We adopted FAS 142, Goodwill and Other Intangible Assets, on January 1, 2002. With the adoption of FAS 142, we ceased amortization of goodwill. The intangible assets established for Blue Cross and Blue Shield trademarks are deemed to have indefinite lives, and beginning January 1, 2002, are no longer amortized.
Net income and earnings per share on a comparable basis as if FAS 142 had been adopted January 1, 2000, are as follows:
There were no shares or dilutive securities outstanding prior to November 2, 2001 (date of Anthem Insurance Companies, Inc.’s demutualization and initial public offering). Accordingly, amounts prior to 2002 represent pro forma earnings per share. For comparative pro forma earnings per share presentation, the weighted-average shares outstanding and the effect of dilutive securities for the period from November 2, 2001 to December 31, 2001 was used to calculate pro forma earnings per share for all periods prior to 2002.
Represents policyholders’ surplus prior to the demutualization on November 2, 2001.
Unless the context otherwise requires, references to the terms “we”, “our”, or “us” used throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, refer to WellPoint, Inc. (name changed from Anthem, Inc. effective November 30, 2004), an Indiana holding company, and its direct and indirect subsidiaries.
X. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Our operating revenue consists of premiums, administrative fees and other revenue. The premiums come from fully-insured contracts where we indemnify our policyholders against costs for covered health and life benefits. Our administrative fees come from contracts where our customers are self-insured, where the fee is based on either processing of transactions or a percent of network discount savings realized. Additionally, we earn operating revenues from our Medicare processing business and from other health-related businesses including disease management programs. Other revenue is principally generated from member co-payments and deductibles associated with the mail-order sale of drugs by our pharmacy benefit management companies.
procedures per visit, inpatient hospital care per admission, physician fees per office visit and prescription drug prices. Utilization rates represent the volume of consumption of health services and typically vary with the age and health status of our members and their social and lifestyle choices, along with clinical protocols and medical practice patterns in each of our markets. A portion of benefit expense recognized in each reporting period consists of actuarial estimates of claims incurred but not yet paid by us. Any changes in these estimates are recorded in the subsequent reporting periods.
Our cost of drugs consists of the amounts we pay to pharmaceutical companies for the drugs we sell via mail order through our pharmacy benefit management companies, or PBM. This amount excludes the cost of drugs related to affiliated health customers recorded in benefit expense. Our cost of drugs can be influenced by the volume of prescriptions at our PBM, as well as cost changes, driven by prices set by pharmaceutical companies and mix of drugs sold.
Our medical membership includes six different customer types: Large Group, Individual and Small Group, National Accounts, BlueCard Host, Senior and State Sponsored.
Senior members are Medicare-eligible individual members age 65 and over who have enrolled in Medicare Advantage, a managed care alternative for the Medicare program, or who have purchased Medicare supplement benefit coverage.
Represents the former Anthem, Inc. only. Historical results have been reclassified to conform to current presentation.
Includes 74,742 members of Unity Health Plans Insurance Company which was sold effective January 1, 2005.
Prescription volume at our PBM increased 36,911,000 prescriptions, or 12%, on a comparable basis in 2004 primarily due to the integration of our Virginia health membership to our internal PBM, as well as increased mail-order utilization and growth within our other existing health lines of business.
Costs for outpatient services and pharmacy continued to be the primary drivers of overall cost trends. Outpatient services cost trend increases were primarily driven by higher per visit costs as more procedures are being performed during each visit to an outpatient provider, particularly emergency room visits, as well as the impact of price increases included within certain provider contracts. Pharmacy benefit cost trend increases were primarily driven by price increases on existing brand drugs and, to a lesser extent, the introduction of new, higher cost drugs. Price increases on existing brand drugs have been seen particularly in those therapeutic classes of drugs designed to reduce cholesterol and anti-depressants, our two largest categories of drugs based on overall expenses.
In response to cost trends, we continue to pursue contracting and plan design changes, promote and implement performance-based contracts that reward clinical outcomes and quality, and expand our disease management and advanced care management programs. In addition, we continually evaluate our drug formulary to ensure the most effective pharmaceutical therapies are available for our members.
Late in the third quarter of 2004, the arthritis drug VIOXX® was removed from the market due to concerns about the risk of heart attacks in persons taking this drug for longer than 18 months. We have provided our network physicians with information regarding alternatives to VIOXX and our PBM has implemented a process to ensure appropriate usage of the COX 2 Inhibitor therapeutic class of drugs.
Merger-related undertakings were expenses recorded in 2004 related to certain obligations under our agreements with the California Department of Insurance, the California Department of Managed Health Care and the Georgia Department of Insurance. These agreements were related to the merger with WHN.
Operating revenue increased $503.2 million, or 69%, to $1,235.2 million in 2004, due to the impact of the merger with WHN, as the results of the acquired specialty business is included effective November 30, 2004. Operating revenue also increased due to increased mail-order prescription volume, including more specialty pharmacy prescriptions and increased wholesale drug costs which are passed through to customers of our PBM. Specialty pharmacy prescriptions include higher cost transactions for biopharmaceutical and injectable medications, which are complex in design and administration, and are costly to ship and store. The increased mail-order prescription volume resulted from both membership increases and additional utilization of our PBM’s mail-order pharmacy option. Effective January 1, 2004, our PBM began providing pharmacy benefit management services to our Virginia health members.
Operating gain increased $31.8 million, or 46%, to $100.9 million in 2004, due to the impact of the merger with WHN, and increased mail-order prescription volume at our PBM. This improvement was partially offset by operating results in our other specialty businesses.
Operating loss decreased $41.5 million, or 28%, to $(105.8) million in 2004, primarily due to lower incentive compensation expenses.
During the twelve months ended December 31, 2003, total medical membership increased approximately 874,000, or 8%, primarily in our BlueCard, National Accounts and ISG businesses. BlueCard membership increased 397,000, or 16%, primarily due to increased sales by other Blue Cross and Blue Shield licensees to accounts with members who reside in or travel to our licensed areas. National Accounts membership increased 277,000, or 20%, due to increased sales in our existing markets due to recognition of the value of Blue Cross and Blue Shield networks and the related discounts we can secure, and our competitive advantage resulting from the breadth of our product offerings and distinctive customer service.
Also contributing to our medical membership increase were ISG enrollment gains of 217,000, or 12%, primarily due to the introduction of new, more affordable product designs and an overall increase in consumer awareness of our wide variety of quality products and services.
Dental membership increased 1,041,000, or 70%, in 2003 primarily due to the integration of Connecticut health members, and growth from new sales. Vision membership increased 417,000 due to the new product launch, which took place in the fourth quarter of 2002.
Administrative fees increased $213.4 million, or 23%, to $1,160.2 million in 2003 due to the impact of the Trigon acquisition, and also due to increased BlueCard activity and increased revenues from self-funded membership, some of which resulted from the shift of customers from fully-insured arrangements. These increases were partially offset by decreased administrative fees from AdminaStar Federal’s 1-800 Medicare Help Line contract with CMS. During the fourth quarter of 2002, CMS awarded a new contract for this service to a competitor. The transition of this contract was substantially completed by June 30, 2003. Administrative fee increases were also partially offset by the termination of a Health Care segment third party administrator arrangement in 2002.
Net investment income increased $17.4 million, or 7%, to $278.1 million in 2003. This increase in investment income primarily resulted from the investment of additional assets in 2003 from our Trigon
acquisition and reinvestment of cash generated from operations, which were partially offset by a decrease in yields from new investments.
Operating revenue increased $3,412.9 million, or 27%, to $16,000.1 million in 2003 due to the impact of the Trigon acquisition, and also due to premium rate increases in our Large Group and ISG businesses. Also contributing to operating revenue growth was higher fully-insured membership, primarily in our ISG business. Operating revenue increases were partially offset by changes in the mix of our products with members selecting
less rich benefit designs, resulting in lower priced products. Also offsetting the growth were shifts by certain National Accounts and Large Group customers to self-funded arrangements, resulting in lower revenues.
Our Specialty segment’s summarized results of operations for the years ended December 31, 2003 and 2002 are as follows:
Operating revenue increased $208.5 million, or 40%, to $732.0 million in 2003, primarily due to increased mail-order prescription volume and increased wholesale drug costs which are passed through to our customers at our PBM, as well as the results of our behavioral health company, which evolved from our acquisition of PRO Behavioral Health on June 1, 2002. The increased mail-order prescription volume resulted from membership increases and additional utilization of our PBM’s mail-order pharmacy option. Operating revenue from our behavioral health business is increasing as we begin to provide these services to more of our existing health membership.
Operating gain increased $18.4 million, or 36%, to $69.1 million in 2003, primarily due to increased mail-order prescription volume. Improved behavioral health results due to additional revenues from existing health members who were converted to our internal behavioral health company during 2003 also contributed to Specialty’s increased operating gains. These improvements in operating gain were partially offset by start-up and integration expenses associated with our dental and vision operations.
Operating revenue from external customers increased $8.5 million, or 4%, to $197.8 million in 2003, primarily due to cost reimbursement activity being reflected in our Medicare administration operations. This
Operating loss increased $52.0 million, or 55%, to $(147.3) million in 2003, primarily due to additional technology expenses, incentive compensation not allocated to the operating segments associated with better than expected performance and legal fees and expenses paid in 2003.
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles, or GAAP. Application of GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes and within this Management’s Discussion and Analysis. We consider some of our most important accounting policies that require estimates and management judgment to be those policies with respect to liabilities for medial claims payable, income taxes, goodwill and other intangible assets, investments and retirement benefits, which are discussed below. Our significant accounting policies are summarized in Note 2 to our audited consolidated financial statements for the year ended December 31, 2004 included in this Form 10-K.
Because the reserve methodology is based upon historical information, it must be adjusted for known or suspected operational and environmental changes. These adjustments are made by our actuaries based on their knowledge and their estimate of emerging impacts to benefit costs and payment speed. Circumstances to be considered in developing our best estimate of reserves include changes in utilization levels, unit costs, mix of business, benefit plan designs, provider reimbursement levels, processing system conversions and changes, claim inventory levels, claim processing patterns and claim submission patterns. A comparison of prior period
Management regularly reviews its assumptions regarding our claims liabilities and makes adjustments to benefit expense when necessary. If it is determined that management’s assumptions regarding cost trends and utilization are significantly different than actual results, our income statement and financial position could be impacted in future periods. Adjustments of prior year estimates may result in additional benefit expense or a reduction of benefit expense in the period an adjustment is made. Further, due to the considerable variability of health care costs, adjustments to claims liabilities occur each quarter and are sometimes significant as compared to the net income recorded in that quarter. Prior year development is recognized immediately upon the actuary’s judgment that a portion of the prior year liability is no longer needed or that additional liability should have been accrued. That determination is made when sufficient information is available to ascertain that the re-estimate of the liability is accurate and will not fluctuate significantly with future development.
As described above, the completion factors and trend factors can have a significant impact on the claim liability. The following example provides the estimated impact to our December 31, 2004 unpaid claims liability assuming hypothetical changes in the completion and trend factors:
In addition, assuming a hypothetical 1% total difference between our December 31, 2004 estimated claims liability and the actual claims paid, net income for the year ended December 31, 2004 would increase or decrease by $27.3 million while basic net income per share would increase or decrease by $0.18 per share and diluted net income per share would increase or decrease by $0.17 per share.
10 to our audited consolidated financial statements, the line labeled “incurred related to prior years” accounts for those adjustments made to prior year estimates. The impact of any reduction of “incurred related to prior years” claims may be offset as we establish the estimate of “incurred related to current year”. Our reserving practice is to consistently recognize the actuarial best estimate of our ultimate liability for our claims within a level of confidence required by actuarial standards. Thus, only when the release of a prior year reserve is not offset with the same level of conservatism in estimating the current year reserve will the redundancy create a net reduction in current benefit expense. When we recognize a release of the redundancy, we disclose the amount that is not in the ordinary course of business. We believe we have consistently applied our methodology in determining our best estimate for unpaid claims liability at each reporting date.
A reconciliation of the beginning and ending balance for medical claims payable for the years ended December 31, 2004, 2003 and 2002 is as follows:
year ended December 31, 2004, the metric was 1.4%. This ratio is calculated using the redundancy of $172.4 million, shown above, which represents an estimate based on paid claim activity from January 1, 2004 to December 31, 2004.
The ratio of current year paid as a percent of current year incurred was 81.3% for 2004, 85.6% for 2003, and 84.1% for 2002. The 2004 ratio was impacted by having only one month of incurred and paid claims during 2004 for the former WHN. If the former WHN had not been included during 2004, the adjusted ratio would have been approximately 87.3% for 2004. The adjusted 2004 ratio compared to the 2003 ratio indicates that we are paying claims faster. The increase is primarily attributable to improved processes and electronic connectivity with our provider networks. The result of these changes is an enhanced ability to adjudicate and pay claims more quickly. To illustrate this point, using the adjusted 2004 ratio, 87.3% of current year incurred claims were paid in the same period as incurred, as compared to 85.6% for the same period in 2003. Hence, the payment patterns in 2004 resulted in acceleration of approximately $236.0 million, as compared to 2003 payment patterns.
Management expects that substantially all of the development of the 2004 estimate of medical claims payable will be known during 2005. This table shows that the Company’s estimates of this liability have approximated the actual development.
During 2004, 2003 and 2002, the valuation allowance decreased by $33.8 million, $81.9 million and $112.4 million, respectively. The 2004 and 2003 reductions resulted from utilizing alternative minimum tax, or AMT,
credits and net operating losses on our federal income tax return for which we had a deferred tax asset with a corresponding valuation allowance. As deferred tax assets related to those deductions are available for use in the tax return, a valuation was no longer required and was reduced. The decrease in the valuation allowance in 2004 was partially offset by an additional $5.6 million related to Indiana state taxes, as discussed below. During 2002 it was determined that the only items requiring a valuation allowance were those that relate to the anticipation of future taxable income. This determination was due to the levels of taxable income reported in our 2001 tax return, income generated during 2002 and taxable income expected in future periods.
During 2004, 2003 and 2002, we recorded additional tax liabilities of $44.1 million, $81.9 million and $57.2 million, respectively. These amounts offset the reduction in valuation allowances discussed above. These additional liabilities were recorded for uncertainty on several tax issues, including uncertainty arising from the lack of clear guidance from the Internal Revenue Service, or IRS, on various tax issues relating to our conversion from tax exempt to tax paying status. During 2002, the remainder of the decrease in the valuation allowance was offset by a reduction of goodwill of $18.0 million and also a reduction in tax expense of $37.2 million, which contributed to a reduced effective tax rate of 31.6% for the year ended December 31, 2002.
Our consolidated goodwill at December 31, 2004 was $10,017.9 million and other intangible assets were $8,211.6 million. The sum of goodwill and intangible assets represents 46% of our total consolidated assets and 94% of our consolidated shareholders’ equity at December 31, 2004.
On November 30, 2004, we completed our merger with WHN and purchased 100% of the outstanding common stock of WHN. 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 preliminary allocation resulted in $7,579.6 million of non-tax deductible goodwill and $7,046.0 million of identifiable intangible assets. The purchase price allocation is preliminary and additional refinements may occur, including the completion of final third-party valuations of certain intangible assets.
While we believe we have appropriately allocated the purchase price of our acquisitions, this allocation requires many assumptions to be made regarding the fair value of assets and liabilities acquired. In addition, the annual impairment testing required under FAS 142 requires us to make assumptions and judgments regarding the estimated fair value of our goodwill and intangibles. Such assumptions include the discount factor used to determine the fair value of a reporting unit, which is ultimately used to identify potential goodwill impairment. Such estimated fair values might produce significantly different results if other reasonable assumptions and estimates were to be used. Because of the amounts of goodwill and other intangible assets included in our consolidated balance sheet, the impairment analysis is significant. If we are unable to support a fair value estimate in future annual goodwill impairment tests or if significant impairment indicators are noted relative to other intangible assets subject to amortization, we may be required to record impairment losses against future income.
For additional information, see Note 4 to our audited consolidated financial statements for the year ended December 31, 2004 included in this Form 10-K.
Investment securities were $13,586.9 million at December 31, 2004 and represented 34% of our total consolidated assets at December 31, 2004. In accordance with Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities, our fixed maturity and equity securities are classified as “available-for-sale” securities and are reported at fair value. We have determined that all investments in our portfolio, with the exception of certain securities held for contractual or regulatory purposes, are available to support current operations, and accordingly, have classified such securities as current assets. Investment income is recorded when earned, and realized gains or losses, determined by specific identification of investments sold, are included in income when the securities are sold.
A summary of current available-for-sale investments with unrealized losses as of December 31, 2004 along with the related fair value, aggregated by the length of time that investments have been in a continuous unrealized loss position, is as follows:
The Company’s fixed maturity investment portfolio is sensitive to interest rate fluctuations, which impact the fair value of individual securities. Unrealized losses reported above were primarily caused by the effect of a rising interest rate environment on certain securities with stated interest rates currently below market rates. The Company currently has the ability and intent to hold these securities until their full cost can be recovered. Therefore, the Company does not believe the unrealized losses represent an other-than-temporary impairment as of December 31, 2004.
For additional information, see Part II, Item 7A of this Form 10-K, “Quantitative and Qualitative Disclosures about Market Risk” and Note 5 to our audited consolidated financial statements for the year ended December 31, 2004 included in this Form 10-K.
We sponsor defined benefit pension plans for our employees, including plans sponsored by WHN prior to the merger. These plans are accounted for in accordance with FAS 87, Employers’ Accounting for Pensions, which requires that amounts recognized in financial statements be determined on an actuarial basis. As permitted by FAS 87, we calculate the value of plan assets (described below). Further, the effects on our computation of pension expense from the performance of the pension plans’ assets and changes in pension liabilities are amortized over future periods. We use a September 30 measurement date for determining benefit obligations and fair value of plan assets. Plans sponsored by pre-merger WHN, which have historically used a December 31 measurement date, will begin using a September 30 measurement date in 2005. The effective rates discussed below are based on a weighted average of all the plans and include the effect of using two measurement dates.
of our assumption. Factors such as past market performance, the long-term relationship between fixed maturity and equity securities, interest rates, inflation and asset allocations are considered in the assumption. The assumption includes an estimate of the additional return expected from active management of the investment portfolio. Peer data and historical returns are also reviewed for appropriateness of the selected assumption. The expected long-term rate of return is calculated by the geometric averaging method, which calculates an expected multi-period return, reflecting volatility drag on compound returns. We believe our assumption of future returns is reasonable. However, if we lower our expected long-term return on plan assets, future contributions to the pension plan and pension expense would likely increase.
This assumed long-term rate of return on assets is applied to a calculated value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner over three years. This produces the expected return on plan assets that is included in the determination of pension expense. The difference between this expected return and the actual return on plan assets is deferred and amortized over the average remaining service of the workforce as a component of pension expense. The net deferral of past asset gains or losses affects the calculated value of plan assets and, ultimately, future pension expense.
In managing the plan assets, our objective is to be a responsible fiduciary while minimizing financial risk. Plan assets include a diversified mix of investment grade fixed maturity securities and equity securities across a range of sectors and levels of capitalization to maximize the long-term return for a prudent level of risk.
At December 31, 2004, our consolidated net prepaid pension asset was $198.7 million, a decrease from $258.3 million at December 31, 2003. The decrease was primarily due to lower funding amounts and the addition of underfunded accrued pension benefit liabilities acquired from WHN during 2004 as compared to 2003. We funded our cash balance pension plans in the amount of $10.0 million during 2004 and $115.0 million during 2003. For the year ending December 31, 2005, the Company does not expect any required contributions under ERISA. The Company may elect to make discretionary contributions up to the maximum amount deductible for income tax purposes.
For the years ended December 31, 2004, 2003 and 2002, we recognized consolidated pretax pension expense of $40.8 million, $21.3 million, and $14.3 million, respectively.
We provide most employees certain life, medical, vision and dental benefits upon retirement. We use various actuarial assumptions including a discount rate and the expected trend in health care costs to estimate the costs and benefit obligations for our retiree benefits. We recognized a postretirement benefit liability of $381.0 million at December 31, 2004.
At our last measurement dates, the weighted average discount rate was 5.87%, developed using a benchmark rate of the Moody’s Aa Corporate Bonds index.
In November 2003, the FASB’s Emerging Issues Task Force (“EITF”), as part of its discussion surrounding EITF Issue No. 03-1, The Meaning of Other-than-Temporary Impairment and its Application to Certain Investments (“EITF 03-1”), reached a consensus to require certain year end quantitative and qualitative disclosures about the unrealized losses from debt and equity securities, and management’s conclusion that any impairment is temporary. The required disclosures are required to include quantitative information about (1) the aggregate amount of unrealized losses and (2) the aggregate related fair values of investments with unrealized losses, summarized by the time period during which the investment has been in an unrealized loss position. See “Critical Accounting Policies and Estimates - Investments” above and Note 5 to our audited consolidated financial statements included in this Form 10-K for these required disclosures.
In September 2004, the FASB issued FASB Staff Position 03-1-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“FSP 03-1-1”), which delayed the effective date for the recognition and measurement guidance of EITF 03-1, as contained in paragraphs 10-20, until certain implementation issues are addressed. The disclosure requirements of the consensus, as described in the preceding paragraph, remain in effect. FSP 03-1-1 requires entities to continue applying relevant “other-than-temporary” guidance to determine if an impairment exists. As described in “Critical Accounting Policies and Estimates - Investments” above, we believe we have adequately reviewed for impairment and that our investment securities are carried at fair value.
in 2006. We anticipate that the benefits we pay in 2006 and beyond will be lower as a result of the new Medicare provisions. FASB Staff Position 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“FSP 106-2”), was issued in May 2004. FSP 106-2, which supersedes FSP 106-1, provides accounting guidance for employers that sponsor postretirement health care plans that provide prescription drug benefits where the company has concluded that prescription drug benefits to “some or all participants for some or all future years are actuarially equivalent to Medicare Part D” and will receive the subsidy available under the Act. The FSP also provides disclosure requirements about the effects of the subsidy for companies that offer prescription drug benefits but have not yet determined whether they are actuarially equivalent to Medicare Part D. We have determined that our prescription drug benefits are actuarially equivalent to Medicare Part D. As such, we accounted for the impact of FSP 106-2 as required in the quarter ended September 30, 2004, using the prospective method. The impact of adopting FSP 106-2, while accretive to earnings, was not material to our consolidated financial statements.
Our cash receipts consist primarily of premiums, administrative fees, investment income, other revenue, proceeds from the sale or maturity of our investment securities, proceeds from borrowings, and proceeds from exercise of stock options and our employee stock purchase plan. Cash disbursements result mainly from claims payments, administrative expenses, taxes, purchase of investment securities, interest expense, payments on long- term borrowings, capital expenditures and repurchase of our common stock. Cash outflows fluctuate with the amount and timing of settlement of these transactions. As such, any future decline in our profitability would likely have some negative impact on our liquidity.
We manage our cash, investments and capital structure so we are able to meet the short and long-term obligations of our business while maintaining financial flexibility and liquidity. We forecast, analyze and monitor our cash flows to enable investment and financing within the overall constraints of our financial strategy.
A substantial portion of the assets held by our regulated subsidiaries are in the form of cash and cash equivalents and investments. After considering expected cash flows from operating activities, we generally invest cash that exceeds our near term obligations in longer term marketable fixed maturity securities, to improve our overall investment income returns. Our investment strategy is to make investments consistent with insurance statutes and other regulatory requirements, while preserving our asset base. Our investments are available for sale to meet liquidity and other needs. Excess capital is paid annually in the form of dividends by subsidiaries to their respective parent companies for general corporate use, as permitted by applicable regulations.
Liquidity-Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
During 2004, net cash provided by operating activities was $1,303.2 million, as compared to $1,159.0 million in 2003, an increase of $144.2 million. The increase resulted from improved net income, including the impact of our merger with WHN, partially offset by a decline in cash from changes in operating assets and liabilities. Our decline in cash from changes in operating assets and liabilities included the impact of long-term compensation payments of approximately $113.0 million made during 2004 that had been accrued in prior years.
The purchase of investment securities in 2004 decreased from 2003 as operating cash was retained for the WHN merger. The increase in 2004 subsidiary purchases resulted primarily from the use of cash for the WHN merger, as compared to minimal activity in 2003. The increase in net property and equipment purchases included one month of cash outflows for the pre-merger WHN companies.
Net cash provided by financing activities was $2,063.4 million in 2004 compared to cash used in financing activities of $260.2 million in 2003. Financing activity related to the merger with WHN, as described below, contributed to the increase in cash provided by financing activities.
Effective with the WHN merger, the board of directors authorized an increase in our commercial paper program from $1,000.0 million to $2,000.0 million. In December 2004, we initially borrowed $1,500.0 million under this commercial paper program, which was used to repay a portion of our senior credit facilities which were used at the date of the WHN merger to complete the transaction. As of December 31, 2004, $793.2 million of commercial paper remained outstanding.
During 2004, we received $159.0 million of proceeds from the issuance of common stock related to the exercise of stock options and our employee stock purchase program. These proceeds were offset by $82.2 million of cash used to repurchase our common stock.
impact of our July 31, 2002 acquisition of Trigon Healthcare, Inc. (“Trigon”), offset by a decline in operating cash flow from our operating assets and liabilities. The decline in cash from operating assets and liabilities primarily resulted from increases in receivables resulting from growth in our revenue base, payment for resolution of a litigation matter and higher incentive payments during 2003 as compared to 2002.
The purchase of investment securities increased as operating cash was invested and cash balances held by our investment managers was reduced. The decrease in subsidiary purchases resulted primarily from minimal activity in 2003 versus 2002, which included our Trigon acquisition. The decrease in net property and equipment purchases was nominal.
Net cash flow used in financing activities was $260.2 million in 2003 compared to cash provided by financing activities of $709.3 million in 2002. During 2003, $217.2 million was used to repurchase our common stock. In addition, $100.0 million was used to fund the payment of senior guaranteed notes, which matured on July 15, 2003. These payments were offset by $57.0 million of proceeds from the issuance of common stock related to the exercise of stock options and our employee stock purchase program.
On November 19, 2004, we entered into new senior revolving credit facilities with certain of our lenders. The new facilities include a $1,000.0 million facility which expires on November 29, 2005 and a $1,500.0 million facility which will mature on November 30, 2009. These facilities replaced our $600.0 million revolving credit facility which was set to mature on June 28, 2005 and the $400.0 million revolving facility, which would have matured on November 5, 2006. Our ability to borrow under these new facilities is subject to compliance with certain covenants. As of December 31, 2004, there were no amounts outstanding under these facilities and we were in compliance with all covenants. These revolving credit facilities support our commercial paper program described in the next paragraph. Any borrowings under the commercial paper program will reduce the availability under the revolving credit facilities.
On December 18, 2002, we filed a shelf registration with the Securities and Exchange Commission to register any combination of debt or equity securities in one or more offerings up to an aggregate amount of $1.0 billion. Specific information regarding terms of the offering and the securities being offered will be provided at the time of the offering. Proceeds from any offering will be used for general corporate purposes, including the repayment of debt, capitalization of our subsidiaries or the financing of possible acquisitions or business expansion. During August 2004, $200.0 million of 3.500% Notes due 2007 were issued under the shelf registration. As of December 31, 2004, Anthem had $800.0 million of the shelf registration capacity remaining.
As discussed in “Financial Condition” above, many of our subsidiaries are subject to various government regulations that restrict the timing and amount of dividends and other distributions that may be paid. Based upon these requirements, we are currently estimating approximately $1.2 billion of dividends to be paid to the parent company during 2005.
During December 2004, we completed a tender offer to purchase subsidiary surplus notes from the holders, and purchased $258.0 million of 9.125% notes due 2010 and $174.9 million of 9.000% notes due 2027. Future interest payments on these portions of the notes will be paid by the subsidiary to the parent company, and are expected to be approximately $39.2 million annually.
During the year ended December 31, 2004, we funded a $10.0 million tax deductible discretionary contribution to our cash balance pension plan. Our current funding strategy is to fund an amount at least equal to
the minimum required funding as determined under ERISA with consideration of factors such as the minimum pension liability requirement and maximum tax deductible amounts. We may elect to make discretionary contributions, including on a quarterly basis, up to the maximum amount deductible for income tax purposes.
In addition to the contractual obligations and commitments discussed above, we have a variety of other contractual agreements related to acquiring materials and services used in our operations. However, we do not believe these other agreements contain material non-cancelable commitments.
For additional information on our debt and lease commitments, see Notes 6 and 16, respectively, to our audited consolidated financial statements for the year ended December 31, 2004 included in this Form 10-K.
This document contains certain forward-looking information about WellPoint, Inc. (“WellPoint”), name changed from Anthem, Inc. effective November 30, 2004, that is intended to be covered by the safe harbor for
“forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts. Words such as “expect(s)”, “feel(s)”, “believe(s)”, “will”, “may”, “anticipate(s)” and similar expressions are intended to identify forward-looking statements. These statements include, but are not limited to, financial projections and estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to future operations, products and services; and statements regarding future performance. Such statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of WellPoint, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements. These risks and uncertainties include: those discussed and identified in public filings with the U.S. Securities and Exchange Commission (“SEC”) made by WellPoint and WellPoint Health Networks Inc. (“WHN”); trends in health care costs and utilization rates; our ability to secure sufficient premium rate increases; competitor pricing below market trends of increasing costs; increased government regulation of health benefits and managed care; significant acquisitions or divestitures by major competitors; introduction and utilization of new prescription drugs and technology; a downgrade in our financial strength ratings; litigation targeted at health benefits companies; our ability to contract with providers consistent with past practice; our ability to achieve expected synergies and operating efficiencies in the WHN merger within the expected time-frames or at all and to successfully integrate our operations; such integration may be more difficult, time-consuming or costly than expected; revenues following the transaction may be lower than expected; operating costs, customer loss and business disruption, including, without limitation, difficulties in maintaining relationships with employees, customers, clients or suppliers, may be greater than expected following the transaction; our ability to meet expectations regarding the timing, completion and accounting and tax treatments of the transaction and the value of the transaction consideration; future bio-terrorist activity or other potential public health epidemics; and general economic downturns. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. WellPoint does not undertake any obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures in WellPoint’s and WHN’s various SEC reports.
As a result of our investing and borrowing activities, we are exposed to financial market risks, including those resulting from changes in interest rates and changes in equity market valuations. Potential impacts discussed below are based upon sensitivity analyses performed on WellPoint’s financial positions as of December 31, 2004. Actual results could vary from these estimates. Our primary objectives with our investment portfolio are to provide safety and preservation of capital, sufficient liquidity to meet cash flow needs, the integration of investment strategy with the business operations and an attainment of a competitive after-tax total return.
Our investment portfolio is exposed to three primary sources of risk: credit quality risk, interest rate risk and market valuation risk.
The primary risks associated with our fixed maturity securities are credit quality risk and interest rate risk. Credit quality risk is defined as the risk of a credit downgrade to an individual fixed maturity security and the potential loss attributable to that downgrade. Credit quality risk is managed through our investment policy, which establishes credit quality limitations on the overall portfolio as well as diversification and percentage limits on securities of individual issuers. The result is a well-diversified portfolio of fixed maturity securities, with an average credit rating of approximately AA. Interest rate risk is defined as the potential for economic losses on fixed maturity securities, due to a change in market interest rates. Our fixed maturity portfolio is invested primarily in U.S. government securities, corporate bonds, asset-backed bonds, mortgage-related securities and
municipal bonds, all of which represent an exposure to changes in the level of market interest rates. Interest rate risk is managed by maintaining asset duration within a band based upon our liabilities, operating performance and liquidity needs. Additionally, we have the capability of holding any security to maturity, which would allow us to realize full par value.
Our equity portfolio is comprised of large capitalization and small capitalization domestic equities, foreign equities and index mutual funds. Our equity portfolio is subject to the volatility inherent in the stock market, driven by concerns over economic conditions, earnings and sales growth, inflation, and consumer confidence. These systematic risks cannot be managed through diversification alone. However, more routine risks, such as stock/industry specific risks, are managed by investing in a diversified equity portfolio.
As of December 31, 2004, we had $150.0 million par value of notes at 4.875% due 2005, which are reported with other current liabilities, as they will mature in August 2005. The carrying and estimated fair value of these notes was $149.8 million and $152.0 million respectively, at December 31, 2004.
We have $2,600.0 million of senior unsecured notes that have fixed interest rates. These notes, at par value, included $200.0 million of notes at 3.50% due 2007, $300.0 million at 3.75% due 2007, $300.0 million at 4.25% due 2009, $800.0 million of 6.80% notes due 2012, $500.0 million at 5.00% due 2014 and $500.0 million at 5.95% due 2034. These notes had combined carrying and estimated fair value of $2,565.9 million and $2,707.6 million at December 31, 2004.
made only with the prior approval of the Indiana Department of Insurance. The combined carrying value of the surplus notes was $66.4 million and $494.1 million at December 31, 2004 and 2003, respectively. The estimated fair value of the surplus notes exceeded the carrying value by $22.4 million and $157.9 million at December 31, 2004 and 2003, respectively. During 2004, we completed a tender offer to purchase a portion of these surplus notes, and purchased a net par value amount of $432.9 million. We recognized a loss of $146.1 million, which has been reported as loss on repurchase of debt securities in the statement of income for the year ended December 31, 2004.
In addition to the surplus notes, our subordinated debt also includes $800.0 million, par value, of notes, including $450.0 million of 6.375% notes due 2006 and $350.0 million of 6.375% notes due 2012 that were obligations of WHN prior to the merger. This indebtedness was assumed in the WHN merger by Anthem Holding Corp., a direct wholly-owned subsidiary of WellPoint. In accordance with accounting guidance for business combinations, this debt was recorded at estimated fair value as of November 30, 2004, the date of our merger. The carrying and estimated fair value at December 31, 2004 was $848.5 million and $854.5 million, respectively.
Should interest rates increase or decrease in the future, the estimated fair value of our fixed rate debt would decrease or increase accordingly.
We use derivative financial instruments, specifically interest rate swap agreements, to hedge exposure in interest rate risk on our borrowings. Our derivative use is limited to hedging purposes and we do not use derivative instruments for speculative purposes. On December 13, 2004, we entered into a $300.0 million notional amount interest rate swap agreement to exchange a fixed 3.75% rate for a LIBOR-based floating rate. This swap agreement expires on December 14, 2007.
Changes in interest rates will affect the estimated fair value of this swap agreement. As of December 31, 2004, we recorded a liability of $0.8 million, the estimated fair value of the swap at that date. We have evaluated the impact on the interest rate swap’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 $8.4 million decrease in fair value, whereas a 100 basis point decrease in interest rates would result in an approximate $8.6 million increase in fair value.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of WellPoint, Inc.’s internal control over financial reporting as of December 31, 2004, based on criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 4, 2005 expressed an unqualified opinion thereon.
The Company participates in securities lending programs whereby marketable securities in its investment portfolio are transferred to independent brokers or dealers based on, among other things, their creditworthiness in exchange for collateral initially equal to at least 102% of the value of the securities on loan and is thereafter maintained at a minimum of 100% of the market value of the securities loaned. The market value of the securities on loan to each borrower is monitored daily and the borrower is required to deliver additional collateral if the market value of the collateral falls below 100% of the market value of the securities on loan. Under the guidance provided in FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, the Company recognizes the collateral as an asset under “securities lending collateral” on its balance sheet and the Company records a corresponding liability for the obligation to return the collateral to the borrower under “securities lending payable”.
The Company’s pharmacy benefit managers (“PBM”) contract with pharmaceutical manufacturers, some of whom provide rebates based on use of the manufacturers’ products by the PBM’s affiliated and non-affiliated clients. The Company accrues rebates receivable on a monthly basis based on the terms of the applicable contracts, historical data and current estimates. The PBM bills these rebates to the manufacturers on a quarterly basis. The Company records rebates attributable to affiliated clients as a reduction to benefit expense. Rebates attributable to non-affiliated clients are accrued as rebates receivable and a corresponding payable for the amounts of the rebates to be remitted to non-affiliated clients in accordance with their contracts is also recorded. The Company generally receives rebates between two to five months after billing.
Property and Equipment: Property and equipment is recorded at cost, net of accumulated depreciation. Depreciation is computed principally by the straight-line method over estimated useful lives ranging from 15 to 39 years for buildings, two to eight years for furniture and equipment, and three to ten years for computer software. Leasehold improvements are depreciated over the term of the related lease. Certain costs related to the development or purchase of internal-use software are capitalized and amortized in accordance with AICPA Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.
Medical Claims Payable: Liabilities for medical claims payable include estimated provisions for both reported and unreported claims incurred on an undiscounted basis, as well as estimated provisions for expenses related to the processing of claims. The liabilities are developed using actuarial principles and assumptions that consider, among other things, contractual requirements, historical utilization trends, claim submission and payment patterns, benefit changes, medical inflation, product mix, seasonality, membership and other relevant factors. The liabilities are regularly reviewed and adjusted for known or suspected operational and environmental changes. Due to the considerable variability of health care costs, adjustments to claims liabilities occur each quarter. Although it is not possible to measure the degree of variability inherent in such estimates, management believes these liabilities are adequate and has consistently applied the methodology in determining the best estimate for medical claims payable at each reporting date.
Revenue Recognition: Gross premiums for fully-insured contracts are recognized as revenue over the period insurance coverage is provided. Premiums applicable to the unexpired contractual coverage periods are
reflected in the accompanying consolidated balance sheets as unearned income. Premiums include revenue from retrospective rated contracts where revenue is based on the estimated ultimate loss experience of the contract. Premium revenue includes an adjustment for retrospective rated refunds based on an estimate of incurred claims. Premium rates for certain lines of business are subject to approval by the Department of Insurance of each respective state.
The Company’s stock-based employee compensation plans are described in Note 12. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of the original FAS 123 to stock-based employee compensation:
As further described in Note 6, on November 30, 2004, the Company borrowed $500.0 under its bridge loan facility, $900.0 under a 364-day facility and $1,400.0 under a five year senior credit facility to partially fund the cash portion of the purchase price. The remainder of the cash portion of the purchase price was funded through the sale of investment securities and from available cash. Debt of $2,800.0 initially incurred with the WHN merger was reduced to $1,893.2 at December 31, 2004.
Of the $7,046.0 of acquired intangible assets, $4,370.0 was assigned to Blue Cross and Blue Shield trademarks, $295.0 was assigned to provider networks, and $251.0 was assigned to a license for a state sponsored program, which are not subject to amortization due to their indefinite life. The remaining acquired intangible assets consist of $2,030.0 of subscriber base with an average life of 20 years and $100.0 of provider contracts with a 30 year life.
assigned to the Health Care and Specialty segments is $10.7 and $3.4, respectively. The pro forma effects of the acquisitions on results for periods prior to the purchase dates are not material to the Company’s consolidated financial statements.
The amortized cost and fair value of fixed maturity securities at December 31, 2004, by contractual maturity, are shown below. Expected maturities may be less than contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
Long-term investments classified as available-for-sale had an estimated fair value and amortized cost of $271.4 and $268.5 as of December 31, 2004, respectively, and $124.5 and $118.7 as of December 31, 2003, respectively.
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.
Future maturities of debt are as follows: 2005, $150.3; 2006, $470.2; 2007, $491.0; 2008, $0.8; 2009, $1,091.1 and thereafter $2,223.6.
Long-term investments: The carrying amount approximates fair value, based on quoted market prices for the same or similar instruments.
Interest rate swap: The fair value of the interest rate swap is based on the quoted market prices by the financial institution that is the counterparty to the swap.
The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.
The Company’s 2001 Stock Incentive Plan (“Stock Plan”) provides for the granting of stock options, restricted stock awards, performance stock awards, performance awards and stock appreciation rights to eligible employees and non-employee directors. The Stock Plan permits the Compensation Committee of the Board of
Significant components of the provision for income taxes consist of the following:
The Company leases office space and certain computer and related equipment using capital and noncancelable operating leases. At December 31, 2004, future lease payments for capital leases and operating leases with initial or remaining noncancelable terms of one year or more consisted of the following:
The Anthem Insurance Companies, Inc. plan is a cash balance arrangement where participants have an account balance and earn a pay credit equal to three to six percent of compensation, depending on years of service. The Anthem Insurance Companies, Inc. plan covers part-time and temporary employees as well as full-time employees of Anthem prior to its merger with WHN who have completed one year of continuous service and attained the age of twenty-one. In addition to the pay credit, participant accounts earn interest at a rate based on 10-year Treasury notes. Employees of WHN do not participate in the Anthem Insurance Companies, Inc. plan.
In addition, the Company offers certain employees postretirement benefits including certain life, medical, vision and dental benefits upon retirement. There are several postretirement benefit plans, which differ in amounts of coverage, deductibles, retiree contributions, years of service and retirement age. The Company may fund certain benefit costs through discretionary contributions to a Voluntary Employees’ Beneficiary Association (“VEBA”) trust and others are accrued, with the retiree paying a portion of the costs. Postretirement plan assets held in the VEBA trust consist primarily of bonds and equity securities.
Plans sponsored by pre-merger Anthem used a September 30 measurement date for determining benefit obligations and fair value of plan assets. Plans sponsored by pre-merger WHN, which have historically used a December 31 measurement date, will begin using a September 30 measurement date in 2005.
In managing the plan assets, the Company’s objective is to be a responsible fiduciary while minimizing financial risk to the Company. In addition to producing a reasonable return, the investment strategy seeks to minimize the volatility in the Company’s expense and cash flow. Over time, the Company has increased the duration and allocation of fixed maturity securities to more closely match the sensitivity of plan assets with the plan obligations.
In August 2000, WHN was added as a party to Shane v. Humana, et al., a class-action lawsuit brought on behalf of health care providers nationwide alleging RICO violations (the “Shane Litigation”). Effective November 30, 2004, WHN merged with Anthem Holding Corp., a wholly owned subsidiary of the Company.
On September 26, 2002, the Company was added as a defendant to the Shane Litigation.
Prior to the Company’s acquisition of the group benefit operations (“GBO”), John Hancock Mutual Life Insurance Company (“John Hancock”) entered into a number of reinsurance arrangements with respect to personal accident insurance and the occupational accident component of workers’ compensation insurance, a portion of which was originated through a pool managed by Unicover Managers, Inc. Under these arrangements, John Hancock assumed risks as a reinsurer and transferred certain of such risks to other companies. These arrangements have become the subject of disputes, including a number of legal proceedings to which John Hancock is a party. The Company is currently in arbitration with John Hancock regarding these arrangements. The Company believes that it has a number of defenses to avoid any ultimate liability with respect to these matters and believes that such liabilities were not transferred to the Company as part of the GBO acquisition.
investigations by state insurance departments, state attorneys general and the U.S. Attorney General. Such investigations could result in the imposition of civil or criminal fines, penalties and other sanctions. The Company believes that any liability that may result from any one of these actions is unlikely to have a material adverse effect on its consolidated financial position or results of operations.
The Company defines operating revenues to include premium income, administrative fees and other revenues. Operating revenues are derived from premiums and fees received primarily from the sale and administration of health benefit products. Operating expenses are comprised of benefit expense, selling expense, general and administrative expense and cost of drugs. The Company calculates operating gain or loss as operating revenue less operating expenses.
The accounting policies of the segments are consistent with those described in the summary of significant accounting policies except that certain shared administrative expenses for each segment are recognized on a pro rata allocated basis, which in aggregate approximates the consolidated expense. Any difference between the allocated expenses and actual consolidated expense is included in other expenses not allocated to reportable segments. Intersegment sales and expenses are recorded at cost, and eliminated in the consolidated financial statements. The Company evaluates performance of the reportable segments based on operating gain or loss as defined above. The Company evaluates investment income, interest expense, amortization expense and income taxes, and asset and liability details on a consolidated basis as these items are managed in a corporate shared service environment and are not the responsibility of segment operating management.
The Company formed Anthem Foundation, Inc. (the “Foundation”), an Indiana non-profit organization exempt from federal taxation under Section 501(c)(3) of the Internal Revenue Code, to conduct, support and assist charitable, health-related, educational, and other community-based programs and projects. The officers of the Foundation are also officers of the Company. These officers receive no compensation for the management services performed for the Foundation but are reimbursed for any cash expenditures incurred on behalf of the Foundation. The Foundation is not a subsidiary of the Company and the financial results of the Foundation are not consolidated with the Company’s financial statements. For 2004, 2003 and 2002, the Company contributed $3.0, $24.0 and $0.1, respectively, to the Foundation. The Company has no current legal obligations for future commitments to the Foundation.
Management, under the supervision and with the participation of the principal executive officer and principal financial officer, has established disclosure controls and procedures to ensure that material information relating to the Company is made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors. Based on their evaluation, the principal executive officer and principal financial officer of the Company have concluded that as of December 31, 2004 the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934) were effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in U.S. Securities and Exchange Commission rules and forms.
Management, under the supervision and with the participation of the principal executive officer and principal financial officer, of WellPoint, Inc. (the “Company”) is responsible for establishing and maintaining effective internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f) (“Internal Control”). The Company’s Internal Control is designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles (“GAAP”). The Company’s Internal Control includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of inherent limitations in any Internal Control, no matter how well designed, misstatements due to error or fraud may occur and not be detected. Accordingly, even effective Internal Control can provide only reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Management, under the supervision and with the participation of the principal executive officer and principal financial officer, assessed the effectiveness of the Company’s Internal Control as of December 31, 2004. Management’s assessment was based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
assets and net assets, respectively, as of December 31, 2004, and approximately $2.0 billion and $0.1 billion of the Company’s revenues and net income, respectively, for the year then ended.
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
The information required by this Item concerning the Executive Officers, the Directors and nominees for Director of the Company and concerning disclosure of delinquent filers under Section 16(a) of the Exchange Act and concerning the Company’s Standards of Business Conduct is incorporated herein by reference from the Company’s definitive Proxy Statement for its 2005 Annual Meeting of Shareholders, which will be filed with the Commission pursuant to Regulation 14A within 120 days after the end of the Company’s last fiscal year.
The information required by this Item concerning remuneration of the Company’s Officers and Directors and information concerning material transactions involving such Officers and Directors is incorporated herein by reference from the Company’s definitive Proxy Statement for its 2005 Annual Meeting of Shareholders which will be filed with the Commission pursuant to Regulation 14A within 120 days after the end of the Company’s last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this Item concerning the stock ownership of management and five percent beneficial owners and securities authorized for issuance under equity compensation plans is incorporated herein by reference from the Company’s definitive Proxy Statement for its 2005 Annual Meeting of Shareholders which will be filed with the Commission pursuant to Regulation 14A within 120 days after the end of the Company’s last fiscal year.
The following consolidated financial statements of the Company are set forth in Part II, Item 8.
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2004, 2003 and 2002
The following financial statement schedule of the Company is included in Item 15(c):
A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference.
On November 30, 2004, Anthem, Inc. (“Anthem”) and WellPoint Health Networks Inc. (“WHN”) completed their merger. WHN merged with and into Anthem Holding Corp., a direct and wholly-owned subsidiary of Anthem, with Anthem Holding Corp. as the surviving entity in the merger. In connection with the merger, Anthem amended its articles of incorporation to change its name to WellPoint, Inc. (“WellPoint”). In addition, the ticker symbol for Anthem’s common stock listed on the New York Stock Exchange was changed to “WLP”. WHN’s operating results are included in WellPoint’s consolidated financial statements for the period following November 30, 2004.
WellPoint received cash dividends from subsidiaries of $1,097.7, $458.6 and $702.0 during 2004, 2003 and 2002, respectively.
The current portion of long-term debt is reported with other current liabilities and represents the senior unsecured notes at 4.875% of $149.8, which mature in August 2005.
WellPoint had cash requirements of approximately $4,000.0 for the WHN merger, including both the cash portion of the purchase price and estimated transaction costs. In anticipation of the merger, on November 15, 2004, WellPoint entered into a bridge loan agreement under which it could borrow up to $3,000.0. The amounts available under this bridge loan were reduced to $1,500.0 upon WellPoint entering into the senior credit facilities described in the paragraph below. On November 30, 2004, WellPoint borrowed $500.0 under this bridge facility to partially fund the WHN merger. As further described below, senior unsecured notes were issued to replace this bridge loan during December 2004. Upon issuance of the senior unsecured notes, the $500.0 of borrowings under the bridge loan was required to be repaid and the commitments under the bridge loan agreement were terminated.
Effective upon the merger with WHN, the board of directors authorized an increase in WellPoint’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 WellPoint debt and common stock. WellPoint 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 WellPoint’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.
Subordinated debentures included in Equity Security Units were unsecured and subordinated in right of payment to all existing and future senior indebtedness. During August 2004, WellPoint completed a remarketing of its $230.0 subordinated debentures included in Equity Security Units, as required under the terms of the Equity Security Units issued in November 2001. As a result of the remarketing, the interest rate on the subordinated debentures was reset to 4.655%.
In connection with the remarketing, in August 2004 WellPoint issued $200.0 of 3.500% Notes due 2007, which were used to exchange and retire $190.0 aggregate principal amount of the 4.655% remarketed subordinated debentures. WellPoint also received approximately $4.7 of cash proceeds, net of underwriting discounts and offering expenses. Following issuance of the 3.500% Notes due 2007, $40.0 of aggregate principal amount of the 4.655% remarketed debentures remained outstanding. During November 2004, WellPoint repurchased and retired the remaining $40.0 of aggregate principal amount of the 4.655% subordinated debentures and as of December 31, 2004, no amounts of the 4.655% subordinated debentures remain outstanding. The $200.0 of 3.500% Notes due 2007 were issued under a shelf registration filed with the Securities and
The information regarding capital stock contained in Note 12 of the Notes to Consolidated Financial Statements of WellPoint and its subsidiaries is incorporated herein by reference.
Plan of Conversion to a Stock Insurance Company, proposed by the Board of Directors of Anthem Insurance Companies, Inc. on June 18, 2001, incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form S-1 (Registration No. 333-67714).
Articles of Incorporation of the Company, as amended effective November 30, 2004, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 30, 2004.
Specimen of Certificate of the Company’s common stock, $0.01 par value per share, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (Registration No. 333-120851).
Indenture, dated as of November 2, 2001, by and between the Company and The Bank of New York, as trustee, regarding subordinated debentures, incorporated by reference to Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
(b) Purchase Contract Agreement, dated as of November 2, 2001, between the Company and The Bank of New York, as purchase contract agent, relating to the 5.95% Subordinated Debentures due 2006, incorporated by reference to Exhibit 4.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
(g) Form of Remarketing Agreement, incorporated by reference to Exhibit 4.10 to the Company’s Registration Statement on Form S-1 (Registration No. 333-70566).
Indenture, dated as of July 31, 2002, between the Company and The Bank of New York, as trustee, incorporated by reference to Exhibit 4.13 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
(b) Form of 4.875% Note due 2005 (Included in Exhibit 4.5(a)), incorporated by reference to Exhibit 4.14 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
Commercial Paper Dealer Agreement, dated as of March 11, 2003, among the Company, as Issuer, and J.P. Morgan Securities Inc., Banc of America Securities LLC and Salomon Smith Barney Inc., each as Dealer, incorporated by reference to Exhibit 4.18 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
(a) Issuing and Paying Agency Agreement, dated as of March 11, 2003, by and between the Company and JPMorgan Chase Bank, incorporated by reference to Exhibit 4.19 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
Senior Note Indenture, dated as of December 31, 2002, between the Company and The Bank of New York, as trustee, incorporated by reference to Exhibit 4.16 to the Company’s Current Report on Form 8-K filed on August 25, 2004.
(a) First Supplemental Indenture, dated as of August 27, 2004, between the Company and The Bank of New York, as trustee, establishing 3.50% Senior Notes due 2007, incorporated by reference to Exhibit 4.20 to the Company’s Current Report on Form 8-K filed on August 27, 2004.
(b) Form of 3.50% Senior Note due 2007 (included as Exhibit A in Exhibit 4.8(a)), incorporated by reference to Exhibit 4.21 to the Company’s Current Report on Form 8-K filed on August 27, 2004.
5-Year Credit Agreement, dated as of November 19, 2004, among the Company, as the Borrower; Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer; the other Lenders party thereto; JPMorgan Chase Bank, as Syndication Agent; UBC Loan Finance LLC and Williams Street Commitment Corporation, as Co-Documentation Agents; and Banc of America Securities LLC and J.P.Morgan Securities Inc., as Joint Lead Arrangers and Joint Book Managers, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 24, 2004.
Amended and Restated Indenture, dated as of June 8, 2001, by and between WellPoint Health Networks Inc. (as predecessor by merger to Anthem Holding Corp., “WellPoint Health”) and The Bank of New York, as trustee, incorporated by reference to Exhibit 4.3 to WellPoint Health’s Current Report on Form 8-K filed on June 12, 2001 (File No. 001-13083).
(a) First Supplemental Indenture, dated as of November 30, 2004, between Anthem Holding Corp. and The Bank of New York, as trustee.
(c) Form of Note evidencing WellPoint Health’s 6 3/8% Notes due 2012, incorporated by reference to Exhibit 4.1 to WellPoint Health’s Current Report on Form 8-K filed on January 16, 2002 (File No. 001-13083).
Indenture, dated as of December 9, 2004, between the Company and The Bank of New York Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 15, 2004.
(a) Registration Rights Agreement, dated as of December 9, 2004, among the Company, Banc of America Securities LLC, Goldman, Sachs & Co., J.P. Morgan Securities Inc. and UBS Securities LLC, incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on December 15, 2004.
Upon the request of the Securities and Exchange Commission, the Company will furnish copies of any other instruments defining the rights of holders of long-term debt of the Company or its subsidiaries.
Anthem 2001 Stock Incentive Plan, amended and restated as of January 1, 2003, incorporated by reference to Exhibit 10.1(iii) to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.
(b) Form of Anthem 2001 Stock Incentive Plan Restricted Stock Award Letter as of January 1, 2005.
Anthem Employee Stock Purchase Plan, incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-1 (Registration No. 333-67714).
Employment Agreement by and between Anthem Insurance Companies, Inc. and Larry C. Glasscock, dated as of October 22, 1999, incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-1 (Registration No. 333-67714).
Employment Agreement by and between Anthem Insurance Companies, Inc. and Samuel R. Nussbaum, M.D., dated as of January 2, 2001, incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-1 (Registration No. 333-67714).
(c) Amendment Three to Employment Agreement by and between Anthem Insurance Companies, Inc. and Samuel R. Nussbaum, N.D., effective as of January 1, 2005.
Employment Agreement by and between Anthem Insurance Companies, Inc. and Michael L. Smith, dated as of January 1, 2000, incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1 (Registration No. 333-67714).
(a) Amendment One to Employment Agreement by and between Anthem Insurance Companies, Inc. and Marjorie W. Dorr, effective as of January 1, 2000, incorporated by reference to Exhibit 10.7(ii) to the Company’s Registration Statement on Form S-1 (Registration No. 333-67714).
(c) Amendment Three to Employment Agreement by and between Anthem Insurance Companies, Inc. and Marjorie W. Dorr, effective as of January 1, 2001, incorporated by reference to Exhibit 10.7(iv) to the Company’s Registration Statement on Form S-1 (Registration No. 333-67714).
(d) Amendment Four to Employment Agreement by and between Anthem Insurance Companies, Inc. and Marjorie W. Dorr, effective as of January 1, 2002, incorporated by reference to Exhibit 10.7(v) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
(e) Amendment Five to Employment Agreement by and between Anthem Insurance Companies, Inc. and Marjorie W. Dorr, effective as of January 1, 2003, incorporated by reference to Exhibit 10.7(vi) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
(b) Amendment Two to Employment Agreement by and between Anthem Insurance Companies, Inc. and Keith R. Faller, effective as of January 1, 2001, incorporated by reference to Exhibit 10.8(iii) to the Company’s Registration Statement on Form S-1 (Registration No. 333-67714).
(d) Amendment Four to Employment Agreement by and between Anthem Insurance Companies, Inc. and Keith R. Faller, effective as of January 1, 2003, incorporated by reference to Exhibit 10.8(v) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
Employment Agreement by and between Anthem Insurance Companies, Inc. and Mark L. Boxer, dated as of November 13, 2000.
Employment Agreement by and between the Company and Randall Lewis, dated as of July 14, 2003.
Letter from Anthem Insurance Companies, Inc. to L. Ben Lytle regarding retirement benefits, incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1 (Registration No. 333-67714).
Anthem Deferred Compensation Plan, amended and restated effective January 1, 1997, incorporated by reference to Exhibit 10.14(i) to the Company’s Registration Statement on Form S-1 (Registration No. 333-67714).
(b) Second Amendment to Anthem Deferred Compensation Plan, executed March 30, 2000, incorporated by reference to Exhibit 10.14(iii) to the Company’s Registration Statement on Form S-1 (Registration No. 333-67714).
Anthem Board of Directors’ Deferred Compensation Plan, amended and restated as of January 1, 2004, incorporated by reference to Exhibit 10.15(i) to the Company’s Quarterly Report on Form
Anthem Supplemental Executive Retirement Plan, amended and restated effective January 1, 1997, incorporated by reference to Exhibit 10.16(i) to the Company’s Registration Statement on Form S-1 (Registration No. 333-67714).
Anthem 1998 Long-Term Incentive Plan, effective January 1, 1998, incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement on Form S-1 (Registration No. 333-67714).
(a) First Amendment to the Anthem 2001-2003 Long-Term Incentive Plan, dated April 25, 2002, incorporated by reference to Exhibit 10.18(i) to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
2001 Annual Incentive Plan, incorporated by reference to Exhibit 10.19 to the Company’s Registration Statement on Form S-1 (Registration No. 333-67714.
Anthem Split Dollar Life Insurance Program, amended and restated effective November 1, 1998, incorporated by reference to Exhibit 10.21 to the Company’s Registration Statement on Form S-1 (Registration No. 333-67714).
Blue Cross License Agreement by and between Blue Cross and Blue Shield Association and the Company, dated November 2, 2001, incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
Blue Shield License Agreement by and between Blue Cross and Blue Shield Association and the Company, dated November 2, 2001, incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
(b) Second Amendment of the Anthem 401(k) Long Term Savings Investment Plan (Second Restatement Effective January 1, 1997), effective October 31, 2002, incorporated by reference to Exhibit 10.25(i) to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
(c) Third Amendment of the Anthem 401(k) Long Term Savings Investment Plan (Second Restatement Effective January 1, 1997), effective January 1, 2002, incorporated by reference to Exhibit 10.25(ii) to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
(e) Fifth Amendment of the Anthem 401(k) Long Term Savings Investment Plan (Second Restatement Effective January 1, 1997), effective January 1, 2004, incorporated by reference to Exhibit 10.25(v) to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
(f) Sixth Amendment of the Anthem 401(k) Long Term Savings Investment Plan (Second Restatement Effective January 1, 1997), effective January 1, 2004, incorporated by reference to Exhibit 10.25(vi) to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
Noncompetition Agreement, dated as of April 27, 2002, among the Company, Trigon Healthcare, Inc. and Thomas G. Snead, Jr., incorporated by reference to Exhibit 10.26 to the Company’s Registration Statement on Form S-4 (Registration No. 333-88776).
(a) First Amendment to the Trigon Healthcare, Inc. 1997 Stock Incentive Plan, dated as of February 15, 2000, incorporated by reference to Exhibit 10.1 to Trigon Healthcare, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.
Trigon Healthcare, Inc. Non-Employee Directors Stock Incentive Plan, incorporated by reference to Exhibit C to Trigon Healthcare, Inc.’s Definitive Proxy Statement for its 1997 Annual Meeting of Shareholders filed on March 14, 1997.
(a) Amendment to the Trigon Healthcare, Inc. Non-Employee Directors Stock Incentive Plan, dated as of April 24, 2002, incorporated by reference to Exhibit 10.36 to Trigon Healthcare, Inc.’s Annual Report on Form 10-K/A No.1 for the year ended December 31, 2001.
Form of Trigon Healthcare, Inc. Stock Option Agreement, incorporated by reference to Exhibit 99(ii) to Trigon Healthcare, Inc.’s Registration Statement on Form S-8 (Registration No. 333-45890).
(a) Schedule of Agreements pursuant to the Form of Trigon Healthcare, Inc. Stock Option Agreement, incorporated by reference to Exhibit 99.6 to the Company’s Registration Statement on Form S-8 (Registration No. 333-97423).
Anthem Long-Term Incentive Plan, effective January 1, 2004, incorporated by reference to Exhibit 10.33 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.
Undertakings to California Department of Insurance, dated November 8, 2004, delivered by WellPoint Health, BC Life, Anthem, Inc. and Anthem Holding Corp., incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on November 10, 2004.
Undertakings to California Department of Managed Health Care, dated November 23, 2004, delivered by WellPoint Health, Blue Cross of California, Anthem, Inc. and Anthem Holding Corp., incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on November 30, 2004.
Undertakings, dated January 7, 1993, by WellPoint Health, Blue Cross of California and certain subsidiaries to the California Department of Corporations, incorporated by reference to Exhibit 10.24 to WellPoint Health’s Registration Statement on Form S-1 (Registration No. 33-54898).
WellPoint Health Networks Inc. Board of Directors Deferred Compensation Plan, incorporated by reference to Exhibit 10.52 to WellPoint Health’s Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 001-13083).
(a) Form of WellPoint Health Networks Inc. 1999 Stock Incentive Plan Notice of Grant of Stock Option and Stock Option Agreement, revised December 2001, incorporated by reference to Exhibit 10.01 to WellPoint Health’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (File No. 001-13083).
(b) Form of WellPoint Health Networks Inc. 1999 Stock Incentive Plan Notice of Grant of Stock Option and Stock Option Agreement, revised September 2003, incorporated by reference to Exhibit 10.02 to WellPoint Health’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (File No. 001-13083).
(d) Form of WellPoint Health Networks Inc. 1999 Stock Incentive Plan Restricted Share Right Grant Agreement (Officers), as of January 26, 2004, incorporated by reference to Exhibit 10.06 to WellPoint Health’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (File No. 001-13083).
(e) Form of WellPoint Health Networks Inc. 1999 Stock Incentive Plan Notice of Grant of Stock Option and Stock Option Agreement with Leonard D. Schaeffer, revised December 2001, incorporated by reference to Exhibit 10.07 to WellPoint Health’s Quarterly Report on Form
(f) Form of WellPoint Health Networks Inc. 1999 Stock Incentive Plan Notice of Grant of Stock Option and Stock Option Agreement with Leonard D. Schaeffer revised September 2003, incorporated by reference to Exhibit 10.08 to WellPoint Health’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (File No. 001-13083).
(a) Amendment, dated June 28, 2004, to the WellPoint Health Networks Inc. 1999 Executive Officer Annual Incentive Plan, incorporated by reference to Exhibit 10.02 to WellPoint Health’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (File No. 001-13083).
WellPoint Health Networks Inc. 2000 Employee Stock Option Plan (as amended through October 19, 2001), incorporated by reference to Exhibit 10.33 to WellPoint Health’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 001-13083).
WellPoint Health Networks Inc. Officer Severance Plan (as adopted December 4, 2001), incorporated by reference to Exhibit 10.23 to WellPoint Health’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 001-13083).
RightCHOICE Managed Care, Inc. 1994 Equity Incentive Plan, incorporated by reference to Exhibit 4(c) of the Post-Effective Amendment No. 2 on Form S-8 to Registration Statement on Form S-4 of RightCHOICE Managed Care, Inc. (File No. 333-34750).
RightCHOICE Managed Care, Inc. Nonemployee Directors’ Stock Option Plan, incorporated by reference to Exhibit 10.16 to the Registration Statement on Form S-1 of RightCHOICE Managed Care, Inc., a Missouri corporation (File No. 33-77798).
WellPoint Health Networks Inc. Comprehensive Executive Non-Qualified Retirement Plan (as amended through September 1, 2002), incorporated by reference to Exhibit 10.01 to WellPoint Health’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (File No. 001-13083).
WellPoint 401(k) Retirement Savings Plan Generally Effective January 1, 2002 (As Amended through March 1, 2002), executed on October 10, 2003, incorporated by reference to Exhibit 10.10 to WellPoint Health’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (File No. 001-13083).
(b) Amendment to the WellPoint 401(k) Retirement Savings Plan, effective as of September 1, 2002, incorporated by reference to Exhibit 10.02 to WellPoint Health’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (File No. 001-13083).
(e) Amendment to the WellPoint 401(k) Retirement Savings Plan (as amended through March 1, 2002), dated March 16, 2003, incorporated by reference to Exhibit 10.66 to WellPoint Health’s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-13083).
(f) Distribution Option Amendment to the WellPoint 401(k) Retirement Savings Plan, dated July 24, 2003, incorporated by reference to Exhibit 10.11 to WellPoint Health’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (File No. 001-13083).
(n) Amendment to the WellPoint 401(k) Retirement Savings Plan, executed on November 30, 2004, incorporated by reference to Exhibit 99.15 to the Company’s Registration Statement on Form S-8 (File No. 333-120851).
Amended and Restated Special Executive Retirement Plan, dated as of December 31, 2002, by and between WellPoint Health and Leonard D. Schaeffer, incorporated by reference to Exhibit 99.2 to WellPoint Health’s Current Report on Form 8-K filed on December 31, 2002 (File No. 001-13083).
Letter agreement, dated December 30, 2003, between WellPoint Health and Leonard D. Schaeffer, incorporated by reference to Exhibit 10.82 to WellPoint Health’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 001-13083).
2004 Annual Salary Information for Chief Executive Officer and Named Executive Officers.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act Rules, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
WellPoint is an independent licensee of the Blue Cross Blue Shield Association (“BCBSA”), an association of independent health benefit plans, and serves its members as the Blue Cross licensee for California and as the Blue Cross and Blue Shield licensee for twelve other states: Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri (excluding 30 counties in the Kansas City area), Nevada, New Hampshire, Ohio, Virginia (excluding the Northern Virginia suburbs of Washington, D.C.) and Wisconsin. WellPoint also serves customers throughout various parts of the United States as HealthLink and UniCare.
be other-than-temporary, in which case securities are written down to fair value and the loss is charged to income. The Company evaluates its investment securities for other-than-temporary declines based on quantitative and qualitative factors.
Premium deficiencies are recognized when it is probable that expected claims and loss adjustment expenses will exceed future premiums on existing medical insurance contracts without consideration of investment income. Determination of premium deficiencies for longer duration life and disability contracts includes consideration of investment income. For purposes of premium deficiencies, contracts are deemed to be either short or long duration and are grouped in a manner consistent with the Company’s method of acquiring, servicing and measuring the profitability of such contracts. Once established, premium deficiencies are amortized over the remaining life of the contract.
Other Policyholder Liabilities: Other policyholder liabilities include certain case-specific reserves as well as rate stabilization reserves associated with retrospective rated insurance contracts. Rate stabilization reserves represent accumulated premiums that exceed what customers owe based on actual claim experience and are paid based on contractual requirements.
Comprehensive Income: Comprehensive income includes net income, the change in unrealized gains (losses) on investments, the change in unrealized gains (losses) on cash flow hedges, and the change in the additional minimum pension liability. Other comprehensive income is net of reclassification adjustments to adjust for items currently included in net income, such as realized gains on investment securities.
Company expects to adopt FAS 123R no later than July 1, 2005. We are currently evaluating the effect that FAS 123R will have on our financial position, results of operations, and operating cash flows.
$23.80 in cash, without interest, and one share of WellPoint common stock for each share of WHN common stock held. The purchase price was $16,022.3 and included cash of $3,718.8, the issuance of approximately 155.3 million shares of WellPoint common stock, valued at $11,293.8, WHN stock options converted to WellPoint stock options and other stock awards for approximately 21.8 million shares, valued at $806.3 and $203.4 of estimated transaction costs. The fair value of common stock issued was based on $72.70 per share, which represents the average closing price of the Company’s common stock for the five trading days ranging from two days before to two days after October 27, 2003, the date the merger was announced.
In connection with the WHN merger, the Company executed certain undertakings with the California Department of Managed Health Care, the California Department of Insurance (“California DOI”), and the
Of the $1,172.7 of acquired intangible assets, $706.4 was assigned to Blue Cross and Blue Shield trademarks, which are not subject to amortization due to their indefinite life. The remaining acquired intangible assets consist of $453.7 of subscriber base with a weighted-average life of 23 years, $8.4 of provider and hospital networks with a 20 year life, and $4.2 of non-compete agreements with a 26 month life.
The results of operations for Trigon are included in the Company’s consolidated statement of income after the completion of the acquisition on July 31, 2002.
The components of other intangible assets as of December 31, 2004 and 2003 are as follows:
As required by FAS 142, the Company completed its annual impairment tests of existing goodwill and other intangible assets with indefinite lives during the fourth quarters of 2004, 2003 and 2002. These tests involved the
Aggregate amortization expense for intangible assets with finite lives for 2004, 2003 and 2002 was $61.4, $47.6 and $30.2, respectively. As of December 31, 2004, estimated amortization expense for each of the five years ending December 31, is as follows: 2005, $234.7; 2006, $223.3; 2007, $211.3; 2008, $199.5; and 2009, $187.2.
The Company recorded charges for other-than-temporary impairment of securities of $0.8, $24.4 and $3.1, respectively, for 2004, 2003 and 2002. Charges for other-than-temporary impairment of securities are reported with net realized gains on investments.
Restricted assets accounted for as trading securities totaled $310.2 and $0.0 as of December 31, 2004 and 2003, respectively. Realized gains and losses from trading activities were not material to the consolidated statements of income.
Subordinated debentures included in Equity Security Units were unsecured and subordinated in right of payment to all existing and future senior indebtedness. During August 2004, the Company completed a remarketing of its $230.0 subordinated debentures included in Equity Security Units, as required under the terms of the Equity Security Units issued in November 2001. As a result of the remarketing, the interest rate on the subordinated debentures was reset to 4.655%.
During 2004, the Company entered into forward starting pay fixed swaps and treasury lock swaps with an aggregate notional amount of $2,000.0. The objective of these hedges was to eliminate the variability of cash flows in the interest payments on the expected issuance of debt securities to be used to partially fund the cash portion of the WellPoint merger.
Property and equipment includes noncancelable capital leases of $25.7 and $7.3 at December 31, 2004 and 2003, respectively. Total accumulated amortization on these leases at December 31, 2004 and 2003 was $5.9 and $4.6, respectively. Depreciation and leasehold improvement and capital lease amortization expense for 2004, 2003 and 2002 was $135.7, $127.8 and $108.1, respectively. Capitalized costs related to the internal development of software of $330.9 and $117.2 at December 31, 2004 and 2003, respectively, are reported with computer software.
A summary of net premiums written and earned for the years ended December 31 is as follows:
Directors to make grants in such amounts and at such times as it may determine, including grants of shares of restricted and unrestricted common stock in lieu of the Company’s obligations to pay cash under other plans and compensatory arrangements, including the Company’s Annual Incentive Plan and Long Term Incentive Plan.
In connection with the acquisition of Trigon, the Company assumed the Trigon 1997 Stock Incentive Plan and the Trigon 1997 Non-Employee Directors Stock Incentive Plan, which collectively provided for the granting of stock options to employees and non-employee directors. Trigon stock options were converted to Anthem stock options. Pursuant to this registration, no additional options may be granted under the converted Trigon plans. The converted stock options were recorded at the acquisition date as additional paid in capital and valued at $195.5 using a Black-Scholes option-pricing model with weighted-average assumptions as follows:
A summary of the stock option activity for the years ended December 31 is as follows:
Effective November 30, 2004, as partial consideration in the WHN merger, the Company issued one share of common stock for each WHN share outstanding, resulting in additional outstanding shares of approximately 155.3 million. The $11,293.8 fair value of the common shares issued was determined based on $72.70 per share, which represents the average closing price of the Company’s common stock for the five trading days ranging from two days before to two days after October 27, 2003, the date the merger was announced. Offering costs of $8.3 reduced the aggregate fair value and $11,285.5 was recorded as par value of common stock and additional paid in capital.
Due to uncertainties, including industry issues, regarding both the timing and amount of deductions, the benefit of the valuation allowance releases were offset by an increase in additional income tax liabilities. The industry issues include the valuation and timing of tax deductions for intangibles in existence as of the conversion of Blue Cross Blue Shield organizations to taxable status, and the Special Tax Deduction for Blue Cross Blue Shield entities under Internal Revenue Code Section 833(b).
The components of net periodic benefit cost included in the consolidated statements of income are as follows:
The weighted average assumed health care cost trend rates to be used for next year to measure the expected cost of other benefits is 9% for 2005 with a gradual decline to 5.15% by the year 2009. These estimated trend rates are subject to change in the future. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, an increase in the assumed health care cost trend rate of one percentage point would increase the postretirement benefit obligation as of December 31, 2004 by $36.0 and would increase service and interest costs by $3.0. Conversely, a decrease in the assumed health care cost trend rate of one percentage point would decrease the postretirement benefit obligation by $29.8 as of December 31, 2004 and would decrease service and interest costs by $2.5.
The Company’s current funding strategy is to fund an amount at least equal to the minimum required funding as determined under ERISA with consideration of factors such as the minimum pension liability requirement and maximum tax deductible amounts. The Company may elect to make discretionary contributions, including on a quarterly basis, up to the maximum amount deductible for income tax purposes. For the year ended December 31, 2004, no contributions were required under ERISA, however the Company made a $10.0 tax deductible discretionary contribution on September 30, 2004. Employer contributions related to other benefits represents payments to retirees for current benefits. Contributions to the VEBA are generally not material.
In addition to the defined benefit plans, the Company has several qualified defined contribution plans covering substantially all employees. Eligible employees may only participate in one plan. Depending upon the plan, voluntary employee contributions are matched by the Company subject to certain limitations. Contributions made by the Company totaled $34.0, $13.2 and $14.3 during 2004, 2003 and 2002, respectively.
Certain senior executives were participants in the Anthem 2001 Long Term Incentive Plan (“2001 LTIP”). The 2001 LTIP operated during the three-year period from 2001 to 2003. At the beginning of the three-year period, the Compensation Committee of the Board of Directors established performance goals, which included specific strategic objectives of the Company. Each participant’s target award was established as a percentage ranging from 30% to 150% of annual base salary for each year of the three-year period. Awards under the 2001 LTIP were approved by the Compensation Committee and were paid in 2004, with the executive having the option to defer payment. The 2001 LTIP terminated after completion of the 2001 to 2003 performance period and payout of awards. The award was paid in cash, stock and restricted stock of Anthem. The 2001 LTIP expense for 2003 and 2002 was $89.5 and $73.7, respectively.
The Compensation Committee approved a one year plan, the 2004 Long Term Incentive Plan (“2004 LTIP”), for certain senior executives based on performance goals which include specific strategic objectives of the Company. Each participant’s target award was established as a percentage ranging from 30% to 150% of annual base salary for 2004. Awards under the 2004 LTIP become payable upon approval by the Compensation Committee and will be paid in cash or stock of the Company during 2005, with the executive having the option to defer payment. The 2004 LTIP expense for 2004 was $16.1.
On May 8, 2003, in a case titled Dr. Allen Knecht, et al., v. Cigna, et al., several chiropractors filed a purported class action in federal district court in Portland, Oregon, naming the Company and WHN, as well as several commercial insurers. This suit alleges that the defendants violated RICO and challenges many of the same practices in regards to chiropractors as other suits in the MDL Cases. This case has been transferred to the MDL docket and is now assigned to Judge Moreno in Miami. This case has been stayed as a tag-along case to the MDL Cases.
On October 17, 2003, in a case titled Jeffrey Solomon, D.C., et al., v. Cigna, et al., several chiropractors and a podiatrist, along with chiropractic and podiatric associations, filed suit in federal district court in Miami, Florida, against ten managed care corporations, including the Company. The suit alleges that the companies violated RICO and challenges many of the same practices as other suits in the MDL Cases. This case has been transferred to the MDL docket and is now assigned to Judge Moreno in Miami. This case has been stayed as a tag-along case to the MDL Cases.
On March 26, 2003, in a case titled Irwin v. AdvancePCS, et al. filed in the California Superior Court in Alameda County, California against Advance PCS, WHN and certain of its wholly owned subsidiaries, the plaintiff alleges that the defendants violated California Business and Professions Code Section 17200 by engaging in unfair, fraudulent and unlawful business practices including, among other things, that pharmacy benefit management companies (such as the Company’s subsidiary that does business under the tradename WellPoint Pharmacy Management) engage in unfair practices such as negotiating discounts in prices of drugs from pharmacies and negotiating rebates from drug manufacturers and retaining such discounts and rebates for their own benefit. On July 9, 2004, the court ordered that the case be resolved in arbitration.
From time to time, the Company and certain of its subsidiaries are parties to various legal proceedings, many of which involve claims for coverage encountered in the ordinary course of business. The Company, like HMOs and health insurers generally, excludes certain health care services from coverage under its HMO, PPO and other plans. The Company is, in its ordinary course of business, subject to the claims of its enrollees arising out of decisions to restrict treatment or reimbursement for certain services. The loss of even one such claim, if it results in a significant punitive damage award, could have a material adverse effect on the Company. In addition, the risk of potential liability under punitive damage theories may increase significantly the difficulty of obtaining reasonable settlements of coverage claims.
Following the merger with WHN on November 30, 2004, the organizational structure of the Company changed. As a result of this change, the Company established three reportable segments: Health Care, Specialty, and Other. The Health Care segment is an aggregation of various operating segments, principally differentiated only by geography. These Health Care operating segments have similar economic, product, distribution, customer and regulatory characteristics, and meet the aggregation criteria as defined under paragraph 17 of FAS 131, Disclosures About Segments of an Enterprise and Related Information (“FAS 131”). Segment disclosures for 2003 and 2002 have been reclassified to conform to the 2004 presentation.