and individual products in each respective market. Despite reporting a consolidated net loss in 2016, the Wellmark entities experienced modest capital and surplus growth supported by increases in unrealized gains. The current level of risk-adjusted capitalization continues to be solid and more than sufficient to support the consolidated business and investment risks. The organization is consistently focused on maintaining high operational efficiency and continues to utilize good cost controls while striving to further improve operational capabilities. This has been demonstrated through administrative cost ratios averaging below fifteen percent over the last several years. Additionally, Wellmark has made significant investments in its systems infrastructure, which increases the potential for improved efficiencies over the long term from shared systems upgrade costs resulting in an even lower systems operating structure. Membership declined in 2016, primarily due to a loss of the state s children health plan (Hawk-I) as well as one large self-insured group. Wellmark announced in 2016 that it will be exiting the Individual ACA market in 2018, which may negatively impact membership growth in the near term. Wellmark continued to incur underwriting losses in 2016, specifically in the individual segment, driven by a higher medical cost trend due to increasing utilization and specialty pharmacy growth. Furthermore, earnings were negatively impacted by higher administrative costs relating to the infrastructure spending. This, in addition to lower realized capital gains, has resulted in a net loss for the first time over the last several years. However, the company expects the underwriting losses to moderate over the near term following pricing actions and reduced exposure to the individual market. Wellmark faces competition in both Iowa and South Dakota, and historically has opted to price competitively with modest earnings in its market space and offset its operational loss risk by seeking returns from its investment portfolio. While there is an ongoing concern over Wellmark s modest earnings targets, A.M. Best believes this is mitigated by the organization s strong capital levels. A negative rating action could occur if Wellmark develops a trend in unfavorable earnings driven by underwriting or investment losses or a substantial decline in risk-adjusted capitalization. FIVE YEAR RATING HISTORY Date Best s FSR Date Best s FSR 06/14/17 A 05/07/14 A 06/17/16 A 05/07/13 A 05/15/15 A KEY FINANCIAL INDICATORS ($000) Total Net Capital & Premiums Total Surplus Written Revenues Net Income Year Assets ,873,807 1,231,216 2,323,086 2,373, , ,065,843 1,393,818 2,337,119 2,395, , ,018,045 1,359,749 2,399,853 2,447,225 15, ,043,927 1,321,982 2,542,744 2,572,834-1, ,129,481 1,330,275 2,654,801 2,695,787-26,507 (*) Within several financial tables of this report, this company is compared against the Total US Life & Health Blue Cross/Blue Shield Companies. (*) Data reflected within all tables of this report has been compiled from the company-filed statutory statement. CORPORATE OVERVIEW Wellmark, Inc. (Wellmark) is a mutual company that together with its subsidiaries provides health benefit plans to approximately 2.0 million members in the Iowa and South Dakota markets. The company offers Blue Cross and Blue Shield branded (blue brand) PPO and managed indemnity plans via Wellmark Blue Cross and Blue Shield of Iowa and Wellmark Blue Cross and Blue Shield of South Dakota. Wellmark Health Plan of Iowa, Inc. offers HMO plans in the Iowa market. Wellmark also owns a subsidiary, Midwest Benefit Consultants, Inc. a general insurance agency that complements its core health care business. Wellmark is also the sole member of The Wellmark Foundation, which provides grants to fund local health or wellness projects or research in Iowa and South Dakota. The Company is in the final stages of winding down First Administrators, Inc. Printed September 8, Page 2 of 24

3 CORPORATE STRUCTURE AMB# COMPANY NAME DOMICILE % OWN Wellmark Inc IA Wellmark Health Plan of Iowa IA Wellmark of South Dakota Inc SD Wellmark Synergy Health Inc. IA BUSINESS PROFILE Wellmark, Inc. (Wellmark), doing business as Wellmark Blue Cross and Blue Shield of Iowa and its subsidiary South Dakota, Inc., doing business as Wellmark Blue Cross and Blue Shield of South Dakota, core business is health insurance and managed care products serving the entire states of Iowa and South Dakota respectively. The Wellmark companies have a strong market presence, and no other competing health insurer has a similar market share in either state. Health maintenance organization (HMO) and point of service (POS) plans are available in Iowa through Wellmark Health Plan of Iowa, Inc. (WHPI), a blue branded HMO. The BlueCard Preferred Provider Organization (PPO) network provides value to the blue brand by providing access to the national Blue Cross and Blue Shield network. Additionally, Wellmark offers its Blue Dental product in the Iowa market. Scope of Operations: The company s large membership base provides a competitive edge when contracting with providers, permitting the creation of large PPO networks in both states. Wellmark s diversified product line is designed to meet the needs of small and large employers, as well as those of individuals. The company s health operations are defined by five segments: large group, small group, individual under age 65, individual over age 65 and Federal Employees Health Benefit Program (FEP). In addition, the company offers Medicare Prescription Drug Plan (PDP) products. THE LARGE GROUP segment consists of employer groups of 51 employees or more and comprises approximately 50% of the enrollment in Iowa and 39% of the membership in South Dakota. Both Fully insured and Self-funded products are available to these groups. Product offerings to groups of employees are standardized while larger groups can have more customized benefits. THE SMALL GROUP segment is comprised of employer groups under 51 employees and represents 8% of the membership in Iowa and 11% in South Dakota. Groups in this segment are more regulated by the Iowa and South Dakota Insurance Divisions than larger employer groups. Product offerings are standardized and are generally available on a fully insured basis only. The company began offering off-exchange Patient Protection and Affordable Care Act (ACA) compatible products beginning in THE INDIVIDUAL UNDER AGE 65 segment has changed substantially over the last four years following ACA implementation. Wellmark retained significant number of pre-aca individual policies through grandfathering and grandmothering in both Iowa and South Dakota. However, the membership in that segment has been gradually declining as individuals roll over to ACA exchange plans with other carriers. While the company began offering off-exchange ACA plans in 2014, it was only in 2017 that Wellmark introduced on-exchange products in Iowa through two joint ventures with large health systems in Iowa. However, due to severe adverse selection leading to financial losses in this segment, Wellmark exited the South Dakota Individual ACA market in 2017 and announced exit from the Iowa on and off exchange Individual ACA market for Wellmark may resume offering individual policies should the rule and regulations change to allow viable risk pools. THE INDIVIDUAL OVER AGE 65 segment offers several of the Medicare Supplement plans standardized by the federal government. The availability of these plans varies by state. This segment represents approximately 10% of the enrollment in Iowa and 6% South Dakota (some of these members also have a Part D product). THE FEDERAL EMPLOYEE PROGRAM (FEP) segment represents 3% of the membership in Iowa and 7% in South Dakota. Wellmark offers both the FEP standard PPO and the basic PPO benefit plan which are part of the national Blue Cross and Blue Shield Federal Employee Program. MEDICARE PDP products are offered by Wellmark Blue Cross and Blue Shield of Iowa and Wellmark Blue Cross and Blue Shield of South Dakota. Wellmark terminated its Medicare Advantage PPO offering, effective January 1, 2013, in both Iowa and South Dakota and no longer offers stand-alone Medicare Advantage coverage to individuals. The Medicare PDP segment represents 1% of the membership in Iowa and 1% in South Dakota (these percentages do not include members that also have a Medicare Supplement product). Wellmark markets its products through multiple distribution channels, including brokers, direct sales representatives, telemarketers and the Internet. Brokers produce a majority of sales to groups with less than 250 employees and individuals under age 65. Direct sales representatives produce a majority of sales to groups with over 250 employees. In addition, telemarketers and the Internet produce a growing amount of sales to individuals, both under and over age 65. The company also maintains a strong affiliation with the Iowa Farm Bureau, a distribution system which exclusively markets Wellmark insurance products to individuals and small groups in rural areas. Wellmark has invested in and widened its development of Accountable Care Organizations (ACO) across the State of Iowa over the past five years. The primary goal is to engage physicians to produce better outcomes and share with them the cost savings. The Company challenges ACO participants to match the consumer price index (CPI) and Wellmark s Trend Target. There are multiple quality index score measurements that tally up to a single aggregate measure falling into three categories of shared savings: Best Practice, Network and Baseline targets. The roll-out of the ACOs has been steady and measured, with physicians incentives modified over time to match more closely with Wellmark s performance incentives. Wellmark s market share in health products has provided a solid foundation from which its product layering strategy is promoted. Other products offered in conjunction with health are: dental, vision, group life, flexible benefit administration, accidental death & dismemberment (AD&D), and long and short-term disability. Most of the ancillary products sold are underwritten by other insurance carriers. Printed September 8, Page 3 of 24

4 TOTAL PREMIUM COMPOSITION & GROWTH ANALYSIS Reinsurance Period DPW Prem Assumed Ending ($000) (% Chg) ($000) (% Chg) ,323, ,337, ,400, ,543, ,655, Yr CAGR 3.1 Reinsurance Period Prem Ceded NPW Ending ($000) (% Chg) ($000) (% Chg) ,323, ,337, ,399, ,542, ,654, Yr CAGR 3.1 Territory: The company is licensed in Iowa and South Dakota BY-LINE BUSINESS ($000) Reinsurance DPW Prem Assumed Product Line ($000) (%) ($000) (%) Comprehensive 1,788, Dental 26, Vision FEHBP 237, Medicare supplement 376, Other health 226, Total 2,655, Reinsurance Prem Ceded NPW Product Line ($000) (%) ($000) (%) Comprehensive ,788, Dental 26, Vision FEHBP 237, Medicare supplement 376, Other health 226, Total ,654, BY-LINE RESERVES ($000) Comprehensive 279 1, , Dental 0 FEHBP 51,490 50,040 47,671 54,047 55,855 Medicare 8 Medicare supplement Other health 2,106 3, Total 53,876 55,343 48,435 58,018 56,737 SUMMARY OF MANAGED CARE OPERATIONS Enrollment Utilization (000 s) (Per 1,000 Members) Total Member % Chg Avg Lngth Physician Hospital Participating Year Members Months Mbr Mths Mbrship Visits Days Physicians ,276 15, , , ,280 15, , , ,287 15, , , ,299 15, , , ,274 15, , ,736 BY-LINE ENROLLMENT (000) Comprehensive Dental Vision FEHBP Medicare 3 Medicare supplement Other health Total 1,274 1,299 1,287 1,280 1,276 GEOGRAPHIC BREAKDOWN BY DIRECT PREMIUM WRITINGS ($000) Iowa 2,627,013 2,517,750 2,378,724 2,319,843 2,309,094 South Dakota 28,257 25,722 21,870 17,275 13,992 Total 2,655,270 2,543,472 2,400,594 2,337,119 2,323,086 RISK MANAGEMENT Wellmark has a formal Enterprise Risk Management (ERM) process and all levels of management participate in this program. The program has a comprehensive governance structure that includes oversight and risk identification through three internal management structures; Audit Services, Compliance and Enterprise Risk Management. Wellmark s risks are identified and assessed in tiers and action plans are developed, metrics are Printed September 8, Page 4 of 24

5 used to monitor risks, and re-evaluations are made periodically by the Audit Committee. Wellmark does not have a dedicated Chief Risk Officer, rather the risk owners are members of Senior Management. The program is comprehensive with steps to develop plans to cover gaps in risk management, monitor metrics for all risks, and reaffirm risk appetite and top risks for future periods. In addition, Wellmark s strategy is to maintain a strong risk-adjusted capital level to help mitigate risks. The program supports the risk culture across the entire organization. Wellmark began filing an Own Risk and Solvency Assessment (ORSA) report annually with the Iowa Insurance Division beginning in Wellmark has performed comprehensive financial scenario modeling that has been incorporated into the ORSA report. OPERATING PERFORMANCE Operating Results: Net earnings, on a statutory basis, were unfavorable in 2016 for the first time in the last several years. This was driven by continued underwriting losses, higher than anticipated expense related to a core claims and membership platform migration and lower realized capital gains. The two years prior underwriting losses were fully offset by a sustained level of net investment income and realized capital gains. PROFITABILITY ANALYSIS ($000) Company Pre-tax Net Period Net Oper Operating Net Total Ending Income Gain Income Return ,063 86, , , , , , , ,315-14,264 15,373 6, ,184-15,258-1,832-7, ,144-34,141-26,507-8,999 5-Yr Total 192, , , ,342 and claims processing system. Underwriting losses are expected to moderate over the near term, as corrective pricing initiatives will continue to be implemented. Wellmark losses from some lines of fully insured business are partially offset by strong gains in other market segments. The underwriting results have begun to improve significantly in early 2017 as a result of better pricing. Pricing in the market place is very competitive; however, Wellmark has benefited in the small group market with membership gains being driven by one of the competitors no longer in the marketplace. PROFITABILITY TESTS Pre-tax Admin NOG Operating Invest Loss Exp. Combined to Tot NOG to Return on Net Total Year Ratio Ratio Ratio Assets Tot Rev Equity Yield Return Year Avg (*) Pre-Tax Invest Total Return quarterly calculation based on more limited quarterly data - see Calculation Specifications NET UNDERWRITING GAIN ($000) Comprehensive -34,979-65,741-44,832 48,537 18,022 Dental 1,516 2,154 2,333 2,644 2,644 Vision FEHBP 4,963 5,173 3,145 1,029 1,026 Medicare Medicare supplement ,311 16,115 30,771 34,001 Other health -23,184 12,713-17,639-14,992-20,300 Other non-health -1,105-1,769-1,578-1,590-1,158 Total -53,663-44,182-42,104 67,270 34,749 Company Industry Composite Period Operating Operating Operating Operating BY-LINE UNDERWRITING RESULTS Ending ROR (%) ROE (%) ROR (%) ROE (%) Net Net Admin Premiums Premiums Loss Exp. Comb Product Line Written Earned Ratio Ratio Ratio Comprehensive 1,788,265 1,789, Dental 26,399 26, Vision Yr Avg FEHBP 237, , Medicare supplement 376, , Underwriting Results: Wellmark reported consolidated statutory Other health 226, , underwriting losses over the last three years with a loss of approximately $60 million, largely driven by their individual lines of business. The underwriting losses are reflective of an increasing medical cost trend and higher administrative costs attributed to the installation of a new core membership Total 2,654,801 2,656, Printed September 8, Page 5 of 24

6 BY-LINE LOSS RATIO Comprehensive Dental Vision FEHBP Medicare Medicare supplement Other health Total BY-LINE COMBINED RATIO Comprehensive Dental Vision FEHBP Medicare Medicare supplement Other health Total Company -Industry Composite- Pre-tax Invest Inv Inc Inv Return on Total Inv Inc Inv Growth Yield Inv Assets Return Growth Yield Year (%) (%) (%) (%) (%) (%) Yr Avg (*) Pre-Tax Invest Total Return quarterly calculation based on more limited quarterly data - see Calculation Specifications BALANCE SHEET STRENGTH Capitalization: Wellmark s capitalization levels are sufficient to support its business risks. Prior to 2016, where capital and surplus experienced a small Investment Results: Wellmark s consolidated net investment income increase, the level of capitalization had trended slightly downward. Going increased in 2016 after remaining relatively flat the three years prior. The forward, however, capital levels are projected to increase over the next 3 years. investment returns are reflective of the low interest rate environment. The net A.M. Best expects Wellmark s risk-based capital levels to be moderately yield increased to 3.02% in 2016 compared to 2.82% in 2015 and 2.73% in pressured by its insured business operating results over the near term; however the level of capital may remain at or near 950% authorized control level over INVESTMENT GAINS ($000) the foreseeable future. The underwriting leverage has been managed below three to one over the last five years, which is considered a very good level. Company Net Realized Unrealized Current BCAR: 270 Inv Capital Capital Year Income Gains Gains CAPITAL GENERATION ANALYSIS ($000) ,207 35,084 33,362 Source of Surplus Growth ,707 43,916 38,903 Pre-Tax Net Realized Unrealized ,923 29,637-8,767 Operating Capital Income Capital ,315 13,426-6,043 Year Gain Gains Taxes Gains ,011 7,634 17, ,063 35,084 4,940 33,362 5-Year Total 257, ,698 74, ,372 43,916 17,149 38, ,315 29,637 9,949-8, ,184 13,426 8,074-6, ,144 7,634 19,997 17,508 5-Yr Total 192, ,698 60,109 74,962 Printed September 8, Page 6 of 24

7 Source of Surplus Growth Net Change % Chg Contrib. Other in in Year Capital Changes C&S C&S , , , , ,675-34, ,892-37, ,292 8, Yr Total -91, , QUALITY OF SURPLUS ($000) Surplus Other Contributed Unassigned Year Notes Debt Capital Surplus ,231, ,393, ,359, ,321, ,330,275 Year-End Conditional Adjusted Year C&S Reserves C&S ,231,216 XX 1,231, ,393,818 XX 1,393, ,359,749 XX 1,359, ,321,982 XX 1,321, ,330,275 XX 1,330,275 LEVERAGE ANALYSIS Industry Company Composite Liab NPW Debt C&S NPW C&S to to to Capital Equity to Total Months to to Total Year Assets(%) Capital & Surplus(%) PMPM(%) Assets(%) Reserves(%) Capital Assets(%) CEDED REINSURANCE ANALYSIS Company Industry Composite Affil Total Total Reins Reins Surplus Reins Surplus Reins Reins Year Rec/C&S Rec/C&S Relief Leverage Relief Rec/C&S Leverage Liquidity: Wellmark s liquidity is enhanced by its access to three lines of credit totaling to a maximum of $125 million in available financing, which provides additional operational and financial flexibility. In 2016, there were no outstanding balances on the lines of credit. Current and overall liquidity ratios have remained over the 150% and 220%, respectively, over the last 5 years. LIQUIDITY ANALYSIS Company Premium Recvble Cash to Claims Current Overall Turnover Claims & to Year Liquidity Liquidity (months) Payables NPE Company Industry Composite Health Avg Clms Tot Health IBNR Pay Period Pay Period Current Overall Year (days) (days) Liquidity Liquidity Investments: Wellmark has a very deliberate strategy to manage its investment risks, while producing returns that enable funding of projects without having to pass on costs to its members through rate increases. A.M. Best has seen in the past, a more aggressive approach to its allocation practices; however, the weight of its portfolio is less towards more volatile investments such as equities and a greater allocation towards fixed income securities. Its fixed income position currently comprises approximately two-thirds of invested assets, and Wellmark s percentage of investments allocated to equities is approximately one-fourth of invested assets. The remainder of invested assets is held in cash and short term securities. A.M. Best does remain concerned with the portion of investments held in equities and the potential impact this exposure could have to the company s balance sheet, should the stock market experience a sharp decline in valuations. A.M. Best recognizes the strong capital balances that will help to absorb any negative downward pressure affecting returns on the portfolio. The portfolio s equity exposure is offset by allocation to low-risk securities within the rest of the portfolio. The bond portfolio is distributed between U.S. Printed September 8, Page 7 of 24

8 Government Securities; U.S. Corporate issues with an emphasis on corporate credit securities, State and local issued securities with over 90% ranked NAIC class 1 or class 2. The real estate holdings include Wellmark s headquarters in Des Moines, IA. The remainder of its invested assets is held in cash, cash equivalents, and highly liquid marketable investment securities. INVESTMENT YIELDS Cash & Invest. Net Short- Real Estate Exp. Year Yield Bonds Stocks Mortgages Term Gross Net Ratio INVESTMENTS - SECURITIES Current Year Distribution of Bonds By Maturity Years Yrs-Avg Maturity Government Gov t Agencies & Muni Industrial & Misc Total Bonds (000) 761, , , , ,536 US Government Foreign Government 0.0 State/Special Revenue - US Industrial & Misc - US Private Issues Public Issues Bond Quality (%) Class Class Class Class Class Class INVESTMENTS - EQUITIES Stocks (000) 718, , , , ,161 Unaffiliated Common Affiliated Common Unaffiliated Preferred INVESTMENTS - MORTGAGE LOANS & REAL ESTATE Mortgages (000) 1,949 Commercial Real Estate (000) 170, , , , ,144 Property Occupied by Co Property Held for Sale INVESTMENTS - OTHER INVESTED ASSETS Other Inv Assets (000) 114, ,005 57, , ,187 Cash Short-Term Schedule BA Assets 9.8 All Other HISTORY Date Incorporated: 09/19/1939 Date Commenced: 10/01/1939 Domicile: IA Wellmark is the result of three Iowa-based Blue plans merging in 1989 and incorporating as IASD Health Services Corp. The present title was adopted during During 1996, South Dakota Blue Shield was merged with Wellmark s Blue Cross operations in South Dakota and a stock subsidiary entitled Wellmark of South Dakota, Inc. was formed. The South Dakota subsidiary conducts business as Wellmark Blue Cross and Blue Shield of South Dakota. MANAGEMENT Officers: Chairman and Chief Executive Officer, John D. Forsyth; Executive Vice President, Treasurer and Chief Financial Officer, David S. Brown; Executive Vice President and General Counsel, Cory R. Harris; Executive Vice Presidents, Marcelle J. Chickering, G. Paul Eddy, Laura J. Jackson, Vicki L. Signor; Secretary, Francis J. Stork. Directors: Thomas M. Cink, M.D., Melanie C. Dreher, John D. Forsyth (Chairman), Daryl K. Henze, William C. Hunter, Paul E. Larson, Angeline Marie Lavin, Terrence J. Mulligan, David G. Neil, Timothy J. Theriault, Therese M. Vaughan. REGULATORY An examination of the financial condition was made as of December 31, 2011, by the insurance department of Iowa. The 2016 annual independent audit of the company was conducted by Ernst & Young, LLP. The annual statement of actuarial opinion is provided by Daniel J. Callahan, FSA, MAAA. Printed September 8, Page 8 of 24

9 FINANCIAL INFORMATION BALANCE SHEET ($000) - YE 2016 Assets Liabilities Total bonds 761,733 Claims payable 365,403 Total preferred stocks 993 Unpaid claims adj expense 4,042 Total common stocks 717,331 Accrued med incent pool 25,212 Real estate 170,837 Advance premiums 108,287 Cash & short-term inv 103,291 Comm taxes expenses 161,320 Health care recvble 61,703 Unallocated items 23,858 Net deferred tax asset 55,192 Uninsured A&H plans 27,447 Prems and consids due 104,127 Health policy reserves 53,876 Accrued invest income 6,506 Other liabilities 29,762 Uninsured A&H plans 90,911 Other assets 56,857 Total liabilities 799,206 Unassigned surplus 1,330,275 Ultimate Parent: Wellmark Inc WELLMARK OF SOUTH DAKOTA, INC West Madison Street Sioux Falls, SD Web: Tel.: Fax: AMB#: NAIC#: Ultimate Parent#: FEIN#: BEST S CREDIT RATING Best s Financial Strength Rating: A Outlook: Stable Best s Financial Size Category: XIII Assets 2,129,481 Total 2,129,481 SUMMARY OF OPERATIONS ($000) Premiums 2,656,268 Hospital/medical services 1,600,657 Net investment income 40,011 Other prof services 221,876 Prem bal charged off -176 Outside referrals 68,326 Other revenues -316 Emerg rm & out of area 86,091 Prescription drugs 315,322 Incent pool & whld adj. 23,396 Less reinsur exp net recover 9,818 Administrative 311,880 Other expenses 92,201 Total 2,695,787 Total 2,709,931 Income (loss) ,144 Provision for FIT... 19,997 Net gain from operations after federal income taxes ,141 RATING RATIONALE Rating Rationale: The ratings of Wellmark, Inc., have been extended to Wellmark of South Dakota, Inc., as this entity is Wellmark, Inc. s operating entity in South Dakota and offers geographic diversification. The ratings of Wellmark, Inc. (Wellmark), and its subsidiaries reflect the organization being a market leader in both states it operates in, strong risk-adjusted capitalization measures, and excellent operational capabilities. Partially offsetting factors are a decrease in membership, earnings negatively impacted by a trend of underwriting losses, and a concentration in a competitive commercial group market. Wellmark continues to be a leading health insurance carrier in both Iowa and South Dakota, where the organization does business as Wellmark Blue Cross and Blue Shield offering group and individual products in each respective market. Despite reporting a consolidated net loss in 2016, the Wellmark entities experienced modest capital and surplus growth supported by increases in unrealized gains. The current level of risk-adjusted capitalization continues to be solid and more than sufficient to support the consolidated business and investment risks. The organization is consistently focused on maintaining high operational efficiency and continues to utilize good cost controls while striving to further improve operational capabilities. This has been demonstrated through administrative cost ratios averaging below fifteen percent over the last several years. Additionally, Wellmark has made significant investments in its systems infrastructure, which increases the potential for improved efficiencies over the long term from shared systems upgrade costs resulting in an even lower systems operating structure. Membership declined in 2016, primarily due to a loss of the state s children health plan (Hawk-I) as well as one large self-insured group. Wellmark announced in 2016 that it will be exiting the Individual ACA market in 2018, which may negatively impact membership growth in the near term. Wellmark Printed September 8, Page 9 of 24

10 continued to incur underwriting losses in 2016, specifically in the individual segment, driven by a higher medical cost trend due to increasing utilization and specialty pharmacy growth. Furthermore, earnings were negatively impacted by higher administrative costs relating to the infrastructure spending. This, in addition to lower realized capital gains, has resulted in a net loss for the first time over the last several years. However, the company expects the underwriting losses to moderate over the near term following pricing actions and reduced exposure to the individual market. Wellmark faces competition in both Iowa and South Dakota, and historically has opted to price competitively with modest earnings in its market space and offset its operational loss risk by seeking returns from its investment portfolio. While there is an ongoing concern over Wellmark s modest earnings targets, A.M. Best believes this is mitigated by the organization s strong capital levels. A negative rating action could occur if Wellmark develops a trend in unfavorable earnings driven by underwriting or investment losses or a substantial decline in risk-adjusted capitalization. FIVE YEAR RATING HISTORY Date Best s FSR Date Best s FSR 06/14/17 A 05/07/14 A 06/17/16 A 05/07/13 A 05/15/15 A KEY FINANCIAL INDICATORS ($000) Total Net Capital & Premiums Total Surplus Written Revenues Net Income Year Assets , , , ,665 20, , , , ,433 29, , , , ,224-9, , , , ,252 27, , , , ,770 4,501 (*) Within several financial tables of this report, this company is compared against the Total US Life & Health Blue Cross/Blue Shield Companies. (*) Data reflected within all tables of this report has been compiled from the company-filed statutory statement. BUSINESS PROFILE Wellmark of South Dakota Inc. (WSD) is a stock life insurance company. It is wholly-owned by Wellmark, Inc., its parent company, and operates as Wellmark Blue Cross Blue Shield of South Dakota. WSD operates as an independent licensee of the Blue Cross Blue Shield Association and carries the names and marks throughout the state of South Dakota. Wellmark, Inc. (Wellmark), doing business as Wellmark Blue Cross and Blue Shield of Iowa and its subsidiary South Dakota, Inc., doing business as Wellmark Blue Cross and Blue Shield of South Dakota, core business is health insurance and managed care products serving the entire states of Iowa and South Dakota respectively. The Wellmark companies have a strong market presence, and no other competing health insurer has a similar market share in either state. Health maintenance organization (HMO) and point of service (POS) plans are available in Iowa through Wellmark Health Plan of Iowa, Inc. (WHPI), a blue branded HMO. The BlueCard Preferred Provider Organization (PPO) network provides value to the blue brand by providing access to the national Blue Cross and Blue Shield network. Additionally, Wellmark offers its Blue Dental product in the Iowa market. Scope of Operations: The company s large membership base provides a competitive edge when contracting with providers, permitting the creation of large PPO networks in both states. Wellmark s diversified product line is designed to meet the needs of small and large employers, as well as those of individuals. The company s health operations are defined by five segments: large group, small group, individual under age 65, individual over age 65 and Federal Employees Health Benefit Program (FEP). In addition, the company offers Medicare Prescription Drug Plan (PDP) products. THE LARGE GROUP segment consists of employer groups of 51 employees or more and comprises approximately 50% of the enrollment in Iowa and 39% of the membership in South Dakota. Both Fully insured and Self-funded products are available to these groups. Product offerings to groups of employees are standardized while larger groups can have more customized benefits. THE SMALL GROUP segment is comprised of employer groups under 51 employees and represents 8% of the membership in Iowa and 11% in South Dakota. Groups in this segment are more regulated by the Iowa and South Dakota Insurance Divisions than larger employer groups. Product offerings are standardized and are generally available on a fully insured basis only. The company began offering off-exchange Patient Protection and Affordable Care Act (ACA) compatible products beginning in THE INDIVIDUAL UNDER AGE 65 segment has changed substantially over the last four years following ACA implementation. Wellmark retained significant number of pre-aca individual policies through grandfathering and grandmothering in both Iowa and South Dakota. However, the membership in that segment has been gradually declining as individuals roll over to ACA exchange plans with other carriers. While the company began offering off-exchange ACA plans in 2014, it was only in 2017 that Wellmark introduced on-exchange products in Iowa through two joint ventures with large health systems in Iowa. However, due to severe adverse selection leading to financial losses in this segment, Wellmark exited the South Dakota Individual ACA market in 2017 and announced exit from the Iowa on and off exchange Individual ACA market for Wellmark may resume offering individual policies should the rule and regulations change to allow viable risk pools. THE INDIVIDUAL OVER AGE 65 segment offers several of the Medicare Supplement plans standardized by the federal government. The availability of these plans varies by state. This segment represents approximately 10% of the enrollment in Iowa and 6% South Dakota (some of these members also have a Part D product). Printed September 8, Page 10 of 24

11 THE FEDERAL EMPLOYEE PROGRAM (FEP) segment represents 3% of the membership in Iowa and 7% in South Dakota. Wellmark offers both the FEP standard PPO and the basic PPO benefit plan which are part of the national Blue Cross and Blue Shield Federal Employee Program. MEDICARE PDP products are offered by Wellmark Blue Cross and Blue Shield of Iowa and Wellmark Blue Cross and Blue Shield of South Dakota. Wellmark terminated its Medicare Advantage PPO offering, effective January 1, 2013, in both Iowa and South Dakota and no longer offers stand-alone Medicare Advantage coverage to individuals. The Medicare PDP segment represents 1% of the membership in Iowa and 1% in South Dakota (these percentages do not include members that also have a Medicare Supplement product). Wellmark markets its products through multiple distribution channels, including brokers, direct sales representatives, telemarketers and the Internet. Brokers produce a majority of sales to groups with less than 250 employees and individuals under age 65. Direct sales representatives produce a majority of sales to groups with over 250 employees. In addition, telemarketers and the Internet produce a growing amount of sales to individuals, both under and over age 65. The company also maintains a strong affiliation with the Iowa Farm Bureau, a distribution system which exclusively markets Wellmark insurance products to individuals and small groups in rural areas. Wellmark has invested in and widened its development of Accountable Care Organizations (ACO) across the State of Iowa over the past five years. The primary goal is to engage physicians to produce better outcomes and share with them the cost savings. The Company challenges ACO participants to match the consumer price index (CPI) and Wellmark s Trend Target. There are multiple quality index score measurements that tally up to a single aggregate measure falling into three categories of shared savings: Best Practice, Network and Baseline targets. The roll-out of the ACOs has been steady and measured, with physicians incentives modified over time to match more closely with Wellmark s performance incentives. Wellmark s market share in health products has provided a solid foundation from which its product layering strategy is promoted. Other products offered in conjunction with health are: dental, vision, group life, flexible benefit administration, accidental death & dismemberment (AD&D), and long and short-term disability. Most of the ancillary products sold are underwritten by other insurance carriers. TOTAL PREMIUM COMPOSITION & GROWTH ANALYSIS Reinsurance Period DPW Prem Assumed Ending ($000) (% Chg) ($000) (% Chg) , , , , , Yr CAGR 2.5 Reinsurance Period Prem Ceded NPW Ending ($000) (% Chg) ($000) (% Chg) , , , , , Yr CAGR 2.5 Territory: The company is licensed in South Dakota BY-LINE BUSINESS ($000) Reinsurance DPW Prem Assumed Product Line ($000) (%) ($000) (%) Comprehensive 476, Dental Vision FEHBP 154, Medicare supplement 55, Other health 10, Total 697, Reinsurance Prem Ceded NPW Product Line ($000) (%) ($000) (%) Comprehensive , Dental Vision FEHBP 154, Medicare supplement 55, Other health 10, Total , BY-LINE RESERVES ($000) Comprehensive 3,034 1,193 11, FEHBP 37,396 35,276 32,777 36,306 36,838 Medicare 5 Medicare supplement Other health 1 Total 40,432 36,552 44,253 36,840 37,330 Printed September 8, Page 11 of 24

12 SUMMARY OF MANAGED CARE OPERATIONS Enrollment Utilization (000 s) (Per 1,000 Members) Total Member % Chg Avg Lngth Physician Hospital Participating Year Members Months Mbr Mths Mbrship Visits Days Physicians , , , , , , , , , , , , , , ,421 BY-LINE ENROLLMENT (000) Comprehensive Dental Vision FEHBP Medicare 1 Medicare supplement Other health Total GEOGRAPHIC BREAKDOWN BY DIRECT PREMIUM WRITINGS ($000) South Dakota 697, , , , ,275 Total 697, , , , ,275 RISK MANAGEMENT Wellmark has a formal Enterprise Risk Management (ERM) process and all levels of management participate in this program. The program has a comprehensive governance structure that includes oversight and risk identification through three internal management structures; Audit Services, Compliance and Enterprise Risk Management. Wellmark s risks are identified and assessed in tiers and action plans are developed, metrics are used to monitor risks, and re-evaluations are made periodically by the Audit Committee. Wellmark does not have a dedicated Chief Risk Officer, rather the risk owners are members of Senior Management. The program is comprehensive with steps to develop plans to cover gaps in risk management, monitor metrics for all risks, and reaffirm risk appetite and top risks for future periods. In addition, Wellmark s strategy is to maintain a strong risk-adjusted capital level to help mitigate risks. The program supports the risk culture across the entire organization. Wellmark began filing an Own Risk and Solvency Assessment (ORSA) report annually with the Iowa Insurance Division beginning in Wellmark has performed comprehensive financial scenario modeling that has been incorporated into the ORSA report. OPERATING PERFORMANCE Operating Results: Wellmark of South Dakota, Inc. (WSD) reported net income of $4.5 million in 2016, down from $27.7 the prior year driven by larger underwriting losses and a decrease in realized capital gains. Earnings are driven by fluctuating realized capital gains and a generally increasing level of investment income. Net earnings, on a statutory basis, were unfavorable in 2016 for the first time in the last several years. This was driven by continued underwriting losses, higher than anticipated expense related to a core claims and membership platform migration and lower realized capital gains. The two years prior underwriting losses were fully offset by a sustained level of net investment income and realized capital gains. PROFITABILITY ANALYSIS ($000) Company Pre-tax Net Period Net Oper Operating Net Total Ending Income Gain Income Return ,572 16,114 20,729 25, ,862 20,642 29,877 34, ,742-12,666-9,413-8, ,652 11,415 27,745 10, ,435 4,501 8,156 5-Yr Total 33,248 37,942 73,439 70,344 Company Industry Composite Period Operating Operating Operating Operating Ending ROR (%) ROE (%) ROR (%) ROE (%) Yr Avg Underwriting Results: Wellmark reported consolidated statutory underwriting losses over the last three years with a loss of approximately $60 million, largely driven by their individual lines of business. The underwriting losses are reflective of an increasing medical cost trend and higher administrative costs attributed to the installation of a new core membership and claims processing system. Underwriting losses are expected to moderate over the near term, as corrective pricing initiatives will continue to be implemented. Wellmark losses from some lines of fully insured business are partially offset by strong gains in other market segments. The underwriting results have begun to improve significantly in early 2017 as a result of better Printed September 8, Page 12 of 24

13 pricing. Pricing in the market place is very competitive; however, Wellmark has benefited in the small group market with membership gains being driven by one of the competitors no longer in the marketplace. PROFITABILITY TESTS Pre-tax Admin NOG Operating Invest Loss Exp. Combined to Tot NOG to Return on Net Total Year Ratio Ratio Ratio Assets Tot Rev Equity Yield Return Year Avg (*) Pre-Tax Invest Total Return quarterly calculation based on more limited quarterly data - see Calculation Specifications NET UNDERWRITING GAIN ($000) Comprehensive -7,939-7,128-23,614 12, Dental Vision FEHBP 1, Medicare Medicare supplement 3,643 3,321 5,168 7,441 6,645 Other health -7,633-3,166-5,953 2, Other non-health Total -9,786-5,822-22,886 22,326 8,020 BY-LINE UNDERWRITING RESULTS Net Net Admin Premiums Premiums Loss Exp. Comb. Product Line Written Earned Ratio Ratio Ratio Comprehensive 476, , Dental Vision FEHBP 154, , Medicare supplement 55,024 55, Other health 10,546 10, Total 697, , BY-LINE LOSS RATIO Comprehensive Dental Vision FEHBP Medicare Medicare supplement Other health Total BY-LINE COMBINED RATIO Comprehensive Dental Vision FEHBP Medicare Medicare supplement Other health Total Investment Results: Wellmark s consolidated net investment income increased in 2016 after remaining relatively flat the three years prior. The investment returns are reflective of the low interest rate environment. The net yield increased to 3.02% in 2016 compared to 2.82% in 2015 and 2.73% in INVESTMENT GAINS ($000) Company Net Realized Unrealized Inv Capital Capital Year Income Gains Gains ,898 4,615 4, ,600 9,234 5, ,121 3, ,510 16,330-17, ,702 2,066 3,655 5-Year Total 40,830 35,498-3,095 Printed September 8, Page 13 of 24

14 Company -Industry Composite- Pre-tax Invest Inv Inc Inv Return on Total Inv Inc Inv Growth Yield Inv Assets Return Growth Yield Year (%) (%) (%) (%) (%) (%) Yr Avg (*) Pre-Tax Invest Total Return quarterly calculation based on more limited quarterly data - see Calculation Specifications BALANCE SHEET STRENGTH Capitalization: The level of capitalization increased for Wellmark of South Dakota, Inc. (WSD) in The increase in capital and surplus is attributed to the favorable, however lower, net gains reported in Net premium growth has been modest; however, the absolute capital growth has been very good over the long term. The five year compound annual growth rate is 6.0% in A.M. Best expects the trend of favorable capital growth to continue, and WSD s current level of capital is more than adequate to support its business risks and the rating. Wellmark s capitalization levels are sufficient to support its business risks. Prior to 2016, where capital and surplus experienced a small increase, the level of capitalization had trended slightly downward. Going forward, however, capital levels are projected to increase over the next 3 years. A.M. Best expects Wellmark s risk-based capital levels to be moderately pressured by its insured business operating results over the near term; however the level of capital may remain at or near 950% authorized control level over the foreseeable future. The underwriting leverage has been managed below three to one over the last five years, which is considered a very good level. Current BCAR: 270 CAPITAL GENERATION ANALYSIS ($000) Source of Surplus Growth Pre-Tax Net Realized Unrealized Operating Capital Income Capital Year Gain Gains Taxes Gains ,572 4, , ,862 9,234 9,220 5, ,742 3,252-2, ,652 16,330-8,763-17, ,066-2,533 3,655 5-Yr Total 33,248 35,498-4,694-3,095 Source of Surplus Growth Net Change % Chg Contrib. Other in in Year Capital Changes C&S C&S ,385 23, , , ,076 4, ,188 5, Yr Total -9,660 60, QUALITY OF SURPLUS ($000) Surplus Other Contributed Unassigned Year Notes Debt Capital Surplus , , , , , , , , , ,438 Year-End Conditional Adjusted Year C&S Reserves C&S ,772 XX 201, ,810 XX 235, ,993 XX 227, ,662 XX 232, ,630 XX 238,630 Printed September 8, Page 14 of 24