President and Chairman's Letter

PRESIDENT & CHAIRMAN'S LETTER

of the National Capital Area is a strong company.
It has succeeded, in large measure, because it has been able to adapt to the changing needs of its customers. At the same time, it has continued to address the mission it was originally founded to serve in 1934. The theme of this annual report, "Tradition & Transition," underscores the company's ability to prepare for the future while honoring its past.

Throughout 1997, BCBSNCA continued the positive performance that has characterized our progress for the past four years. We are proud to report that, in virtually every facet of our business, we exceeded our corporate goals for the year.

Our membership goal in 1997 was to increase non-Federal Employee Program enrollment by 32,000 members. By year end, some 40,456 members had been added, an increase of 11.6 percent in one year. In fact, our net enrollment has increased during each of the preceding 10 quarters, reflecting the trust customers place in us and the value we offer.

Our enrollment success was fueled by our ability to keep customers satisfied - while holding down administrative expenses to keep premium rates competitive. In fact, our 1997 customer satisfaction scores increased, reflecting improved customer service.

Our consolidated statutory net gain from operations in 1997 was $29.9 million, compared to $33.9 million in 1996. Reserves at year end were $149.8 million, an increase of $16.9 million or 12.7 percent compared to $132.9 million one year earlier.

We are a resilient, goal-oriented company. In an era of declining customer loyalty, we have maintained unbroken relationships with customers and group accounts since the 1930s and 1940s. We are proud to feature several of our long-standing customers in this annual report, representing a wide range of business categories. We very much appreciate their participation, and their support.

Our successful efforts to affiliate with Blue Cross and Blue Shield of Maryland made the topic of "transition" even more appropriate for this year's annual report. Following regulatory approval in January, 1998, we completed the legal requirements

needed to establish a new not-for-profit holding company, CareFirst, Inc., under which our company and Blue Cross and Blue Shield of Maryland are affiliated.

This affiliation will benefit the communities served by both our Plans while making us more competitive in an increasingly challenging marketplace. Specific advantages include an expanded network of health providers, offering more choices and seamless care for customers; a wider range of product offerings; better customer service; and greater portability of Blue Cross and Blue Shield coverage between the two Plans' service areas.

We appreciate the support of our trustees in providing the strategic direction for our company. And we appreciate our associates for carrying out our important day-to-day work of providing health care services for the community. Our associates' volunteer efforts also help to improve the quality of life in our area. We all share in the pride of knowing that our efforts have restored our company to a position of leadership and respect with our customers, and among Blue Cross and Blue Shield organizations nationally.

There have never been better reasons to look forward to the future. The tradition will continue for our associates, for our customers, and for our community.

Andrew P. Czajkowski
Chairman, Board of Trustees

Larry C. Glasscock
President and Chief Executive Officer