Regulators lower Blues' reserves for last year

August 27, 1993|By Patricia Meisol | Patricia Meisol,Staff Writer

Maryland insurance regulators have completed a financial examination that shows the state's largest insurer was far less healthy than was originally reported.

The state's examination of Blue Cross and Blue Shield of Maryland, which focused on the company's finances from 1988 through the end of 1992, put the company's reserve at $9.1 million as of Dec. 31. That compared with $24.9 million reported by Blue Cross in March.

"They were obviously skating on rather thin ice at the end of the year," said Dwight K. Bartlett III, the Maryland insurance commissioner.

The possibility that the company might have been insolvent prompted insurance regulators to order the examination of the company's books.

The examination, released yesterday, did not include a review of Blue Cross' administrative -- or nonrisk -- business, which amounts to more than half of the $1.5 billion in premiums collected last year. The insurer's nonrisk business primarily involves processing claims and providing administrative services for companies that pay their own medical bills.

While this kind of business does not have the same insurance risk for Blue Cross, it does have a major impact on the insurer's bottom line. Losses from this portion of the business last year, for instance, amounted to $4.8 million.

Charles Siegel, associate insurance commissioner, said the results from this business, though not examined, were used to to determine the $9.1 million reserve level.

Blue Cross' lower reserve was caused primarily by a decision by regulators last fall to force the insurer to adhere to a conservative method of valuing its assets -- the method commonly used in the insurance industry. This current revaluation came after Blue Cross had previously recast its financial reports in anticipation of the stricter rules. The $24.9 million figure reported by the company in March was a drop from reported reserves of $66 million last year.

Since the start of this year, however, the company's reserves have increased substantially.

Blue Cross sold Green Spring Mental Health, its mental health management services unit, for $37.2 million in May. The sale helped boost its reserve -- a financial cushion for unanticipated medical bills or other losses -- to $60.4 million as of June 30.

"I would characterize it as a relatively clean report," said James R. Swenson, senior vice president and chief financial officer of Blue Cross. In addition, he said, "the commissioner made a number of constructive recommendations which we will take."

Among those was a criticism of minutes of directors' meetings for the years since 1988, saying they were "written in a vague and obscure manner, often lacking supporting details with regard to the financial condition of the corporation and its subsidiaries." The examiners recommended that the board record each instance of buying and selling bonds.

Blue Cross President William L. Jews took issue with the XTC insurance examiners' use of more conservative valuation methods for the company's health maintenance organizations, which are worth about $30 million under industry accounting rules. In a written response to examiners, he noted that an evaluation of the HMOs, by Salomon Bros. placed their market value at between $122 million and $143 million.

The Salomon report offered no assurance that Blue Cross would receive that amount were it to sell the subsidiaries. Under accounting rules, the insurance industry values such assets at their net worth rather than the price they might command in the marketplace.

The examination also said the annual reports for 1989, 1990 and 1991 contained several errors in the reporting of investments, and some remained in the 1992 report.

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