Health Insurer Financial Insights Volume 3 | Summer 2020

Consulting Actuaries

HEALTH INSURER FINANCIAL INSIGHTS VOLUME 3 | SUMMER 2020

As we present the third edition of our Health Insurer Financial Insights IN THIS ISSUE newsletter, we find ourselves in the midst of unprecedented times. Q2 YTD 2020 Statutory Results This newsletter focuses on market profitability and capitalization by Market trends for public and non-public health insurers, and their claims experience through the first half of 2020. Section 04 provides insight 01 into how health carriers are reporting the impact of COVID-19. Our Market aim is to keep you abreast of key market trends and dynamics that Capitalization: Statutory Capital/ impact health insurer financial results and profitability. We hope you RBC Trends enjoy the newsletter and find it informative. Please look for our next 02 edition this Fall. Public Companies Financial Q2 YTD 2020 Statutory Financials: Individual, Group, Medicare, and Medicaid Markets Performance Overall, health insurer profit margins improved in 2020. Pre-tax margins increased in Q2 2020 with decreased loss ratios in all markets due to the impact of COVID-19 on developing claims experience. The differences by line of business indicate that COVID-19 has had a larger impact 03 on the claim experience for certain services, such as Dental, when compared to major medical and Rx services. COVID-19 Corner

2019 Market Capitalization: Statutory Capital/Risk Based Capital (RBC) Trends Market capitalization measured by Total Adjusted Capital (TAC) increased due to small increases in market size (measured by premium) and very little total change in Risk Based 04 Capital ratios. Overall, Public Companies saw minor decreases to their RBC ratios in 2019, while Non-Public Blues saw increases in both TAC and RBC ratios.

Public Companies Financial Performance Public Companies continue to perform well. We reviewed the profitability of their insured blocks of business and noted that margins increased, as loss ratios improved in Q2 2020 as a result of reduced utilization during the COVID-19 pandemic. However, operating expenses have been increasing in recent quarters. 01 Q2 YTD 2020 STATUTORY1 RESULTS BY MARKET HEALTH INSURERSpg2 Total chart size 3.05 x chart size 3.05 x 2.3 1.65

FINANCIALS BY MARKET chart size 3.05 x 2.1 We summarize the reported profitability trends of carriers with Q2 2020 YTD statutory financial information. We also summarize enrollment and loss ratio trends in the individual, group, Medicare, and Medicaid markets. Overall, pre-tax margins increased in Q1–Q2 2020 to 5.9% with decreased loss ratios due to the impact from COVID-19 lockdowns.

ALL MARKETS (COMMERCIAL, MEDICARE, MEDICAID, AND OTHER)

Profit Margin ALL MARKETS PRE-TAX PROFIT MARGINS 2015 TO Q1–Q2 2020/PUBLIC VS. BLUE VS. OTHER Overall, health insurer profit margins improved in 7% Q1–Q2 2020 to 5.9%. 6.5% 5.9% Margins increased for Public 6% 5.9% Companies from 2019 by

2.7%. For Non-Public Blues, 5% 4.7% the margins increased by

4.0% over these reported in 4% 2019 and for Other Health

Carriers margins improved 3% by 3.6%.

1% Pre-tax Profit Margin (as % of Premium)

-1%

-2% 2015 2016 2017 2018 2019 Q1–Q2 2020

Public Non-Public Other Health All Health Companies Blues Carriers Carriers

Q1–Q2 2020 Carrier Type 2015 2016 2017 2018 2019 Q1–Q2 2020 vs 2019 Public Companies 4.6% 4.5% 4.6% 4.6% 3.8% 2.7% 6.5% Non-Public Blues -1.0% 0.6% 3.5% 4.2% 1.9% 4.0% 5.9% Other Health Carriers 2.5% 2.3% 3.9% 2.8% 1.1% 3.6% 4.7% All Health Carriers 2.4% 2.8% 4.1% 4.0% 2.6% 3.3% 5.9%

All Carriers Change: 5.6% 3.7% 4.5% 3.0% 1.8%

$480

$460 01 Q2 YTD 2020 STATUTORY1 RESULTS BY MARKET $440 $420

$400 GROUP MARKET pgPremium PMPM pg 3 Group3 Group Market Market $380chart size 3.05 x chart1.65 size 3.05 x Premiums PMPM 1.65COMMERCIAL GROUP PREMIUMS PMPM PUBLIC$360 VS. BLUE VS. OTHER Group premiums PMPM increased slightly in 2015 2016 2017 2018 2019 Q1–Q2 2020 AllAll Carriers Carriers Change: Change: 5.65.6% % 3.73.7% % 4.54.5% % 3.03.0% % 1.81.8% % Q1–Q2 2020, with average market premiums $480 reaching $467 PMPM for Q1–Q2 2020, an $480 $460 increase of 1.8% from 2019. The increase is the $460 18 $440 lowest for Public Companies (0.0%) and highest $440 for Other Health Carriers (6.6%). $42016 $420

Public Non-Public Other Health All Health $40014 $400Premium PMPM

Companies Blues Carriers Carriers Premium PMPM $380 $38012

$360 $360 10 2015 2016 2017 2018 2019 Q1–Q2 2020 2015 2016 2017 2018 2019 Q1–Q2 2020 Covered Lives (in Millions) 8

2 COMMERCIAL GROUP ENROLLMENT Enrollment 6 PUBLIC VS.2015 BLUE VS. OTHER2016 2017 2018 2019 Q1–Q2 2020 Enrollment in the comprehensive fully insured 18 18 group market continued to decline in Q1–Q2 2020 16 at an average of -3.8% from 2019. 16

14 Q1–Q2 14 2015 2016 2017 2018 2019 2020 12 Total Enrollment 12 (in Millions) 34.5 32.5 31.8 30.9 29.8 28.6 10 10

Public Non-Public Other Health All Health Covered Lives (in Millions) Covered Lives (in Millions) 8 Companies Blues Carriers Carriers 8

6 6 2015 2016 2017 2018 2019 Q1–Q2 2020 2015 2016 2017 2018 2019 Q1–Q2 2020

Loss Ratio COMMERCIAL GROUP LOSS RATIO PUBLIC VS. BLUE VS. OTHER Reported loss ratios decreased -8.1% to 77.6% 92% in Q1–Q2 2020 from 2019. The decrease was consistent across the three insurer types. 89%

Public Non-Public Other Health All Health 86% Companies Blues Carriers Carriers

83% Loss Ratio 80%

77%

74% 2015 2016 2017 2018 2019 Q1–Q2 2020 92% 92%

89% Q1–Q2 2020 Carrier Type 2015 2016 2017 89% 2018 2019 Q1–Q2 2020 vs 2019 86% Public Companies 80.0% 80.9% 81.7%86% 82.1% 84.0% -8.1% 75.9%

83% Non-Public Blues 83.7% 82.9% 81.7%83% 81.9% 84.2% -8.2% 76.0% Loss Ratio Loss Ratio Other Health Carriers 88.0% 88.4% 87.8% 80% 87.2% 90.0% -8.3% 81.8% 80% All Health Carriers 83.8% 83.8% 83.4% 83.4% 85.7% -8.1% 77.6% 77% 77% 1. NAIC health blanks only. Excludes NAIC Life/Accident/Health, NAIC P&C, and CA DMHC Filers. Data as of September 2020. 2. Some of the market enrollment is not included, most notably those insured by Life/Accident/Health74% statutory filers, which needs to be considered when reviewing this chart and others in this report. 74% 2015 2016 2017 2018 2019 Q1–Q2 2020 2015 2016 2017 2018 2019 Q1–Q2 2020 Copyright © 2020 Oliver Wyman 3 Pg 4 Individual Market Public Non-Public Other Health All Health chart size 3.05 x Companies Blues Carriers Carriers 1.65

All Carriers Change: 11.6% 21.1% 20.0% -1.4 % 1.3%

$650

$550 01 Q2 YTD 2020 STATUTORY1 RESULTS BY MARKET $450 Pg 4 Individual Market INDIVIDUAL MARKET $350 Public Non-Public Other Health All Health Pg 4 Individual Companies Blues Carriers Carriers MarketPremium PMPM chart size 3.05 x 1.65 Public Non-Public Other Health All Health Premiums PMPM COMPREHENSIVE$250chart size 3.05 INDIVIDUAL x Companies PREMIUMS Blues PMPMCarriers Carriers PUBLIC1.65 VS. BLUE VS. OTHER Individual premiums remained fairly flat in All Carriers Change: 11.6% 21.1% 20.0% -1.4 % 1.3% Q1–Q2 2020 with reported average individual $150 All Carriers$650 Change:2015 112016.6% 21.1%2017 20.0%2018 -1.42019 % Q1–Q21.3 %2020 market premiums of $499 PMPM, an increase $650 of 1.3% from 2019. For Public Companies the $550 8 change in premium was the highest at 6.0% and $550 for Other Health Carriers, the lowest at -2.4%. $4507

$4506 Public Non-Public Other Health All Health Companies Blues Carriers Carriers $350 5 Premium PMPM $350 4 Premium PMPM $250 3 $250 $150

Covered Lives (in Millions) 2 2015 2016 2017 2018 2019 Q1–Q2 2020 $1501 2015 2016 2017 2018 2019 Q1–Q2 2020

2 0 Enrollment COMPREHENSIVE8 2015 2INDIVIDUAL016 2017 ENROLLMENT2018 2019 Q1–Q2 2020 PUBLIC VS. BLUE VS. OTHER Enrollment remained essentially unchanged from 87 2019. Public and Other Health Companies increased 76 enrollment slightly from 2019 levels. Public Companies 65 market participation is likely driven by a more stable 54 market and improved financial performance. 43 Q1–Q2

2015 2016 2017 2018 2019 Covered Lives (in Millions) 2 2020 3

Total Enrollment Covered Lives (in Millions) 21 (in Millions) 15.1 15.1 13.8 12.6 12.0 12.1 10 2015 2016 2017 2018 2019 Q1–Q2 2020 Public Non-Public Other Health All Health 0 Companies Blues Carriers Carriers 2015 2016 2017 2018 2019 Q1–Q2 2020

Loss Ratio COMPREHENSIVE INDIVIDUAL LOSS RATIO PUBLIC VS. BLUE VS. OTHER Reported loss ratios decreased by 7.4% to 72.2% 110% in Q1–Q2 2020 from 2019. The decrease is largest among Public Companies at 12.0% and the lowest 100% for Non-Public Blues and Other Health Carriers at 90% 5.9% and 5.8%, respectively. 80% Public Non-Public Other Health All Health

Companies Blues Carriers Carriers Loss Ratio 70%

60%

50% 110% 2015 2016 2017 2018 2019 Q1–Q2 2020

110% 100% Q1–Q2 2020 Carrier Type 2015 2016 2017 2018 2019 Q1–Q2 2020 vs 2019 100% 90% Public Companies 92.8% 93.9% 79.8% 70.7% 76.2% -12.0% 64.1% 90% Non-Public Blues 105.5% 92.3% 79.9%80% 70.5% 78.7% -5.9% 72.8%

Other Health Carriers 104.8% 106.4% 92.5%Loss Ratio 80% 80.5% 84.2% -5.8% 78.3% 70% All Health Carriers Loss Ratio 101.6% 95.7% 82.7%70% 73.4% 79.6% -7.4% 72.2% 60% 1. NAIC health blanks only. Excludes NAIC Life/Accident/Health, NAIC P&C, and CA DMHC Filers. Data as of September 2020. 60% 2. Some of the market enrollment is not included, most notably those insured by Life/Accident/Health50% statutory filers, which needs to be considered when reviewing this chart and others in this report. 2015 2016 2017 2018 2019 Q1–Q2 2020 50% Copyright © 2020 Oliver Wyman 2015 2016 2017 2018 2019 Q1–Q2 2020 4 Pg 5 Medicare

chart size 3.05 x 1.0

Pg 5 Medicare

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01 Q2 YTD 2020 STATUTORY1 RESULTS BY MARKET

Pg 6 Medicaid14 MEDICARE ADVANTAGE 12 10 Enrollment2 MEDICARE ENROLLMENT PUBLIC VS. BLUE8 VS. OTHER Enrollment growth in the Medicare Advantage (MA) Pg 6 Medicaid14 6 market continued in Q1–Q2 2020 with the overall trend of gradual increases driven by population demographics 12 4 Covered Lives (in Millions) and the continued popularity of MA plans. The majority 10 2 of the growth has been for Public Companies. 8 0 2015 2016 2017 2018 2019 Q1–Q2 2020 6 Q1–Q2 2015 2016 2017 2018 2019 2020 4

Total Enrollment Covered Lives (in Millions) (in Millions) 13.7 14.5 15.4 16.6 17.1 18.9 2

Public Non-Public Other Health All Health 0 Companies Blues Carriers Carriers 2015 2016 2017 2018 2019 Q1–Q2 2020

Loss Ratio MEDICARE LOSS RATIO PUBLIC VS. BLUE VS. OTHER Reported loss ratios decreased by 5.9% to 79.9% in Q1–Q2 2020 from 2019. The decrease is the largest 95% for Non-Public Blues at 7.7% and the lowest for 90% Other Health Carriers at 3.3%. 85%

Public Non-Public Other Health All Health Loss Ratio Companies Blues Carriers Carriers 80% 95% 75% 90% 2015 2016 2017 2018 2019 Q1–Q2 2020

85% 30 Loss Ratio 80% MEDICAID MANAGED CARE 25 75% 20 2015 2016 2017 2018 2019 Q1–Q2 2020 2 Enrollment MEDICAID15 ENROLLMENT PUBLIC VS. BLUE VS. OTHER Enrollment increased by 0.7 million in insured 10 30 Managed Medicaid programs for Q1–Q2 2020. Public 5 Covered Lives (in Millions) Companies had the largest increase at 0.6 million. 25 0 20 2015 2016 2017 2018 2019 Q1–Q2 2020 Q1–Q2 2015 2016 2017 2018 2019 2020 15

Total Enrollment 10 (in Millions) 37.1 39.9 43.2 44.2 43.0 43.7 5 Covered Lives (in Millions)

Public Non-Public Other Health All Health 0 Companies Blues Carriers Carriers 2015 2016 2017 2018 2019 Q1–Q2 2020

Loss Ratio MEDICAID LOSS RATIO PUBLIC VS. BLUE VS. OTHER Reported loss ratios decreased by 3.5% to 87.1% in 100% Q1–Q2 2020 from 2019. The decrease is the largest for Public Companies at 5.4%. Other Health Carriers 95% reported a 1.5% higher loss ratio. 90%

Public Non-Public Other Health All Health Loss Ratio 85% Companies Blues Carriers Carriers 100% 80% 2015 2016 2017 2018 2019 Q1–Q2 2020 95%

90%

1. NAIC health blanks only. Excludes NAIC Life/Accident/Health, NAIC P&C, and CA DMHCLoss Ratio Filers. Data as of September 2020. 2. Some of the market enrollment is not included, most notably those insured by Life/Accident/Health85% statutory filers, which needs to be considered when reviewing this chart and others in this report. 80% Copyright © 2020 Oliver Wyman 2015 2016 2017 2018 2019 Q1–Q2 2020 5 01 Q2 YTD 2020 STATUTORY1 RESULTS BY MARKET

Q2 2020 REPORTED CLAIMS EXPERIENCE

We compared the reported PMPM incurred claims in second quarter of 2020 to expected claims based on the first quarter 2020 reported PMPM claims and typical growth from the first to second quarter to highlight the impact of COVID-19 on developing claims experience. We summarized the reported data by major lines of business: Individual and Group Comprehensive; Medicare Advantage; Medicare Supplemental; Medicaid; and Dental. Across all the lines of business the reported PMPM claims in Q2 of 2020 were about 11% lower than expected or -$38 on a PMPM basis. The difference in actual to expected change ranges from Sectionabout 9% 1 claimsfor Medicare Advantage to 42% for Dental.

The expected Q2 2020 claims across all lines of INCURRED CLAIMS PMPM – MAJOR LINES OF BUSINESS Q1–Q2 2017 TO Q1–Q2 2020 business were estimated based on average change in PMPM incurred claims from Q1 to Q2 as reported $450 Q1 to Q2 average Q1 to Q2 average for first half of 2017 to 2019. As shown in the chart to change 2017 to 2019: change in 2020: $400 2.8% -8.4% the right, the average Q1 to Q2 change in incurred $352 Expected claims PMPM was 2.8% for the period from 2017 to $350 $334 $342 $320 $305 $305 $313 Reported 2019 which we utilized as pre-COVID-19 basis for $296 $303 $300 the expected Q1 to Q2 growth rate. We applied the growth rate to the Q1 2020 reported incurred claims $250 PMPM of $342 to estimate the expected claims for $200 Q2 2020 at $352. The reported claims were $313 PMPM in Q2 of 2020 which is about 8.4% lower than $150 Q1 2020 and estimated 11% lower than expected $100 claims. The lower than expected reported claims in the second quarter of 2020 is clearly visible in $50 the chart. This reduction is attributable to reduced Q1 Q2 Q1 Q2 Q1 Q2 Q1 Q2 0 utilization during the COVID-19 pandemic. 2017 2018 2019 2020

Incurred Claims by Line of Business We performed the comparison of the expected to reported incurred claims for Q2 of 2020 across the major lines of business which are summarized in the table below. In column 6 of the table, the reported less expected claims difference is the lowest for Medicare Advantage (9%) and Medicaid (10%) and the highest for Medicare Supplement (18%) and Dental (42%). In the Comprehensive Individual and Group lines of business the reported to expected differences are slightly higher than the average at about 13% and 14%, respectively. The differences by line of business indicate that COVID-19 has larger impact on Dental than major medical and Rx services provided by the comprehensive product lines.

2017–2019 2020 Q1 2020 Q2 Reported 2020 Q2 2020 Q2 Average Reported Reported Change 2020 Q2 Reported Reported minus Line of Business Change Claims Claims Q1 2020 to Expected minus Expected Expected Claims Q1 to Q2 PMPM PMPM Q2 2020 Claims Change PMPM

(1) (2) (3) (4) = (3) (2) - 1 (5) = (2) x [1 + (1)] (6) = (4) - (1) (7) = (3) - (5)

Comprehensive Individual 12.3% $363 $362 -0.3% $408 -12.6% -$46 Comprehensive Group 5.8% $378 $349 -7.8% $400 -13.6% -$51 Medicare Advantage 0.5% $921 $841 -8.7% $926 -9.3% -$85 Medicare Supplement -13.0% $186 $129 -30.7% $162 -17.7% -$33 Medicaid 1.7% $378 $347 -8.3% $385 -10.0% -$38 Dental -0.1% $21 $12 -42.0% $21 -41.9% -$9 Total 2.8% $342 $313 -8.4% $352 -11.2% -$38

1. NAIC health blanks with business from 2017 to 2020 Q2 YTD only. Excludes NAIC Life/Accident/Health, NAIC P&C, and CA DMHC Filers. Data as of September 2020.

Copyright © 2020 Oliver Wyman 6 02 2015 TO 2019 STATUTORY1 RISK BASED CAPITAL MARKET CAPITALIZATION: STATUTORY CAPITAL/RBC TRENDS Market capitalization measured by TotalSection Adjusted 2 Capital (TAC) increased due to small increases 200 in the size of the market (measured by premium), and very little total change in Risk Based Capital 180.2 180 164.7 ratios. Overall, Public Companies saw minor decreases160 to their RBC ratios in 148.0 2019, while Non-Public 133.0 Blues saw increases in both TAC and RBC ratios. 140 125.6 120

100

Capital Held TOTAL80 ADJUSTED CAPITAL BY CARRIER TYPE 2015 TO 2019 • Total capital held by health companies increasedSection 2 60 Public Non-Public Other Health All Health 200 Companies Blues Carriers Carriers 40 180.2

every year since 2015, from $125.6 billion to Total Adjusted Capital in ($ Billions) 180 20 164.7 $180.2 billion. 160 148.0 0 133.0 • Every carrier type increased capital each year 140 125.20156 2016 2017 2018 2019 since 2015. 120 100

• The Non-Public Blues collectively held more 80 1100% Blue under $2B capital than the publics in both 2018 and 2019. 60 1000% Public Non-Public Other Health All Health Companies Blues (10 companies)Carriers Carriers 40 900%

Public Non-Public Other Health All Health Total Adjusted Capital in ($ Billions) Blue $2–6B 800% Companies Blues Carriers Carriers 20 (12 companies)

0 RBC Ratio 700% Blue over $6B 2015 2016 2017 20600%18 2019 (10 companies) 500% 2015 2016 2017 2018 2019 RBC Ratios RBC RATIOS BY CARRIER TYPE 2015 TO 2019 1100% • RBC ratios for health carriers declined from 2015 to Blue under $2B 1000% (10 companies) 1000% 2016 overall, before rebounding in 2017 and 2018. 900% 1000 Blue $2–6B 800% 2019 saw additional overall increases, with increases 900% (12 companies)900

RBC Ratio 700% for Non-Public Blues and Other Health Carriers, and Blue over $6B 600% a slight decrease for Public Companies. 800% (10 companies)800 500% 2015 2016 2017 2018 2019 • Non-Public Blues consistently had the highest RBC 700% 700 ratios, reflecting their limited availability to raise RBC Ratio 600% 600 capital outside of business operations. 1000% 500% 1000 • Publicly traded and other health carriers had similar 500 900% RBC ratios for all five years. 400% 90400 2015Y 2016Y 800% 300% 800 Public Non-Public Other Health All Health 2015 2016 2017 2018 2019 Companies Blues Carriers Carriers 700% 700

RBC Ratio 600% 2019 Premium 2019 Adjusted Average1400% Lives 600 Carrier Type (in Billions) Capital (in Millions) 500% 2015 2016 2017 2018 2019 Major Medical (In Billions) Major Medical 500

Public Companies 413.3 76.1 59.2 400% 492% 485% 495% 489% 473% Public Companies 400 1200% 2015Y 2016Y Non-Public Blues UnitedHealthcare 198.8 79.6 31.2 300% 724% 721% 818% 883% 903% 2015 2016 2017 2018 2019 Anthem Other Health Carriers 139.6 24.5 21.5 479% 452% 464% 465% 481% Humana Centene All Health Carriers 751.7 180.2 111.91000 % 565% 554% 590% 603% 600% Aetna 1400% Cigna 1. NAIC Health and Life Blanks Only, Excludes NAIC P&C and CA DMHC Filers, Companies with Less than $500 Million in Accident and Health Direct Premiums from the 2018 Accident and Health Policy Experience Exhibit, and Companies who Derive Less than 60% of Total AHPEE Premium from Non-Comprehensive Medical Products. Non-Public Blues Copyright © 2020 Oliver Wyman 800% 7 Public CompaniesHealth Care Service Corporation RBC Ratio 1200% GuideWell (Florida Blue) UnitedHealthcare Independence Health Group Anthem Humana 600% Other Health Carriers Centene 1000% Kaiser Aetna

Total Cigna 400% Total Non-Public Blues 800% Health Care Service Corporation

RBC Ratio GuideWell (Florida Blue)

200% Independence Health Group 2015 2016 2017 2018 2019 600% Other Health Carriers Kaiser

Total 400% Total

200% 2015 2016 2017 2018 2019 02 2015 TO 2019 STATUTORY1 RISK BASED CAPITAL

RBC Ratios of Public Companies • Publicly traded companies’ RBC ratios were relatively flat over the 2015 to 2018 period, and saw a small decrease in 2019. • This is likely driven by corporate capital targets and the desire to either deploy excess capital or return it to shareholders.

2019 Premium 2019 Adjusted Avg. 2015–2019 Public Companies (in Billions) Capital Lives (in Millions) 2015 2016 2017 2018 2019 Section 2 Major Medical (in Billions) Major Medical 200 Molina 14.0 1.7 180.2 2.7 321% 312% 305% 441% 372% 180 164.7 Cigna 160 148.020.1 10.0 3.6 542% 544% 559% 554% 547% 133.0 Centene 140 125.6 55.3 7.3 9.9 365% 363% 361% 393% 377% Aetna 120 50.6 9.7 7.4 588% 569% 607% 557% 484% 100 Humana 58.7 8.1 6.3 427% 497% 543% 483% 434% 80

Anthem 60 67.6 12.9 10.2 502% 497%Public 509%Non-Public505% Other485% Health All Health Companies Blues Carriers Carriers UnitedHealthcare40 144.1 25.8 18.3 514% 474% 478% 476% 495% Total Adjusted Capital in ($ Billions) Total Public Companies20 410.4 75.6 58.3 492% 485% 495% 489% 473% 0 2015 2016 2017 2018 2019

RBC Ratios of Non-Public Blues NON-PUBLIC BLUES RBC RATIOS BY ANNUAL PREMIUM 2015 TO 2019 • RBC ratios for Non-Public Blue licensees 1100% tend to have in inverse relationship with Blue under $2B 1000% (10 companies) revenue; the lower the revenue, the 900% Blue $2–6B higher the RBC ratio. 800% (12 companies)

RBC Ratio 700% • This relationship was not as pronounced Blue over $6B 600% (10 companies) in 2019. 500% 2015 2016 2017 2018 2019

2019 Premium 2019 Adjusted Avg. 2015–2019 Non-Public Blues (in Billions) Capital Lives (in Millions) 2015 2016 2017 2018 2019 1000% Major Medical (in Billions) Major Medical 1000 Blue under $2B (10 companies) 15.1 6.8 2.8 879% 864% 911% 933% 910% 900% 900 Blue $2–6B (12 companies) 47.8 21.6 8.0 815% 796% 915% 921% 901% 800% Blue over $6B (10 companies) 135.9 51.2 20.4 668% 673% 767% 862%800903% Total Non-Public700% Blues 198.8 79.6 31.2 724% 721% 818% 883%700903%

RBC Ratio 600% 600 RBC Ratios 500%of Other Health Carriers 500 Other Health Carriers often are affiliated with health systems and prefer not to tie up capital in insurance companies. 400% 400 Overall capital levels have been fairly stable, similar to Publics. 2015Y 2016Y 300% 2015 2016 20192017 Premium 20182019 Adjusted2 019Avg. 2015–2019 Other Health Carriers (in Billions) Capital Lives (in Millions) 2015 2016 2017 2018 2019 Major Medical (in Billions) Major Medical Kaiser14 00Foundation% Health Plan, Inc. 19.8 2.4 3.0 610% 590% 442% 555% 520% CareSource Management Group Company 9.7 1.1 1.5 412% 328% 335% 280% 318%

University of Pittsburgh Medical Center 8.7 1.4 1.1 357% Public436% Companies464% 368% 391% 1200% Other over $500M Premium 101.4 19.7 15.9 478% 445% UnitedHealthcar477% 479%e 498% Anthem Total Other Health Carriers 139.6 24.5 21.5 534% 528% 545% 563% 550% Humana Centene 1000% 1. NAIC Health and Life Blanks Only, Excludes NAIC P&C and CA DMHC Filers, Companies with Less than $500 Million in Accident and Health Direct PremiumsAetna from the 2018 Accident and Health Policy Experience Exhibit, and Companies who Derive Less than 60% of Total AHPEE Premium from Non-Comprehensive MedicalCigna Products. Copyright © 2020 Oliver Wyman 8 Non-Public Blues 800% Health Care Service Corporation

RBC Ratio GuideWell (Florida Blue) Independence Health Group

600% Other Health Carriers Kaiser

Total 400% Total

200% 2015 2016 2017 2018 2019 Section 2 200 180.2 180 164.7 160 148.0 133.0 140 125.6 120

100

60 Public Non-Public Other Health All Health Companies Blues Carriers Carriers 40 Total Adjusted Capital in ($ Billions) 20

0 2015 2016 2017 2018 2019

1100% Blue under $2B 1000% (10 companies) 900% Blue $2–6B 800% (12 companies)

RBC Ratio 700% Blue over $6B 600% (10 companies) 500% 2015 2016 2017 2018 2019

02 2015 TO 2019 STATUTORY1 RISK BASED CAPITAL 1000% 1000 RBC Ratios of the Top Ten Companies by 2019 Premiums 900% 900 • The top ten companies by 2019 revenue represent 65% of 2019 major medical premiums, 62% of 2019 lives, 800% and 57% of 2019 adjusted capital of major medical carriers. 800 • Two of the700% Non-Public Blue companies in the top ten, GuideWell and Health Care Service Corporation (HCSC), 70have0 consistently had the highest RBC ratios of the top ten. RBC Ratio 600% 600 • The other Blue, Independence Health Group, consistently had among the lowest RBC ratios of the top ten. 500% 500 • The only Other (than Public or Blue) company, Kaiser, had the most volatility in their RBC ratio besides HCSC. 400% 400 • The six Publics all had little variability in their RBC ratios. 2015Y 2016Y 300% 2015 2016 2017 2018 2019 RBC RATIOS OF THE TOP TEN CARRIERS BASED ON 2019 PREMIUMS 2015 TO 2019

1400%

Public Companies 1200% UnitedHealthcare Anthem Humana Centene 1000% Aetna Cigna

Non-Public Blues 800% Health Care Service Corporation

RBC Ratio GuideWell (Florida Blue) Independence Health Group

600% Other Health Carriers Kaiser

Total 400% Total

200% 2015 2016 2017 2018 2019

2019 Premium 2019 Adjusted Avg. 2015–2019 Carrier Top Ten Carriers (in Billions) Capital Lives (in Millions) 2015 2016 2017 2018 2019 Type Major Medical (In Billions) Major Medical UnitedHealthcare Public 144.1 25.8 18.3 514% 474% 478% 476% 495% Anthem Public 67.6 12.9 10.2 502% 497% 509% 505% 485% Humana Public 58.7 8.1 6.3 427% 497% 543% 483% 434% Centene Public 55.3 7.3 9.9 365% 363% 361% 393% 377% Aetna Public 50.6 9.7 7.4 588% 569% 607% 557% 484% Health Care Service Corporation Blue 35.7 19.0 5.7 784% 822% 1,001% 1,264% 1,253% Cigna Public 20.1 10.0 3.6 542% 544% 559% 554% 547% Kaiser Other 19.8 2.4 3.0 610% 590% 442% 555% 520% GuideWell (Florida Blue) Blue 17.8 4.4 2.6 793% 884% 668% 679% 799% Independence Health Group Blue 17.7 2.3 2.5 413% 366% 412% 463% 473% Total Top Ten 487.4 102.0 69.4 534% 528% 545% 563% 550%

1. NAIC Health and Life Blanks Only, Excludes NAIC P&C and CA DMHC Filers, Companies with Less than $500 Million in Accident and Health Direct Premiums from the 2018 Accident and Health Policy Experience Exhibit, and Companies who Derive Less than 60% of Total AHPEE Premium from Non-Comprehensive Medical Products. Copyright © 2020 Oliver Wyman 9 03 PUBLIC COMPANIES FINANCIAL PERFORMANCE PUBLIC COMPANIES FINANCIAL PERFORMANCE Public Companies continue to perform well. We reviewed the profitability for the insured blocks of business and noted that margins remained strong, as loss ratios improved in Q2 2020 due to COVID-19. However operating expenses have been increasing in more recent quarters.

Net Income Trends – Insured Business1 • All companies in this study have reported record profit margins in second quarter of 2020 due to declining loss ratios. • The variability in profit margins from Q1 2019 to Q4 2019 for Anthem and Cigna and in 2019 Q4 for Aetna are primarily driven by loss ratio variances. UnitedHealthcare’s profit margins have been fairly consistent through 2019.

PgHEALTH 10 Performance CARE ESTIMATED NET INCOME (AS % OF PREMIUM) – INSURED BUSINESS Q1 2017–Q2 2020

14% 12.7% 12.5% 12% 10.9% 10.7% 10%

8% 7.8%

4% Net Income (as % of Premium)

0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020

UnitedHealthcareAnthemCAetna igna Average (unweighted)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 All Q Carrier 2 100% 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020 Average

UnitedHealthcare 4.5% 4.6% 4.9% 6.9% 5.1% 5.2% 5.6% 5.2% 5.7% 5.4% 5.9% 5.8% 5.2% 10.7% 5.8% 90% Anthem 4.5% 3.9% 3.4% 5.5% 5.9% 4.6% 4.2% 1.8% 6.4% 4.5% 4.5% 3.4% 5.2% 7.8% 4.7%

Aetna2 4.9% 7.5% 6.0% 2.5% 8.1% 7.4% 6.3% — 4.8% 4.5% 4.3% 1.7% 4.1% 12.5% 5.7% 80% 77.9% 72.2% Cigna2 7.4% 7.3% 7.1% 4.8% 9.7% 8.7% 8.9% — 9.7% 8.8% 8.0% 6.2% 10.4% 12.7% 8.4% 70.5% Loss Ratio 70% 70.3% Unweighted Average 5.3% 5.8% 5.4% 4.9% 7.2% 6.5% 6.3% 3.5% 6.7% 5.8% 5.7% 4.3% 6.2% 10.9% 6.0% 70.2%

60%

1. Based on 10Q and 10K segment reporting, and revenue and expense allocation estimates between insured and self-insured business. Results are indicative, but may not tie directly to other50% internal or external financial reports. 2. Due to a changeQ1 in 10-K andQ2 10-Q presentationQ3 inQ4 the wake Q1of changes Q2in their businessQ3 structureQ4 in Q4 2019,Q1 Aetna’sQ2 and Cigna’sQ3 Q1–Q3 2019Q4 data is Q1not comparableQ2 with prior quarters. The 20change17 in financial2017 reporting2017 presentation2017 was20 18caused by20 18CVS buying20 18Aetna in 20November18 20201819 and Cigna2019 buying20 Express19 Scripts2019 in December2020 2018,2020 and as such, we removed the Q4 2018 data points for those companies. UnitedHealthcareAnthemCAetna igna Average (unweighted) Copyright © 2020 Oliver Wyman 10

20%

15% 13.0% 12.4% 11.8% 10% 11.5% 8.7%

Operating Expense Ratio 5%

0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020

UnitedHealthcareAnthemCAetna igna Average (unweighted) Pg 10 Performance

14% 12.7% 12.5% 12% Pg 10 Performance 10.9% 10.7% 10%

14% 8% 12.7%7.8% 12.5% 12% 6% 10.9% 10.7% 10% 4% Net Income (as % of Premium)

8% PUBLIC COMPANIES FINANCIAL PERFORMANCE 7.8% 03 2%

6% Medical0% Loss Ratio1 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Reported4% loss2017 ratios2017 declined2017 to around2017 70%2018 for 20Cigna,18 Aetna,2018 and2018 UnitedHealthcare2019 2019 and2019 to 78%2019 for Anthem2020 2020in Q2 2020 Net Income (as % of Premium) due to COVID-19.UnitedHealthcar eAnthemCAetna igna Average (unweighted) 2% MEDICAL LOSS RATIO Q1 2017–Q2 2020 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 100% 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020

UnitedHealthcareAnthemCAetna igna Average (unweighted)

90%

80% 100% 77.9% 72.2% 70.5% Loss Ratio 70% 90% 70.3% 70.2%

60% 80% 77.9% 72.2% 70.5% Loss Ratio 50% 70% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 70.3% 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 202070.2%

UnitedHealthcareAnthemCAetna igna Average (unweighted) 60%

50% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020 2 1 EstimatedUnitedHealthcar OperatingeA ExpensenthemC RatioAetna igna Average (unweighted) • Operating expense ratios increased in Q2 2020 for all four companies driven by combination of reinstatement of the HIP Fee for 2020 and premium credits provided in response to the COVID-19 pandemic to members enrolled in certain Individual plans and fully insured employer customers. 20% • The increase for Anthem is also due to increased spend to support growth.

OPERATING15% EXPENSE RATIO Q1 2017–Q2 2020 13.0% 12.4% 20% 11.8% 10% 11.5% 8.7%

15%

Operating Expense Ratio 5% 13.0% 12.4% 11.8% 10% 11.5% 0% 8.7% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020

Operating Expense Ratio 5% UnitedHealthcareAnthemCAetna igna Average (unweighted)

0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020

UnitedHealthcareAnthemCAetna igna Average (unweighted)

1. Based on 10Q and 10K segment reporting, and revenue and expense allocation estimates between insured and self-insured business. Results are indicative, but may not tie directly to other internal or external financial reports. 2. Anthem Q2 and Q3 2019 estimated operating expense ratio impacted by the creation of the PBM IngenioRx in Q2 2019. Copyright © 2020 Oliver Wyman 11 04 COVID-19 CORNER COVID-19 IMPACT CARRIER INSIGHTS The United States experienced its first confirmed case of COVID-19 on January 20, 2020.1 Since that date, the virus has spread rapidly and driven dramatic changes to the healthcare landscape. The 2nd quarter earnings calls provide some insight into how health carriers are viewing the impact of COVID-19 on healthcare costs, utilization patterns, membership, and how they are assisting their customers during this difficult period.

DIRECT COSTS The costs associated with COVID-19 include those for testing and treatment associated with COVID-19 related diagnoses. • Anthem: To date have paid $500 million associated with COVID-19 related diagnoses2 • Centene: Through the end of June, have paid approximately $550 million associated with COVID claims3 • Humana: Projected Annual COVID testing and treatment costs of $600 million4 • Molina: Just over 4,100 hospitalizations with an average inpatient episode cost of $9,000 plus the cost of outpatient and other professional services5

UTILIZATION Generally, COVID-19 began to impact utilization run rates in the second half of March 2020. Utilization further declined in April before seeing a slight rebound in May and approached normal levels in June based on carrier estimates. • Anthem: Aggregate utilization was 40% below expectations in April, 20% lower in May, and recovered to 90% of baseline in June2 • Centene: Volume began to return in May and June was virtually a normal month – with the recent surge in the virus, there appears to be some decline in utilization in July3 • Cigna: Utilization was 30% to 35% lower in April, 20% to 25% lower in May, and closer to normal in June at approximately 0% to 5% lower6 • Humana: Decline in medical utilization of at least 30% during the last two weeks of March and through most of April. In late April and throughout May, utilization began to rebound. In June, it was approximately 10% below normal levels, excluding COVID utilization. In July, the non-COVID inpatient utilization remained flat to June, but COVID testing and treatment costs were a bit higher than June.4 • Molina: Significantly lower utilization in cost categories representing approximately two thirds of total spend with utilization levels increasing slowly as the quarter progressed5 • UnitedHealth Group: At the lowest point in April, inpatient care – inclusive of COVID-19 related care – was about three quarters of baseline whereas Outpatient and physician services fell to roughly 60% of normal levels. In June, inpatient care recovered to nearly 95%. Outpatient and physician services were tracking above 90%. These national trends have continued thus far in July, even as certain states are seeing short-term deferral of services where there are elevated levels of infection and hospitalization.7

MEMBERSHIP During the 2nd quarter, the COVID-19 pandemic drove the unemployment rate to a high of 14.7% in April. This rate decreased slightly throughout the rest of the quarter ending at 11.1%.8 The shift in enrollment from the Commercial to the Medicaid markets was lower than expected, however, those in the industry seem to believe there may be a larger shift once the increased unemployment benefits from the CARES Act expire. • Anthem: Attrition in Commercial business has been less than expected to date, however, attrition is likely to accelerate when federal assistance expires2 • Centene: In April, raised 2020 revenue guidance by $6 billion, including $4 billion in COVID-related membership growth – this has been reduced by $0.5 billion as new membership is now expected to peak in November instead of August – the midpoint of projected year-end unemployment rate is 10.3%3 • Molina: Medicaid membership increased sequentially by 152,000 members in the quarter, a 5% increase, due to the suspension of redeterminations – believe that unemployment related enrollment has not yet materially accessed managed Medicaid. Through the first three weeks of July the Medicaid membership continued to grow by about 30,000 members5

CUSTOMER ASSISTANCE Health insurers used a variety of methods to provide relief to customers including premium credits and the waiving of cost-sharing for COVID-related costs. Some carriers also chose to accelerate payments to their provider partners who have experienced cash flow issues. • Anthem: Provided one month premium credit, ranging from 10% to 15% to its individual and employer group customers, in addition to, a 50% credit for those in their dental plans2 • BCBS of Massachusetts: On August 5th, BCBS of MA announced $101 million in premium relief and anticipated rebates to customers and members. This brings their total commitment to $217 million (including $116 million that it has invested to support members, customers, clinical partners, and the community). Credits will be applied in September for fully insured employer groups and members including under-65 direct pay and Medex members – it will total 15% of their May premium. Before end of 2020, MA members will have a one month “premium holiday”9 • Cigna: Waiving all cost sharing for COVID-19 testing and treatment and for Medicare Advantage in individual and family plans, additionally waiving cost sharing for in-office and telehealth visits for primary care, specialty care and behavioral health6 • Humana: Constituent support will amount to around $2 billion by year-end4 • Molina: Refunds amounted to $75 million pre-tax and related to the states of Ohio, Illinois, California, South Carolina, Mississippi, and Washington5 • UnitedHealth Group: Waiving all consumer COVID-19 diagnostic and treatment costs, accelerating $2 billion in needed funding to care providers, providing over $1.5 billion in direct consumer and customer assistance, including premium forgiveness and suspension of member cost sharing, to help people manage their health conditions7

1. Severe Acute Respiratory Syndrome Coronavirus 2 from Patient with Coronavirus Disease, United States, https://wwwnc.cdc.gov/eid/article/26/6/20-0516_article 2. Anthem Q2 Earnings Release, Call Transcript 3. Centene Q2 Earnings Release, Call Transcript 4. Humana Q2 Earnings Release, Call Transcript 5. Molina Q2 Earnings Release, Call Transcript 6. Cigna Q2 Earnings Release, Call Transcript 7. UnitedHealth Group Q2 Earnings Release, Call Transcript 8. Labor Force Statistics from the Current Population Survey, https://data.bls.gov/timeseries/LNS14000000 9. BCBS of Massachusetts Press Release, Aug. 5th, 2020, http://newsroom.bluecrossma.com/2020-08-05-Blue-Cross-Blue-Shield-of-Massachusetts-to-Issue-More-Than-100-Million-in- Premium-Relief-to-Insured-Customers-and-Members Copyright © 2020 Oliver Wyman 13 HOW CAN WE SUPPORT YOU? WE UNDERSTAND THAT ACTUARIAL ADVICE IS VALUABLE ONLY IF THE MESSAGE IS TIMELY, CLEAR AND CLIENT FOCUSED. WE LOOK FORWARD TO EXPLORING HOW OUR ACTUARIES—SPECIALIZED EXPERTS WITH DEEP INDUSTRY KNOWLEDGE—CAN HELP YOU SUCCEED.

FOR MORE INFORMATION ABOUT THIS REPORT, PLEASE CONTACT:

Marc Lambright, FSA, MAAA Principal [email protected]

Peter Kaczmarek, FSA, MAAA Senior Consultant [email protected]

Zachary Smith, FSA, MAAA, CERA Senior Consultant [email protected] www.oliverwyman.com