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An independent licensee of the Blue Cross and Blue Shield Association. ® Registered marks of the Blue Cross and Blue Shield Association. ®´and SM Registered and service marks of Horizon Blue Cross Blue Shield of New Jersey. © 2012 Horizon Blue Cross Blue Shield of New Jersey. Three Penn Plaza East, Newark, New Jersey 07105 w w w . H o r i z o n B l u e . c o m

celebrating

Years

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Chairman,president & CEO

In the wake of health care reform, Horizon Blue Cross Blue Shield of New Jersey took bold,decisive actions to position the company to

continue to succeed and thrive post reform. We moved quickly to develop and begin implementing a multi-year strategy to meet therequirements of the Affordable Care Act and to transform key aspects of how we do business.

Regardless of the Supreme Court’sdecision on the individual mandateand other components of theAffordable Care Act, we believe themarketplace is shifting toward a consumer/retail market. That movement will be driven, in part, bythe requirement in the reform law toestablish health insurance exchangesthat are expected to be operationalin late 2013. We expect that a significant number of individuals andsmall groups will go to onlineexchanges to compare and purchasethe health insurance plans that bestfit their needs, creating a majorchange for employers, insurers and consumers in theway that health insurance is purchased.

There are other factors, in addition to health carereform, that are driving the shift to a consumer/retailhealth care marketplace including: growing individual financial responsibility for health insuranceand health care costs as employers and plan sponsorspass more costs on to their employees; increasingavailability of quality and cost information to supportconsumer decision making; and growing consumeruse of web, mobile and social media applications thatempower consumer decision making. In addition, the growth of market segments that operate in a consumer/retail manner, including Medicaid, seniormarkets and the individual market, are part of thisindustry trend. As we plan for these changes, we recognize that many of our current customers willcontinue to receive their health insurance as they

have traditionally – as a benefit of their employment –and Horizon BCBSNJ is as committed to continuing to provide them with access to affordable, qualitycare and service excellence as we are to serving ourretail customers.

While health care reform has helped to address access to care, the law does little to slow the growth

of health care costs or improve the quality of patient care. On average,businesses saw their health insurancepremiums rise by 9 percent in 2011.The average family of four paid more than $19,000 a year for its health insurance. In a weak economy, where many consumers face significant challenges in meeting basic needs, rising health care costs only exacerbate an already difficult situation.

In 2011, Horizon BCBSNJ focused onaddressing both cost and quality.Through our Horizon HealthcareInnovations team, we have been collaborating extensively with

physicians and other health care professionals on expanding and enhancing new models of care thatwill help to improve the care our members receive,while at the same time, slow the rise in cost. The models of care already in place across New Jersey include our Patient-Centered MedicalHome (PCMH), Accountable Care Organization (ACO) and Episodes of Care. The care philosophyunderlying each of these models is that by improvingthe coordination of our members’ health care needs, it is possible to provide them with better overall careand to lower health care costs. For example, by improving the quality of care patients receive, we can reduce costly interventions, such as hospital readmissions and Emergency Room visits, and thathelps to keep health care affordable for everyone.

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A LETTER FROM OUR

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The ongoing implementation of the Affordable CareAct continues to have a significant impact on thehealth insurance industry and the members we serve.After meeting 38 short-term requirements during asix-month period in 2010, Horizon BCBSNJ movedquickly in 2011 to begin addressing longer-termrequirements, such as the creation of online healthcare insurance exchanges and a range of consumertransparency mandates.

How individuals purchase their health insurance will change considerably with the development ofpublic insurance exchanges. The health care reformlaw requires the creation of exchanges where individuals and small groups can go online to compare available plans and purchase insurance.Insurers are working closely with both their stategovernments as well as the U.S. Department ofHealth and Human Services to get clarification on themany technical requirements necessary to participateon exchanges. The complexities of developing andimplementing the exchanges, which are expected tostart enrolling members in October 2013, are alreadybeing addressed by an enterprise-wide team atHorizon BCBSNJ.

In 2011, HorizonBCBSNJ focused onbuilding capabilitiesfor the retail/consumer market.In preparation forparticipation in theonline health care exchangesavailable to individuals andsmall groups, wecontinue to developa uniquely deep

understanding of our members, driven by our closeand longstanding ties to our community. We arefocused on learning about the preferences and needsof various segments of our membership, and the New Jersey population in general, to help us designand deliver products and services that better meetthe needs of our customers. How we support andserve each of our members is yet another way that

Horizon BCBSNJ will deliver a differentiated consumer experience and be positioned to succeed ina post-reform marketplace.

A stronger direct-to-consumer focus is the catalystfor several new initiatives underway at Horizon BCBSNJ that reflect our dedication to MakingHealthcare Work.

Blue to you

Being an integral part of the New Jersey communities where we live and work is an importantpart of how we connect with the members we serve.We are always exploring new ways to do just that.Horizon BCBSNJ Medicare Advantage members inOcean County, New Jersey, have quickly becomefamiliar with the company’s distinctive Blue to youvan. Last fall, the Blue to you van began travelingthroughout Ocean County as part of several new andinnovative approaches to bring Horizon BCBSNJservices closer to our members.

The new, wheelchair-accessible van is staffed byknowledgeable representatives and equipped withstate-of-the-art technology to provide access to web-based services for insurance information, conduct basic medical screenings and arrange medical appointments. In addition to the van, ourBlue to you initiative includes dedicated health planners who can assist our Medicare Advantagemembers with health-related questions, help arrangefor referrals to community services they may needand ensure that they are well informed about theircoverage and benefits. We are meeting with community leaders and our members directly, listening to their questions and working with them to build healthier communities.

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Finding new ways to connect with our members wasa major goal in 2011. We were proud to introduce anew member portal that enabled Horizon BCBSNJmembers to easily access their health informationand play a more active role in their own health andwell being. We introduced Blue to you, a local community-focused initiative that includes a state-of-the-art van and dedicated health plannersjust for our Medicare Advantage members. The Blue to you mobile unit has been a visible part of the Ocean County community for several months,providing seniors with a direct, personal connectionto Horizon BCBSNJ right in their own neighborhood.We expanded our mobile site earlier this year to give members on the go access to their health information wherever they are. Later this year, wewill open the doors to our first Horizon BCBSNJ retail store. The store will give our customers a newway to interact with us and will allow us to showthem all the ways Horizon BCBSNJ is MakingHealthcare Work for them.

At Horizon BCBSNJ, we believe consumers will continue to play a greater and more active role inmaking decisions about the health care they needand want. More than ever, consumers will be instrumental in improving their personal health andwell being. Aspects of the health care reform lawthat focus on wellness incentives will reinforce andreward members for taking positive action. OurJourney to Health program has been successful inhelping our members manage chronic conditions,identify and address health risks and take preventivemeasures to keep themselves healthy. Horizon BCBSNJ employees are leading by example. LastMay, our employees renewed their commitment tobecoming healthier. Since that time, Horizon BCBSNJ employees have collectively walked more

than 3 billion steps, the equivalent of going to themoon nearly seven times. In our first company-widehealth challenge, we asked employees to Step It Upand increase the number of steps they took each day.The results are indicative of the kind of employeeswe have here at Horizon BCBSNJ. Many employeesconsistently exceeded the daily limit of 30,000 steps(approximately 15 miles). Collectively, we becamestronger, healthier and more confident of what wecould achieve. Step It Up has since become ourmantra. Employees in every facet of our business areworking to develop and implement ways to be moreeffective and efficient – and the result will be an evenbetter company for our customers and our healthcare partners.

Being a part of the communities where we live andwork has always been one of Horizon BCBSNJ’sgreatest strengths. We understand the challengesNew Jerseyans face, yet never lose sight of all thatmakes our state one we are so proud to call home.This pride and commitment is the driving forcebehind the 5,200 employees who strive to serve our3.6 million members to the best of their abilities eachand every day. Horizon BCBSNJ is celebrating 80 years of providing access to quality, affordablehealth care. Most importantly, for eight decades,families and businesses have had the peace of mindof knowing we are here for them when they need us.That’s Making Healthcare Work.

Robert A. MarinoMay 2012

Customer­Experience

The health care reform law requiresthe creation of exchanges whereindividuals and small groups can goonline to compare available plansand purchase insurance.

DELIVERING A DIFFERENTIATED

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Blue to you is one important way Horizon BCBSNJ is providing our members with a better, more personalizedexperience. During the implementation of health care reform, we are even more committed to ensuring our members understand the changes, and are informed and empowered to make the right health care choices fortheir personal well being. The community has responded with a warm welcome and the Blue to you team andvan are regularly requested for community events.

The Horizon BCBSNJ Retail Store

In 2011, Horizon BCBSNJ laid the foundation for a new retail store. The store will be located near ourSouth Jersey headquarters and is designed to deliver an exciting new customer experience. Horizon BCBSNJmembers and prospective customers will be able tocome to the store to:

• Purchase health care insurance; • Ask questions; • Learn more about their benefits and the latest

trends in health; and• Attend clinical and educational events.

The store will offer a comfortable environment forcustomers to browse through a variety of information and learn more about health carethrough the latest technologies, including touch-screen health kiosks, “smart” boards andmuch more.

The Horizon BCBSNJ retail store is scheduled toopen later this year and is expected to become avaluable part of the community.

The Blue to you program and the Horizon BCBSNJ retail store are two examples of how thecompany is exploring innovative new ways to connect with and better serve our members andthe communities where we live and work.

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The new, wheelchair-accessible van is staffed by

knowledgeable representatives and equipped with

state-of-the-art technology to provide access to

web-based services for insurance information,

conduct basic medical screenings and arrange

medical appointments.

Blue to you is one important wayHorizon BCBSNJ is providing our members with a better, more personalized experience.

Artist’s rendering, Horizon BCBSNJ retail store.

6

Many of the short-term requirements of theAffordable Care Act were focused on increasing access to care. The law provided for coverage of dependents up to age 26, coverage of preventiveservices without member cost-sharing, the elimination of pre-existing condition exclusions forchildren up to age 19, the elimination of lifetime limits on “essential benefits” and coverage for high-risk individuals with pre-existing conditions who lacked health insurance. However, the equally

pressing issues of health care cost and quality have not been fully addressed by the law and continue to be formidable challenges for our stateand the nation.

Health care costs continue to rise. In 2011, employers paid an average of 9 percent more fortheir employees’ health care than they did in 2010.This was the largest increase employers experiencedin the past five years. Aspects of the health carereform law, including coverage of dependents up toage 26, the elimination of lifetime limits and restrictions on annual limits, account for 1 to 2 percent of the increase. Other drivers of theincrease include higher medical claims and an aging workforce. National health expenditures are currently estimated at 17.6 percent of the grossdomestic product (GDP). At the current rate ofgrowth, health care costs are expected to double bythe year 2019 to $4.5 trillion and account for nearly20 percent of GDP. As the country works to slow thegrowth in health care costs, it is important to consider that health care spending is highly concentrated, with 10 percent of the populationaccounting for 63 percent of health care spending.One percent of the population accounts for 21 percent of the total health care spending.

At Horizon BCBSNJ, we are working hard to collaborate with physicians, hospitals and the healthcare community to develop models of care thatimprove quality and slow the growth of costs. As thelargest health insurer in the state, we are in a strongposition to share our data and expertise with members, physicians, hospitals and other health careprofessionals to address gaps in care, improve care coordination and, ultimately, achieve better quality care.

In 2011, HorizonHealthcareInnovations focusedon integrating models of patientcare and provider reimbursement to shift the focusfrom the quantity of health care services to quality ofcare and outcomes for patients. We believe thatthese new models will provide our members withaccess to a more coordinated approach to care thatwill not only result in better outcomes, but also helpto stem the rising costs of health care.

Last year, Horizon Healthcare Innovations focused onthree models of care:

• Patient-Centered Medical Home (PCMH).• Accountable Care Organization (ACO).• Episodes of Care.

Patient-Centered Medical Home (PCMH)

The goal of a PCMH is to help improve the overallhealth of members by better coordinating the carethey receive. When members participate in a PCMH,they receive coordinated and integrated care acrossall aspects of their health. A PCMH is designed toimprove the quality of health care a patient receives,

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Delivery

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Physicians who work with Horizon BCBSNJ

to transform their practices into a PCMH are

required to meet patient satisfaction metrics

and quality metrics that encompass both

clinical processes and clinical outcomes.

At Horizon BCBSNJ, we are working hard to collaborate with physicians, hospitals and the

health care community to develop models of carethat improve quality and slow the growth of costs.

TRANSFORMING HEALTH CARE

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achieve better outcomes for the patient, help reduce unnecessary services and manage overallhealth care costs.

Physicians who work with Horizon BCBSNJ to transform their practices into a PCMH are required to meet patient satisfaction metrics and quality metrics that encompass both clinical processes andclinical outcomes. To help in the difficult process of transforming into a PCMH, Horizon BCBSNJ providesits PCMHs with care coordinators who provide outreach, education and coordination to patients to ensure they get the care and attention they need.More than 80,000 Horizon BCBSNJ members accesstheir care through a PCMH, and we are collaboratingwith physician offices across the state to expand the number of PCMHs.

Last November, Horizon Healthcare Innovations and Horizon NJ Health, the Medicaid subsidiary ofHorizon BCBSNJ, joined forces with a Newark-basedmedical practice – Forest Hill Family HealthAssociates – to form a PCMH for Medicaid beneficiaries. This PCMH serves 2,500 patients inNewark, including 1,800 Horizon NJ Health members,who will experience more preventive, proactive, culturally-competent and coordinated care to helpthem get and stay healthy.

The Medicaid population often faces complex andchronic health conditions that can result in higherEmergency Room use and hospital admissions.According to the federal Agency for HealthcareResearch and Quality (AHRQ), hospital admissions ofpatients covered by Medicaid jumped by 30 percentbetween 1997 and 2008, compared to a 5 percentgrowth among patients who have private healthinsurance over the same period of time. We believe

that PCMHs will address this much higher rate of hospitalization for Medicaid patients throughimproved coordination, strengthened preventive care and better health maintenance for people who have chronic conditions.

Accountable Care Organization (ACO)

An ACO is a new approach to health care that createsjoint accountability among providers for achievingmeasured quality results and eliminating unnecessarymedical costs. An ACO encourages a more holisticapproach to patient care and health management to achieve improved quality while avoiding unnecessary costs.

An ACO is a locally organized group of health careprofessionals, including Primary Care Physicians andspecialists, and may also include inpatient and outpatient facilities, that are held jointly accountablefor delivering coordinated, cost-effective, qualitycare to a defined population of patients. PCMHs arean essential foundation for the creation of an ACO.While a PCMH is based on improving health carequality and managing costs at one practice, an ACOworks with multiple practices and also incorporateshospitals and other care settings. ACOs share thesame principles of PCMHs – to improve the quality ofhealth care patients receive and contain overallhealth care costs by improving coordination andaligning incentives among patients, providers andpayors. Horizon BCBSNJ launched an ACO pilot inlate 2010, and is working to expand the number ofACOs concurrent with our expansion of PCMHsthroughout the state.

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Episodes of Care

Episodes of Care models focus on improving quality and reducing the cost of common, complex procedures byalso aligning incentives among patients, providers and payors to reward quality and efficiency. The Episodes ofCare model reimburses a provider for all the components of a patient’s care related to a specific procedure oran acute episode within a defined period. In February 2011, Horizon Healthcare Innovations launched anEpisodes of Care pilot with five orthopedic practices, representing 25 orthopedic surgeons. The participatingprovider is responsible for organizing all the care needed for a joint replacement, including pre-operative

evaluation and testing, surgery and rehabilitation, and receives a fixed payment for theservices provided.

The program’s emphasis on collaboration has helped create an ongoing dialogue notonly between Horizon Healthcare Innovations and the participating practices, but alsoamong the practices themselves, with physicians sharing experiences for the ultimatebenefit of the patient.

Data from the pilot will be reviewed by a clinical advisory committee comprised ofphysicians in the pilot and Horizon Healthcare Innovations, and will be used to designinnovative reimbursement models to support this model of care delivery.

Understanding the health care system can be a challenge. That is why providing our 3.6 millionmembers with the service and support they need liesat the heart of our mission to make health care workby improving the health care experience for ourmembers and the communities we serve.

In 2011, Horizon BCBSNJ focused on the end-to-endconsumer experience to identify what was workingwell and what we could improve. It is an ongoingprocess that reflects our unwavering commitment totaking care of the customer. We are here to answermembers’ questions or help them find the physicianthey need, but we also serve as a trusted resource in helping them navigate the changes brought about by health care reform and other shifts in the marketplace.

Our efforts are starting to pay off. In 2011, HorizonBCBSNJ was proud to be rated #1 by the FederalEmployee Program (FEP) among all Blue Crossand/or Blue Shield Plans nationwide. Our FEP program ranked first when compared to other FEPprograms in the nation, attaining the highest scoresin each of these areas:

• Service profile (comprised of member satisfaction and operational measures).

• Strategic profile (comprised of benefit cost,administrative cost and strategic growth).

• Overall score.

We were honored to be recognized earlier this yearas one of The Best Insurance Companies in 2012for overall customer satisfaction according to<Insure.com>. Insure.com, an industry website thatoffers a broad array of consumer-focused insuranceinformation and services, surveyed more than 4,500 customers from the largest insurance companies in the nation by market share for overallcustomer service ratings and reviews. Insure.comanalyzed the following five measures of customersatisfaction for a large insurance company:

• Customer service. • Claims experience. • Value for the price paid. • Percent who plan to renew their policies. • Percent who would recommend their insurers.

Horizon BCBSNJ finished second in a field of 20 peer insurers, scoring just a fraction below the first-place health plan. Along with being ranked as atop health insurer, Horizon BCBSNJ also receivedInsure.com’s People’s Choice Award for Best HealthInsurance Companies.

Experienceimproving the HEALTH CARE

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Technology continues to play a key role in the evolution of the health care landscape. The healthinsurance exchanges are redefining how and whereconsumers will purchase their health insurance.Today’s consumers literally have social media, online resources and “smart” electronic devices attheir fingertips.

In 2011, Horizon BCBSNJ made technology enhancements that continue to make it easier for our customers to access their health information, do business with us and manage their health. Some of our key accomplishments include:

Horizon Blue Mobile – Members can access information about Horizon BCBSNJ anytime, anywhere from a web-enabled mobile device. This includes finding a participating physician withthe Online Provider Directory, looking up health termsfrom the glossary, researching health and wellness questions, and finding health plan options.

Redesigned Member Online Services (MOS) –The new and improved MOS is now available to all of our members. Members can register to accessimportant information about their Horizon BCBSNJhealth coverage and:

• Check claim status; • Review Explanation of Benefits (EOBs) and

sign up for paperless EOBs; • View benefit and eligibility information; • Pay premium bills; • Access pharmacy services; • Request a new ID card; and • Choose a new Primary Care Physician

or dentist.

Redesigned Website for Horizon NJ Health, ourMedicaid Subsidiary – Horizon NJ Health’s websitewas redesigned with a focus on easier navigation,helping members and prospective members answerquestions like, Is my doctor in the network? and Are my prescription drugs covered? The website,which is also available in Spanish:

• Focuses on influencing community partners, advocates and caregivers;

• Features employee testimonial videos; and• Ensures health literacy to help members

better understand their benefits.

“Quexting” – Many people find texting an easy wayto interact and obtain information. With those usersin mind, Horizon BCBSNJ implemented a pilot program that allows them to text their request for ahealth insurance quote and get a response text backwith the information they need.

Some of the technology enhancements we haveplanned for 2012 include:

Redesigned Online Provider Directory –Our redesigned Online Provider Directory will be easier to navigate and offer more functionality,including the ability for the user to suggest a providerto us and provide feedback on the site.

Mobile Member Online Services – Members willhave access to much of their Horizon BCBSNJ benefitinformation from their web-enabled mobile devices.Mobile Member Online Services users will be able toreview benefits and eligibility, view referrals andauthorizations, check the status of a claim, request anew ID card and change their Primary Care Physicianor dentist.

Virtual ID Cards – Members will have the ability to e-mail or print an ID card directly from MemberOnline Services.

ConnectionsNEW

In 2011, Horizon BCBSNJ made technology

enhancements that continue to make it

easier for our customers to access their

health information, do business with us and

manage their health.

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Accomplishments�

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AWARDS &

Michelle Machemer Director,

Systems Development

Joanne RyanDirector, Actuarial

Kalyan NarayananIT Director,

Head of eBusiness

Elizabeth RubinDirector, Informatics Operations,Horizon Healthcare Innovations

Voted one of the nation’s 100 Best Companies byWorking Mother Magazine. Horizon BCBSNJ employeenamed to Top 100 Working Mothers list.

Named to InformationWeek 500 list – for more than six consecutive years.

Named by AARP as one of the nation’s Best Employers for Workers over 50.

Special Investigations Unit at Horizon BCBSNJachieved $27 million in fraud recoveries.

Ranked 1st of all Federal EmployeeProgram (FEP) programs in the nation.

Earned eHealthcare LeadershipAwards for Best WebsiteDesign, Best Interactive Siteand Best Doctor Directory.

ReceivedInsure.com Awardfor one of the bestplans in the nation,including People’s Choice Award.

Horizon NJ Health rated asNew Jersey’s Top MedicaidManaged Care Plan.

Blue to you van tookHorizon BCBSNJ directly toOcean County, NJ, seniors.

Our new Medicaid website received positive reviews from the Centers for Medicare &Medicaid Services (CMS).

Launched newHorizon Blue Mobilewebsite, providingportable access to customers.

Received A- rating fromStandard & Poor’s.

Ranked 3rd in the nation as Best Places for Diverse Managers by Diversity MBA Magazine. Recognized as a Top 10 Best in Class forRepresentation as well as for Retention &Inclusion. Ranked among the top 10 companiesin the area of Succession Planning for the firsttime by Diversity MBA Magazine. Three HorizonBCBSNJ employees named to Diversity MBA Top100 Under 50 Executive and Emerging Leaders.

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F I N A N C I A L S

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Management’s Discussion and Analysis of Financial Condition

Horizon Healthcare Services, Inc. (d/b/a Horizon Blue Cross Blue Shield of New Jersey) and its majority-owned subsidiaries makeup the largest health insurance company in New Jersey. We have the exclusive right to market products and services using the Blue Cross and Blue Shield names and marks in New Jersey under license agreements with the Blue Cross and Blue ShieldAssociation, an association of independent Blue Cross and Blue Shield Plans. We serve over 3.6 million members who areoffered Horizon Blue Cross Blue Shield of New Jersey branded products.

We offer a comprehensive spectrum of indemnity, managed care, pharmacy and dental products provided through multiplenetwork systems. We underwrite policies and provide services for multi-state employer groups, large and small businesses,individuals, Medicare and Medicaid beneficiaries, and state and federal employees. Our diverse portfolio of benefit designsallows members and group administrators to select from a variety of management and premium structures. Within ourportfolio of benefits, groups may choose various funding options, ranging from fully insured to partially or fully self-fundedfinancial arrangements. While self-funded customers utilize our networks, they bear all or portions of the claims risk.

Medical Membership — December 31, 2011 Compared to December 31, 2010

Membership counts include both subscribers and their covered dependents. For membership reporting purposes, we havedisplayed our enrollment by customer type and funding method.

Our membership as of December 31, 2011 compared to December 31, 2010 was as follows (in thousands):

2 0 1 1 A n n u a l R e p o r t Overall enrollment increased 65,000 members in 2011. The insured member increase of 9,000 members wasconcentrated in Medicaid as a result of the MedicaidManaged Care Expansion program and was offset by thedecline in Large group membership. The self-fundedenrollment increase of 56,000 members was driven by theState Health Benefits Program (“SHBP”).

Results of Operations for the Year Ended December 31, 2011 (“2011”) as C ompared to the Year EndedDecember 31, 2010 (“2010”)

Insured premiums increased $312.8 million, or 3.9%, to $8.24 billion in 2011 from $7.93 billion in 2010. The primarydriver of the insured revenue growth was increasedreimbursements for Medicaid and Medicare due toenrollment growth, which was partially offset by declines in commercial insured premiums resulting from lower enrollment.

Administrative service fee income increased $36.8 million, or 11.7%, to $352.7 million for 2011 from $315.9 million for2010 primarily due to the increase in enrollment in our self-insured business.

Other revenues were $29.8 million for 2011 compared to $34.6 million for 2010, a decrease of $4.8 million, or 13.9%. The decrease is primarily attributable to lower revenues fromour automobile personal injury protection and workers’compensation operations.

Investment income was $127.0 million for 2011 compared to $124.7 million for 2010, an increase of $2.3 million, or 1.8%.While the average balance in our cash and investmentsincreased to $3.37 billion in 2011 from $3.16 billion in 2010,interest was held down due to lower interest rates.

We recognized $55.5 million of net realized gains during 2011as a result of the rebalancing of our portfolios and tradingactivity on our available-for-sale portfolio, which werepartially offset by $10.3 million of losses that were deemedother-than-temporary. During 2010, we recognized $37.7 million of net realized gains primarily as a result oftrading activity on our available-for-sale portfolios, which was partially offset by $0.1 million of losses that weredeemed other-than-temporary.

Medical and other benefit costs were $6.95 billion in 2011compared to $6.83 billion in 2010, an increase of $124.7 million, or 1.8%. Excluding the impact of the favorableincurred by not reported development, medical and otherbenefit costs increased by 3.2%, which is in line with thegrowth noted in insured premiums. The medical cost ratiowas 84.3% and 86.1% in 2011 and 2010, respectively.

SG&A expenses were $1.51 billion for 2011 compared to $1.35 billion for 2010, an increase of $158.2 million, or 11.7%.The increase in 2011 is primarily due to increased spending on technological investments as we prepare for theexchanges in 2014, higher expenses related to claims andother outsourcing arrangements, and settlement costs. Our administrative cost ratio increased 120 basis points to17.5% for 2011 from 16.3% for 2010.

Income tax expense was $60.7 million for 2011 compared to$53.9 million for 2010, an increase of $6.8 million, drivenprimarily by greater pre-tax income, offset by a lowereffective tax rate. The effective tax rate decreased to 17.3%in 2011 from 20.1% in 2010 primarily due to the benefit fromthe utilization of prior year capital loss carryforwards, thefavorable settlement of a federal tax audit and benefitsrealized due to various state tax planning.

Net income for 2011 grew to $289.5 million from $214.2 million in 2010.

Capital reserves grew $242.0 million to $2.21 billion as ofDecember 31, 2011 due primarily to net income for the yearpartially offset by a decrease in other comprehensive incomerelated to unrealized losses on our investments, and pensionand post retirement costs.

Years ended Increase/ Percent 2011 2010 (Decrease) Change

Customer type:

Large group 1,574 1,630 (56) (3.4%)

State Health Benefits Program 712 670 42 6.3%

Federal Employee Program 124 121 3 2.5%

Small group 415 418 (3) (0.7%)

Individual 195 189 6 3.2%

Medicaid 540 474 66 13.9%

Medicare Advantage 58 51 7 13.7%

Total members 3,618 3,553 65 1.8%

Funding method:

Fully insured 1,772 1,763 9 0.5%

Self-funded 1,846 1,790 56 3.1%

Total members 3,618 3,553 65 1.8%

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Horizon Healthcare Services, Inc. and SubsidiariesConsolidated Balance Sheets

as of December 31, 2011 and 2010(in thousands)

Assets 2011 2010

Current assets:

Cash and cash equivalents $ 246,337 $ 350,577

Investments available-for-sale, at fair value 1,864,195 1,602,249

Investments held-to-maturity, at amortized cost 125,081 128,021

Premiums and other receivables, net 721,686 655,811

Deferred income taxes 29,371 34,914

Prepaid expenses and other current assets 80,224 63,600

Total current assets 3,066,894 2,835,172

Investments held-to-maturity, at amortized cost 812,718 937,276

Restricted investments, at amortized cost 369,864 356,285

Property and equipment, net 279,783 251,026

Other assets 123,416 94,706

Total assets $ 4,652,675 $ 4,474,465

Liabilities and Capital Reserves

Current liabilities:

Medical and other benefits payable $ 842,946 $ 963,091

Unearned premiums 166,787 175,123

Accounts payable and accrued expenses 466,977 471,876

Managed cash overdrafts 346,655 297,181

Income taxes payable – 4,903

Other current liabilities 315,114 302,182

Total current liabilities 2,138,479 2,214,356

Obligations for employee benefits 161,522 146,854

Mortgages payable and capital lease obligations, less current portion 132,507 136,617

Other liabilities 10,211 8,718

Total liabilities 2,442,719 2,506,545

Commitments and contingencies

Capital reserves:

Retained earnings 2,183,071 1,892,748

Accumulated other comprehensive income 26,885 75,172

Total capital reserves 2,209,956 1,967,920

Total liabilities and capital reserves $ 4,652,675 $ 4,474,465

Horizon Healthcare Services, Inc. and SubsidiariesConsolidated Statements of Operations

for the Years Ended December 31, 2011 and 2010(in thousands)

2011 2010

Revenues:

Insured premiums $ 8,244,535 $ 7,931,695

Administrative service fee income 352,745 315,853

Other revenues 29,806 34,598

Total operating revenues 8,627,086 8,282,146

Investment income 126,965 124,744

Net realized gains 55,492 37,710

Total revenues 8,809,543 8,444,600

Expenses:

Medical and other benefit costs 6,950,888 6,826,191

Selling, general and administrative expenses 1,508,458 1,350,297

Total expenses 8,459,346 8,176,488

Income before income tax expense 350,197 268,112

Income tax expense (60,668) (53,873)

Net income $ 289,529 $ 214,239

2 0 1 1 A N N U A L R E P O R T 2120 www.HorizonBlue.com www.HorizonBlue.com2 0 1 1 A N N U A L R E P O R T

Directors OfficersBOARD OF HORIZON BCBSNJ

Standing, left to right:

Lawrence R. CodeyPresident & COO (Retired)Public Service Electric & Gas Company

John C. KellySenior Vice President, Finance (Retired)Pfizer, Inc.

Russell L. Hewit, Esq.PartnerDughi, Hewit & Domalewski, P.C.

Alfred C. Koeppe, Esq.President & CEONewark Alliance

Robert A. MarinoPresident & CEO (Chairman as of March 8, 2012)Horizon Blue Cross Blue Shield of New Jersey

Emmanuel A. KampourisChairman of the Board(Chairman until March 8, 2012)Horizon Blue Cross Blue Shield of New JerseyChairman, President & CEO (Retired)American Standard Companies, Inc.

Daniel J. McCarthy, Esq.PartnerRogut McCarthy, LLC

Peter G. Stewart, Esq.Partner (Retired)Carella, Byrne, Cecchi, Olstein,Brody & Agnello, P.C.

Vincent J. GiblinPresident (Retired)International Union of Operating Engineers

Aristides W. GeorgantasExecutive Vice President (Retired)Chase Manhattan Corporation

Seated, left to right:

Leo J. Rogers, Jr.Director, George Rothman Institute of Entrepreneurial Studies (Retired)Fairleigh Dickinson University

Barbara Bell ColemanPresidentBBC Associates LLC

Leonard G. Feld, MD, PhD, MMMChairman, Pediatrics, Carolinas Medical CenterChief Medical Officer, Levine Children’sHospital

Michael M. QuickExecutive Vice PresidentSusquehanna Bank

RETIRED FROM BOARD:

Emmanuel A. KampourisLeo J. Rogers, Jr.

Thank you for your dedicationand service on the Horizon BCBSNJ Board of Directors.

Robert A. Marino President & CEO

(Chairman as of March 8, 2012)

Mark L. BarnardSenior Vice President,

Service

Christy W. BellExecutive Vice President,Healthcare Management

Douglas E. BlackwellSenior Vice President &

Chief Information Officer

Margaret M. CoonsSenior Vice President,

Human Resources

David R. HuberSenior Vice President –

Administration, Chief FinancialOfficer & Treasurer

Christopher M. LepreSenior Vice President,Market Business Units

Linda A. Willett, Esq.Senior Vice President,

General Counsel & Secretary

James F. AlbanoVice President,

Healthcare Services

Joseph J. AlbanoVice President,

Consumer & Senior Markets

Lawrence B. AltmanVice President,

Office of Health Care Reform

Carol A. BanksVice President,

State Health Benefits Program

Philip M. Bonaparte, MDVice President &

Chief Medical Officer, Horizon NJ Health

Charles A. BowlesVice President,Commercial &

Major Accounts Markets

Colleen D. Brennan, Esq.Vice President &

Chief Compliance Officer

Donna M. CelestiniVice President,

Business Process Improvement

Karen L. ClarkVice President,

Medicaid

William D. GeorgesVice President,

Marketing & Product Development

Margaret M. JohnsonVice President &

Chief Pharmacy Officer

Gary H. LinVice President &

Chief Actuary

Glenn D. Pomerantz, MDVice President &

Chief Medical Officer

Experience

H E A LT H C A R E

C A R E

T R A N S F O R M A T I O N

C U S T O M E RE X P E R I E N C E

D I F F E R E N T I A T E D

I M P R O V E DH E A L T H