BlueCard membership consists of estimated host members using the national BlueCard program. Host members are generally members who reside in or travel to a state in which a WellPoint subsidiary is the Blue Cross and/or Blue Shield licensee and who are covered under an employer sponsored health plan issued by a non-WellPoint controlled Blue Cross Blue Shield licensee (i.e., the “home” plan). We perform certain administrative functions for BlueCard members, for which we receive administrative fees from the BlueCard members’ home plans. Other administrative functions, including maintenance of enrollment information and customer service, are performed by the home plan. Host members are computed using, among other things, the average number of BlueCard claims received per member per month.
The following discussion summarizes our aggregate cost of care trends for the full year 2004 for our Large Group and ISG fully-insured businesses only. Cost of care information as discussed below is presented as if pre-merger Anthem, Inc. and WHN were combined for all of 2004 and 2003. Accordingly, cost of care reported previously for pre-merger Anthem, Inc. is not comparable to what is presented below. Our cost of care trends are calculated by comparing the year over year change in average per member per month claim costs for which we are responsible, which excludes member co-payments and deductibles. Our aggregate cost of care trend was just under 10% for 2004.
Financial results for 2004 include operations of WHN for the one month period ended December 31, 2004 only. Financial results for 2003 represent the results of the former Anthem, Inc. only and have been reclassified to conform to current presentation.
Throughout the following discussion of our results of operations, the operating results related to the Trigon acquisition are included for the year ended December 31, 2003 and the five months ended December 31, 2002. Both periods exclude any operating results related to the WHN acquisition.
Income tax expense increased $184.2 million, or 73%, to $437.6 million in 2003, primarily due to increased income before taxes. In addition, our effective income tax rate increased to 36.1% in 2003 from 31.6% in 2002. This 450 basis point increase in the effective income tax rate was primarily due to the release of a deferred tax valuation allowance in 2002.
We follow Statement of Financial Accounting Standards No. 141, Business Combinations, and Statement of Accounting Standards No. 142, Goodwill and Other Intangible Assets. FAS 141 specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill. Under FAS 142, goodwill and other intangible assets (with indefinite lives) are not amortized but are tested for impairment at least annually. We completed our annual impairment tests of existing goodwill and other intangible assets (with indefinite lives) for each of the years ended December 31, 2004, 2003 and 2002 and based upon these tests we have not incurred any impairment losses related to any goodwill and other intangible assets (with indefinite lives).
On July 31, 2002, we completed our purchase of 100% of the outstanding stock of Trigon Healthcare, Inc. In accordance with FAS 141, we allocated the purchase price to the fair value of assets acquired, including intangible assets, and liabilities assumed. This allocation process included the review of relevant information about the assets and liabilities, independent appraisals and other valuations to determine the fair value of assets acquired and liabilities assumed. The allocation resulted in $2,146.1 million of non-tax deductible goodwill and $1,172.7 million of identifiable intangible assets.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 became law in December 2003 and expanded Medicare, primarily adding a prescription drug benefit for Medicare-eligible retirees starting
The availability of financing in the form of debt or equity is influenced by many factors including our profitability, operating cash flows, debt levels, debt ratings, contractual restrictions, regulatory requirements and market conditions. We have access to a $2.0 billion commercial paper program supported by $2.5 billion of revolving credit facilities, which allow us to maintain further operating and financial flexibility.
We maintained a strong financial condition and liquidity position, with consolidated cash, cash equivalents and investments, including long-term investments, of $15.8 billion at December 31, 2004. Since December 31, 2003, total cash, cash equivalents and investments, including long-term investments, increased by $8.3 billion, primarily resulting from our merger with WHN.
All of our current investments are classified as available-for-sale. As of December 31, 2004, approximately 91% of our current investments were fixed maturity securities. Market risk is addressed by actively managing the duration, allocation and diversification of our investment portfolio. We have evaluated the impact on the fixed maturity portfolio’s fair value considering an immediate 100 basis point change in interest rates. A 100 basis point increase in interest rates would result in an approximate $476.7 million decrease in fair value, whereas a 100 basis point decrease in interest rates would result in an approximate $466.7 million increase in fair value. While we classify our current fixed maturity securities as “available-for-sale” for accounting purposes, we believe our cash flows and duration of our portfolio should allow us to hold securities to maturity, thereby avoiding the recognition of losses should interest rates rise significantly.
Our subordinated debt includes surplus notes issued by one of our insurance subsidiaries. Par value of amounts outstanding at December 31, 2004 included $42.0 million of 9.125% surplus notes due 2010 and $25.1 million of 9.000% surplus notes due 2027. Any payment of interest or principal on the surplus notes may be
Postretirement benefits represent outstanding obligations for retiree medical, life, vision and dental benefits. These benefits are accrued in accordance with FAS 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. The Company accrues the estimated costs of retiree health and other postretirement benefits during the periods in which eligible employees render service to earn the benefits, and are reported with other noncurrent liabilities.
Effective upon the merger with WHN, the board of directors authorized an increase in the Company’s commercial paper program from $1,000.0 to $2,000.0, the proceeds of which may be used for general corporate purposes, including the repurchase of the Company’s debt and common stock. The Company initially borrowed $1,500.0 under this commercial paper program, which was used to repay a portion of the senior credit facilities described above. As of December 31, 2004, $793.2 of commercial paper remained outstanding. Commercial paper borrowings have been classified as long-term debt at December 31, 2004 in accordance with FAS 6, Classification of Short-Term Obligations Expected to Be Refinanced, as the Company’s practice and intent is to replace short-term commercial paper outstanding at expiration with additional short-term commercial paper for an uninterrupted period extending for more than one year or with borrowings under the senior credit facilities, including the $1,500.0 five year facility described above.
On December 13, 2004, the Company entered into a $300.0 notional amount interest rate swap agreement to exchange a fixed 3.75% rate for a LIBOR-based floating rate. The swap agreement expires December 14, 2007. For the year ended December 31, 2004, the Company recognized $0.1 of income from this swap, which was recorded as a reduction of interest expense. As of December 31, 2004, the Company recognized a derivative liability of $0.8, which is recorded as a current liability.
Equity Security Units: The fair value of the Equity Security Units is based on quoted market prices for these instruments.
As of the merger date, there were 478,226 WHN options that were not vested. Unearned compensation related to these unvested options was $12.9 at December 31, 2004.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
Capital contributions to subsidiaries were $14.7, $15.6 and $0.0 during 2004, 2003 and 2002, respectively. The contributions in 2004 and 2003 were non-cash and were to record the tax benefit of option exercises at subsidiary levels.
At December 31, 2004, 2003 and 2002 WellPoint reported $34.4, $71.2 due from and $10.0 due to subsidiaries, respectively. These amounts are for administrative expenses and are routinely settled, and as such, are classified as current assets.
Exchange Commission in December 2002 for any combination of debt or equity securities in one or more offerings up to an aggregate amount of $1,000.0. As of December 31, 2004, WellPoint had $800.0 of the shelf registration capacity remaining.
(c) Pledge Agreement, dated as of November 2, 2001, among the Company, The Chase Manhattan Bank, as collateral agent, custodial agent and securities intermediary, and The Bank of New York, as purchase contract agent, relating to the 5.95% Subordinated Debentures due 2006, incorporated by reference to Exhibit 4.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
(b) Amendment Two to Employment Agreement by and between Anthem Insurance Companies, Inc. and Marjorie W. Dorr, effective as of July 29, 2000, incorporated by reference to Exhibit 10.7(iii) to the Company’s Registration Statement on Form S-1 (Registration No. 333-67714).
Undertakings to California Department of Managed Health Care, dated November 23, 2004, delivered by WellPoint Health, Golden West, Anthem, Inc. and Anthem Holding Corp., incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on November 30, 2004.
WellPoint Health Networks Inc. 1999 Stock Incentive Plan (as amended through December 6, 2000), incorporated by reference to Exhibit 10.37 to WellPoint Health’s Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 001-13083).
(h) Amendment to the WellPoint 401(k) Retirement Savings Plan (As Amended Through October 10, 2003), dated November 13, 2003, incorporated by reference to Exhibit 10.15 to WellPoint Health’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (File No. 001-13083).
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of WellPoint, Inc. at December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Comprehensive income (loss) reclassification adjustments for the years ending December 31 are as follows:
In May 2000, a case titled California Medical Association vs. Blue Cross of California, et. al., was filed in U.S. district court in San Francisco against Blue Cross of California (“BCC”), one of WHN’s subsidiaries. The lawsuit alleges that BCC violated the Racketeer Influenced and Corrupt Organizations Act (“RICO”) (the “CMA Litigation”).