offered a diverse portfolio of complementary insurance, managed care products and administrative services to employer, individual, insurer and government customers. The Cobalt merger was effective as of September 30, 2003 for accounting purposes.
On June 30, 2003, the Company completed its acquisition of Golden West (see Note 3 to the Consolidated Financial Statements), which served over 275,000 dental and vision members, primarily in California, at the time of acquisition.
On April 30, 2002, the Company completed its acquisition of MethodistCare (see Note 3 to the Consolidated Financial Statements), which served over 70,000 members in Houston, Texas and surrounding areas at the time of acquisition. This acquisition was intended to enable UNICARE, WellPoint's national operating unit, to expand its product line by offering HMO and open-access products in the Gulf Coast and surrounding regions in Texas, including the greater Houston-Galveston metropolitan area. As a result of the acquisition, the Company recognized an extraordinary gain from negative goodwill on acquisition of $8.9 million, or $0.06 per share assuming full dilution, for the year ended December 31, 2002. (See Note 23 to the Consolidated Financial Statements.)
As a result of these acquisitions, the Company has significantly expanded its operations outside of California. In order to integrate its acquired businesses and implement its regional expansion strategy, the Company will need to develop satisfactory networks of hospitals, physicians and other health care service providers, develop distribution channels for its products and successfully convert acquired books of business to the Company's existing information systems, which will require continued investments by the Company.
In response to rising medical and pharmacy costs, the Company has from time to time implemented premium increases with respect to certain of its products. The Company will continue to evaluate the need for further premium increases, plan design changes and other appropriate actions in the future in order to maintain or restore profit margins. There can be no assurances, however, that the Company will be able to take subsequent pricing or other actions or that any actions previously
The Company's revenues are primarily generated from premiums earned for risk-based health care and specialty services provided to its members; fees for administrative services, including claims processing and access to provider networks for self-insured employers; and investment income. Operating expenses include health care services and other benefits expenses, consisting primarily of payments for physicians, hospitals and other providers for health care and specialty products claims; selling expenses for broker and agent commissions; general and administrative expenses; interest expense; depreciation and amortization expense; and income taxes.
(c)Medical membership includes management services and network services members, which are primarily included in the Large Group for each respective state.
(e)Medical members as of December 31, 2003, excluding BlueCard Host members, include 682,613 medical members from the Cobalt acquisition.
(g)Central Region-Large Group membership includes network access services members, primarily from HealthLink, of 1,246,775 and 1,471,639 as of December 31, 2003 and December 31, 2002, respectively. As of December 31, 2003, the Company revised its methodology of calculating the number of medical members represented by each subscriber contract within the Company's rental networks and a Missouri joint venture. The weighted average factor changed from approximately 2.4 members to 2.1 members per subscriber. The impact of this change as of quarter end for the years ended December 31, 2002 and 2003 is to reduce membership as follows:
(h)The Company has revised its medical membership counting methodology to include estimated "host" members using the national BlueCard program. Host members are generally members who reside in a state in which a WellPoint subsidiary is the Blue Cross and/or Blue Shield licensee and who are covered under an employer-sponsored health plan issued by a non-WellPoint controlled Blue Cross Blue Shield licensee. Host members are computed using, among other things, an
estimate of the average number of BlueCard claims received per member per month. Total BlueCard host members as of quarter end for the years ended December 31, 2002 and 2003 were as follows:
As a result of the January 31, 2002 acquisition of RightCHOICE, the organizational structure of the Company changed effective February 1, 2002. As a result of this change, the Company established the following two reportable segments: Health Care and Specialty. (See Note 18 to the Consolidated Financial Statements for further discussion.) The Health Care segment provides a broad spectrum of network-based health plans, including PPOs, HMOs, POS plans, other hybrid plans and traditional indemnity plans, to large and small employers and individuals as well as other health care-related products, such as vision, preventive care, COBRA and flexible benefits account administration. The Specialty business is maintained as a separate segment providing an array of specialty products, including pharmacy benefits management, dental, life insurance, disability insurance, behavioral health, workers' compensation insurance products and workers' compensation managed care services.
The operating results for the year ended December 31, 2003 compared to the year ended December 31, 2002 were impacted by the Cobalt and RightCHOICE acquisitions. Specifically, the Company's operating results for the year ended December 31, 2003 included three months of operating results from the Cobalt acquisition and twelve months of operating results from the RightCHOICE acquisition, whereas the Company's operating results for the year ended December 31, 2002 included only eleven months (February 1, 2002 through December 31, 2002) of operating results attributable to the acquired RightCHOICE business. In order to provide a more meaningful comparison of the
Company's results of operations for the year ended December 31, 2003 versus the year ended December 31, 2002, the following discussion presents financial measures that exclude operating results attributable to the acquired RightCHOICE business for the month of January 2003 and exclude operating results attributable to the acquired Cobalt business for the three months ended December 31, 2003, which we refer to as "Same-Store." The Company also uses Same-Store measures for purposes of reporting comparative financial results to its Board of Directors.
Management services and other revenue increased 15.4%, or $126.4 million, to $944.8 million for the year ended December 31, 2003 from $818.4 million for the year ended December 31, 2002. Excluding management services and other revenue attributable to the acquired RightCHOICE business of $13.5 million for the month of January 2003 and management services and other revenue attributable to the acquired Cobalt business of $47.6 million for the quarter ended December 31, 2003, management services and other revenue increased $65.3 million or 8.0%. Excluding the RightCHOICE and Cobalt acquisitions, the increase in the Health Care segment was primarily due to an increase in
Selling expense consists of commissions paid to outside brokers and agents representing the Company. The selling expense ratio remained constant at 4.0% for the years ended December 31, 2003 and 2002. Selling expenses were $807.7 million and $681.8 million for the years ended December 31, 2003 and 2002, respectively. The acquired Cobalt business had a lower selling expense ratio of 1.6% (selling expense of $6.5 million and combined premium revenue and management services and other revenue of $406.1 million for the quarter ended December 31, 2003) than the Company's core businesses due to its larger proportion of large employer group business. The RightCHOICE business had a selling expense ratio of 3.8% (selling expense of $4.7 million and combined premium revenue and management services and other revenue of $123.5 million for the one month ended January 31, 2003). Excluding the Cobalt and RightCHOICE acquisitions, the Company's selling expense ratio was 4.1% for the year ended December 31, 2003 as compared to 4.0% for the year ended December 31, 2002.
Interest expense decreased $16.1 million to $50.6 million for the year ended December 31, 2003, compared to $66.7 million for the year ended December 31, 2002. Interest expense for the year ended December 31, 2002 included a $6.3 million pre-tax reclassification related to the extinguishment of debt under the Company's Zero Coupon Convertible Subordinated Debentures that was previously recorded as an extraordinary loss (see Note 23 to the Consolidated Financial Statements). Other than this $6.3 million reclassification, the decrease in interest expense from the year ended December 31, 2002 to the year ended December 31, 2003 was primarily due to the reduction in the weighted average interest rate (which includes fees associated with the Company's borrowings and interest rate swap agreements) for the year ended December 31, 2003 of 4.2%, compared to 6.0% for the year ended December 31, 2002. Partially offsetting the impact of the reduction in the weighted average interest rate was an increase in the Company's commercial paper program of approximately $230.1 million, of which $125.1 million was used to partially fund the Cobalt acquisition.
Other expense, net decreased $19.0 million to $36.1 million for the year ended December 31, 2003, compared to $55.1 million for the year ended December 31, 2002. Prior to 2003, results of the Company's insurance general agency subsidiary were reported on a "net basis" in other expense, net. For the year ended December 31, 2003, the results have been recorded on a "gross basis," with external revenue reported in management services and other revenue, commissions reported in selling expense and other costs reported in general and administrative expense. The impact of this change is a reduction of $17.7 million in other expense, net for the year ended December 31, 2003. In addition, the decrease also resulted from lower losses on disposal of fixed assets of approximately $9.9 million. These decreases were offset by the following items: (i) an increase in intangible amortization of approximately $3.2 million during the quarter ended December 31, 2003, primarily due to the amortization of intangibles acquired in the Cobalt acquisition, (ii) an increase in minority interest expense of $2.7 million related to an equity interest in the Atlanta CHPN. (See "Item 1. Business-Managed Health Care Networks and Provider Relations-Blue Cross Blue Shield of Georgia.") and (iii) a decrease in income from the Company's share of its investments in a joint venture of $2.7 million.
The Company's net income for the year ended December 31, 2003 was $935.2 million, compared to $703.1 million for the year ended December 31, 2002. Net income for the year ended December 31, 2002 included a $38.9 million after-tax realized gain ($64.9 million less $26.0 million tax) from the Company's investment in Trigon Healthcare, Inc. Net income for the year ended December 31, 2002 also included an extraordinary gain of $8.9 million, or $0.06 per basic and diluted share. The extraordinary gain was related to the acquisition of MethodistCare, resulting from an excess of the fair value of net assets over acquisition costs. Earnings per share totaled $6.34 and $4.87 for the years ended December 31, 2003 and 2002, respectively. Earnings per share assuming full dilution totaled $6.16 and $4.67 for the years ended December 31, 2003 and 2002, respectively.
On March 15, 2002, WellPoint effected a two-for-one split of the Company's Common Stock. The stock split was in the form of a 100% stock dividend of one additional share of WellPoint Common Stock for each share outstanding. Share and per share data for 2001 have been adjusted to give effect to the stock split.
The operating results for the year ended December 31, 2002 compared to the year ended December 31, 2001 were impacted by the RightCHOICE acquisition, which was consummated on January 31, 2002. Specifically, the Company's operating results for the year ended December 31, 2002 included eleven months of operating results attributable to the acquired RightCHOICE business. Additionally, the year ended December 31, 2002 included twelve months of operating results attributable to the Cerulean acquisition while the year ended December 31, 2001 only included nine-and-a half months, from the March 15, 2001 acquisition date. In order to provide a more meaningful comparison of the Company's results of operations for the year ended December 31, 2002 versus the year ended December 31, 2001, the following discussion presents financial measures that exclude operating results attributable to the acquired RightCHOICE business for the eleven months ended December 31, 2002, from the January 31, 2002 acquisition date. In addition, two-and-a-half months of operating results attributable to acquired Cerulean business, January 1, 2002 to March 15,
Management services and other revenue increased 34.2%, or $208.7 million, to $818.4 million for the year ended December 31, 2002 from $609.7 million for the year ended December 31, 2001. Excluding management services and other revenue attributable to the acquired RightCHOICE business of $138.0 million for the eleven months ended December 31, 2002 and acquired Cerulean business of $36.4 million from January 1, 2002 to March 15, 2002, management services and other revenue increased $34.3 million, or 5.6%, on a Same-Store basis for the year ended December 31, 2002 due primarily to an increase in pharmacy benefit management services revenues.
Investment income was $314.0 million for the year ended December 31, 2002, compared to $241.8 million for the year ended December 31, 2001, an increase of $72.2 million or 29.9%. This $72.2 million increase was a result of a net realized investment gain of $55.4 million for the year ended December 31, 2002, compared to a net realized investment loss of $4.2 million for the year ended December 31, 2001. The net realized investment gains in 2002 were primarily due to a pre-tax investment gain of $64.9 million realized from WellPoint's investment in Trigon Healthcare, Inc., which was acquired by Anthem, Inc. during 2002. In accordance with generally accepted accounting principles, WellPoint realized the gain related to its investment upon completion of the Trigon transaction. Excluding this gain on the Trigon transaction, net realized investment losses for the years ended December 31, 2002 and 2001 would have been $9.5 million and $4.2 million, respectively. This increase in net realized investment losses of $5.3 million resulted primarily from the Company's restructuring of its investment portfolio mix in 2002. The Company believes the disclosure of net realized investment losses for the year ended December 31, 2002 excluding the Trigon gain is useful to investors in understanding the reasons, other than the Trigon gain, for the change in net realized investment losses from the year ended December 31, 2001. The Company also excludes the Trigon gain for purposes of reporting comparative financial results to its Board of Directors. Gross investment income increased $16.1 million, or 6.4%, for the year ended December 31, 2002 from the year ended December 31, 2001 as a result of higher average investment balances during the year ended December 31, 2002 (for which gross investment income was $267.9 million) versus the year ended December 31, 2001 (for which gross investment income was $251.8 million). As a partial offset to this increase, net investment expenses increased by $3.5 million from $5.8 million for the year ended December 31, 2001 to $9.3 million for the year ended December 31, 2002, due primarily to higher investment manager fees.
The following table depicts health care services and other benefits expense by reportable segment:
The medical care ratio for the year ended December 31, 2002 of 81.5% remained unchanged from the year ended December 31, 2001. The medical care ratio attributable to the Health Care segment was 81.9% for the year ended December 31, 2002 compared to 82.0% for the year ended December 31, 2001. The medical care ratio attributable to the Specialty segment was 68.4% for the year ended December 31, 2002 compared to 70.4% for the year ended December 31, 2001. The acquired RightCHOICE business had a slightly lower medical care ratio than the Company's core businesses, while the acquired Cerulean business experienced a higher medical care ratio than the Company's core businesses due to Cerulean's higher percentage of large employer group business and fewer managed care offerings. Excluding health care services and other benefits expense attributable to the acquired RightCHOICE business of $928.4 million for the eleven months ended December 31, 2002 and acquired Cerulean business of $455.2 million from January 1, 2002 to March 15, 2002, health care services and other benefits expense increased $2,391.2 million, or 25.3%, on a Same-Store basis, commensurate with the Same-Store increase in premium revenue. On a Same-Store basis, the medical care ratio for the Company remained unchanged at 81.5% for the years ended December 31, 2002 and 2001.
The general and administrative expense ratio decreased to 12.7% for the year ended December 31, 2002 from 13.7% for the year ended December 31, 2001. The acquired RightCHOICE business experienced a higher general and administrative expense ratio than the Company's core businesses for the year ended December 31, 2002 due to integration expenses, its higher concentration of administrative services business and certain other transaction-related expenses. The acquired Cerulean business experienced an improved general and administrative expense ratio for the year ended December 31, 2002 over the year ended December 31, 2001. Excluding general and administrative expense attributable to the acquired RightCHOICE business of $203.5 million and combined premium revenue and management services and other revenue of $1,295.7 million for the eleven months ended December 31, 2002 and general and administrative expense attributable to the acquired Cerulean business of $76.9 million and combined premium revenue and management services and other revenue of $576.4 million from January 1, 2002 to March 15, 2002, the general and administrative expense ratio decreased to 12.4% for the year ended December 31, 2002, compared to 13.7% for the year ended December 31, 2001. This decrease was due to administrative efficiencies from technology investments and systems convergence efforts and fixed administrative costs spread over a larger membership base.
Interest expense increased $16.8 million to $66.7 million for the year ended December 31, 2002, compared to $49.9 million for the year ended December 31, 2001. As mentioned earlier, interest expense for the year ended December 31, 2002 included a $6.3 million pre-tax reclassification related to the extinguishment of debt under the Company's Zero Coupon Convertible Subordinated Debentures that was previously recorded as an extraordinary loss (see Note 23 to the Consolidated Financial Statements). Other than this $6.3 million reclassification, the increase in interest expense from the year ended December 31, 2001 to the year ended December 31, 2002 was related to the higher average debt balance for the year ended December 31, 2002 in comparison to the year ended December 31, 2001, primarily due to the issuance of the $350.0 million aggregate principal amount at maturity of 63/8% Notes on January 16, 2002 (see Note 11 to the Consolidated Financial Statements) as a result of the RightCHOICE acquisition. Partially offsetting the increase in interest expense was a reduction in borrowing rates. The weighted average interest rate for all debt for the years ended December 31, 2002 and 2001, including the fees associated with the Company's borrowings and interest rate swap agreements, was 6.0% and 6.7%, respectively.
The Company's net income for the year ended December 31, 2002 was $703.1 million, compared to $414.7 million for the year ended December 31, 2001. Net income for the year ended December 31, 2002 included net realized investment gains of $33.3 million, net of tax, which included a $38.9 million after-tax realized gain from the Company's investment in Trigon Healthcare, Inc. as discussed earlier and an extraordinary gain related to the acquisition of MethodistCare, resulting from an excess of the fair value of net assets over acquisition costs. This extraordinary gain amounted to $8.9 million, or $0.06 per diluted share. The Company reclassified the pre-tax extraordinary loss related to the early redemption of certain of the Company's Zero Coupon Convertible Subordinated Debentures due 2019 of $6.3 million ($3.8 million, net of tax, or $0.03 per diluted share) to interest expense pursuant to Statement of Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." (See Note 23 to the Consolidated Financial Statements.) Net income for the year ended December 31, 2002, excluding net realized investment gains of $33.3 million and the $8.9 million extraordinary gain, was $660.9 million, or $4.39 per diluted share. For the year ended December 31, 2001, adjusted for the SFAS No. 142 impact of $32.2 million, net income would have been $446.9 million or $3.39 per diluted share. (See Note 7 to the Consolidated Financial Statements.)
member months of 4.9% for the year ended December 31, 2003 compared to the year ended December 31, 2002. See "Critical Accounting Policies" for a discussion of medical claims payable and reserves for future policy benefits. As of December 31, 2003, the Company's long-term indebtedness was $1,238.3 million, of which $459.4 million was related to the Company's 63/8% Notes due 2006 (which includes a fair value adjustment of $9.9 million), $349.1 million was related to the Company's 63/8% Notes due 2012 and $429.8 million was related to the commercial paper program. The 63/8% Notes due 2012, with an aggregate principal amount at maturity of $350.0 million, were issued to partially finance the RightCHOICE acquisition in 2002. The Company's revolving credit facility indebtedness of $235.0 million at December 31, 2001 was repaid during the year ended December 31, 2002, with $200.0 million obtained through the commercial paper program and operating cash of $35.0 million. During the year ended December 31, 2003, the Company issued an additional $104.7 million in commercial paper (net of repayments made during the year) to repurchase Common Stock of the Company. In the third quarter of 2003, the Company also issued an additional $125.1 million in commercial paper primarily to finance the purchase of Cobalt (refer to "Liquidity and Capital Resources" below for a discussion of the potential repurchase of the Company's commercial paper as a result of the Company's pending merger with Anthem, Inc.).
Stockholders' equity totaled $5,429.9 million as of December 31, 2003, an increase of $1,453.2 million from $3,976.7 million as of December 31, 2002. The increase was primarily due to net income of $935.2 million for the year ended December 31, 2003, the net issuance of 5.1 million shares, or $441.4 million, of the Company's Common Stock related to the acquisition of Cobalt, a net increase of $382.3 million from the reissuance of treasury stock related to the Company's employee 401(k) plan, stock option and stock purchase plans and an increase in other comprehensive income of $105.6 million, net of taxes. Partially offsetting these increases were the repurchase of 3.9 million shares of the Company's Common Stock for $268.6 million and net losses from the reissuance of treasury stock of $142.7 million.
As of December 31, 2003, consolidated cash and investments were $8.8 billion, of which $1.4 billion was in cash and cash equivalents. The Company's primary sources of cash are premium and management services revenues and investment income. The Company's primary uses of cash include health care claims and other benefits, capitation payments, income taxes, repayment of long-term debt, interest expense, broker and agent commissions, administrative expenses, Common Stock repurchases and capital expenditures. In addition to the foregoing, other uses of cash include provider network and systems development costs and costs associated with the integration of acquired businesses.
Net cash provided by operating activities was $1,464.1 million for the year ended December 31, 2003, compared with $1,401.0 million for the year ended December 31, 2002. Net cash provided by operating activities for the year ended December 31, 2003 was due primarily to net income of $935.2 million, an increase in medical claims payable of $138.2 million due to membership growth and higher health care expenses per member per month, an increase in accounts payable and accrued expenses of $190.6 million primarily attributable to employee compensation related accruals, an increase in income taxes payable of $137.9 million and an increase in other current liabilities of $91.4 million due to timing of pharmaceutical drug and pharmacy rebate payments, increases in drug purchases and timing of other accruals related to normal operations. Partially offsetting these increases was an increase in receivables, net of $172.2 million due to timing of cash receipts, primarily related to pharmacy rebate receivables from hospitals and government agencies and membership growth.
or pursuant to an auction bid process. The $750.0 million facility also contains sublimits for letters of credit and "swingline" loans. Each credit agreement requires the Company to maintain certain financial ratios and contains restrictive covenants, including restrictions on the incurrence of additional indebtedness and the granting of certain liens, limitations on acquisitions and investments and limitations on changes in control (see Note 11 to the Consolidated Financial Statements). As of December 31, 2003 and December 31, 2002, there were no amounts outstanding under the revolving credit facility.
In anticipation of the completion of the RightCHOICE acquisition on January 31, 2002, the Company on January 16, 2002 issued $350.0 million aggregate principal amount at maturity of 63/8% Notes due January 15, 2012 (the "2012 Notes"). The net proceeds of this offering totaled approximately $348.9 million. The 2012 Notes bear interest at a rate of 63/8% per annum, payable semi-annually in arrears on January 15 and July 15 of each year commencing July 15, 2002. Interest is computed on the basis of a 360-day year of twelve 30-day months.
The 2006 Notes may be redeemed, in whole or in part, at the Company's option at any time. The redemption price for any 2006 Notes redeemed will be equal to the greater of the following amounts: 1) 100% of the principal amount of the 2006 Notes being redeemed on the redemption date; and 2) the sum of the present values of the remaining scheduled payments of principal and interest on the 2006 Notes being redeemed on that redemption date (not including any portion of any payments of interest accrued to the redemption date) discounted to the redemption date on a semi-annual basis at the Treasury rate as determined by the designated Reference Treasury Dealer (Salomon Smith Barney Inc. or UBS Warburg LLC or their respective successors), plus 25 basis points. In each case, the redemption price will also include accrued and unpaid interest on the 2006 Notes to the redemption date.
The 2006 and 2012 Notes are unsecured obligations and rank equally with all of the Company's existing and future senior unsecured indebtedness. All existing and future liabilities of the Company's subsidiaries are and will be effectively senior to the 2006 and 2012 Notes. The indenture governing the 2006 and 2012 Notes contains a covenant that limits the ability of the Company and its subsidiaries to create liens on any of their property or assets to secure certain indebtedness without also securing the indebtedness under the 2006 and 2012 Notes.
On October 2, 2002, the Company announced that it had elected to redeem its Zero Coupon Convertible Subordinated Debentures due 2019 (the "Debentures") as of October 28, 2002. Substantially all of the Debentures were tendered for conversion into the Company's Common Stock prior to the redemption date. Approximately $50,000 principal amount at maturity of the Debentures were settled in cash. This conversion did not have an extraordinary income statement impact. (See Note 11 to the Consolidated Financial Statements.) Prior to the Company's announcement of its election to redeem the Debentures, Debentureholders in 2002 converted $18.0 million in aggregate principal amount at maturity of the Company's Debentures with a carrying value (including accreted interest) of $12.6 million. In lieu of delivering shares of Common Stock upon conversion of these Debentures, the Company elected to pay cash of $18.9 million, which resulted in an extraordinary after-tax loss of $3.8 million, as shown on the Consolidated Income Statements in the Company's annual report on Form 10-K for the year ended December 31, 2002. In accordance with SFAS No. 145, which was effective for fiscal years beginning after May 15, 2002, the Company had determined that the extinguishment of debt under the Debentures did not meet the requirements of unusual or infrequent and therefore would not be included as an extraordinary item with the rescission of FASB Statement No. 4. Accordingly, for the year ended December 31, 2002, the Company reclassified an extraordinary loss of $6.3 million, which included a tax benefit of $2.5 million, to interest expense.
As a part of a hedging strategy to limit its exposure to variable interest rate increases, the Company has from time to time entered into interest rate swap agreements in order to reduce the volatility of interest expense resulting from changes in interest rates on its variable rate debt. The swap agreements were contracts to exchange variable-rate interest payments (weighted average rate for the year ended December 31, 2002 of 2.25%) for fixed-rate interest payments (weighted average rate for the year ended December 31, 2002 of 7.08%) without the exchange of the underlying notional amounts. In 2002, the Company was party to $200.0 million of fixed-rate swap agreements, consisting of a $150.0 million notional amount swap agreement at 6.99% maturing on October 17, 2003 and a $50.0 million notional amount swap agreement at 7.06% maturing on October 17, 2006. In September 2002, the Company terminated these two fixed-rate swap agreements with an aggregate cash settlement of $17.6 million, of which $1.8 million was accrued interest and the remaining $15.8 million represented the fair value of the swap agreements at the time of termination and is being amortized over the term of the original swap agreements. As of December 31, 2003, the remaining balance of the unamortized $50.0 million notional amount swap agreement was $5.4 million. (See Note 12 to the Consolidated Financial Statements.)
(B)As of December 31, 2003, outstanding borrowings under the commercial paper program totaled approximately $429.8 million, with an average maturity of 43 days. The commercial paper may be issued with varying maturities up to a maximum of 270 days from the date of issuance. The Company intends to maintain commercial paper borrowings of at least the amount outstanding at December 31, 2003 for more than one year. Accordingly, for financial reporting purposes, the commercial paper has been classified under non-current liabilities in the Consolidated Financial Statements. (See Note 11 to the Consolidated Financial Statements.)
The Company's committed credit availability as of December 31, 2003 was as follows:
In connection with obtaining the approval of WellPoint's and Anthem's shareholders for the proposed merger, Anthem filed a preliminary registration statement on Form S-4, including the preliminary joint proxy statement/prospectus constituting a part thereof, with the Securities and Exchange Commission on November 26, 2003. Anthem will file a final registration statement, including a definitive joint proxy statement/prospectus constituting a part thereof, and other documents with the Securities and Exchange Commission. The final joint proxy statement/prospectus will be mailed to holders of WellPoint and Anthem common stock.
WellPoint and Anthem have made appropriate filings and applications with insurance and HMO regulators in California, Delaware, Georgia, Illinois, Missouri, Oklahoma, Puerto Rico, Texas, Virginia, West Virginia and Wisconsin. Pursuant to applicable insurance and HMO laws and regulations, and before the merger may be consummated, the insurance commissioner and, where applicable, HMO regulator, must review and approve the acquisition of control of the insurance company or HMO subsidiary domiciled in its respective jurisdiction. In addition to the filings with and approvals from the domiciliary insurance and HMO regulators, pre-acquisition notifications of the merger under state insurance antitrust laws and regulations will be required in certain states in which insurance company or HMO subsidiaries of both WellPoint and Anthem operate.
Following the merger, WellPoint stockholders will become shareholders of Anthem. In addition, in the merger agreement, among other things, WellPoint has agreed that Anthem will have its corporate headquarters and principal executive offices in Indianapolis, Indiana and that Anthem's name will be changed to WellPoint, Inc. WellPoint and Anthem have also agreed to file an application to have the common stock of Anthem listed on the New York Stock Exchange under the ticker symbol "WLP."
After the merger, the board of directors of Anthem will have 19 members, consisting of 11 current members of Anthem's board of directors designated by Anthem (including Larry C. Glasscock) and eight current members of WellPoint's board of directors designated by WellPoint (including Leonard D. Schaeffer). Also after the merger, Leonard D. Schaeffer of WellPoint will be Chairman of the Board of Directors of Anthem and Larry C. Glasscock of Anthem will be the President and Chief Executive Officer and a director of Anthem. By the second anniversary of the completion of the merger, Leonard D. Schaeffer will retire as Chairman and as a director of Anthem and Larry C. Glasscock will succeed him as Chairman.
Either WellPoint or Anthem may terminate the merger agreement, even after the requisite shareholder approvals have been received, if the merger has not been completed by November 30, 2004, and either of them may also terminate the merger agreement in certain other circumstances specified in the merger agreement. The Company currently expects the transaction to close by mid-2004.
In November 2001, WellPoint entered into a merger agreement with CareFirst, Inc. ("CareFirst"), which agreement was amended in January 2003. CareFirst has the exclusive right to use the Blue Cross and Blue Shield names and marks in Maryland, Delaware, the District of Columbia and certain counties in Northern Virginia. Under the amended merger agreement, CareFirst would have become a subsidiary of WellPoint. The consummation of the CareFirst transaction was subject to a number of conditions, including the approval of the insurance regulators in Maryland, Delaware and the District of Columbia for the conversion of CareFirst from a non-profit corporation to a for-profit entity. On March 5, 2003, the Maryland insurance commissioner issued an order disapproving this conversion. In August 2003, the Company received a notice from CareFirst electing to terminate the amended merger agreement in accordance with its terms.
In March 2002, the Company received a letter from the IRS notifying the Company that the IRS was considering revoking the September 1998 private letter ruling. The letter stated that the IRS was considering, in essence, reversing its earlier position and concluding that the $800.0 million payment was not an ordinary and necessary business expense. The letter further stated that the IRS was withdrawing the private letter ruling and that the Company could no longer rely on the private letter ruling. Under Section 7805(b) of the Internal Revenue Code, the IRS has discretionary authority to limit the retroactive effect of any revocation of a letter ruling. In March 2002, the Company submitted a written request for such relief under Section 7805(b).
RightCHOICE common stock. In connection with the RightCHOICE Recapitalization, the predecessor of Old RightCHOICE, Blue Cross and Blue Shield of Missouri, received a ruling from the IRS that, among other things, the conversion of Blue Cross and Blue Shield of Missouri from a non-profit corporation to a for-profit corporation qualified as a reorganization under the Internal Revenue Code and that Blue Cross and Blue Shield of Missouri recognized no gain or loss for federal income tax purposes. If the IRS subsequently revokes, modifies or decides not to honor the ruling due to a change in law or for any other reason, RightCHOICE, as the successor to Old RightCHOICE, could be subject to federal income tax on the difference between the value of each of Blue Cross and Blue Shield of Missouri's assets at the time of the RightCHOICE Recapitalization and its tax basis in its assets at the time of the RightCHOICE Recapitalization. RightCHOICE is now a wholly owned subsidiary of WellPoint. RightCHOICE and the Missouri Foundation entered into an indemnification agreement that provides, with certain exceptions, that the Missouri Foundation will indemnify RightCHOICE against the tax liability as a result of the IRS's revocation or modification, in whole or in part, of its ruling, or an IRS determination that RightCHOICE's conversion was a taxable transaction for federal income tax purposes. If a tax liability should arise against which the Missouri Foundation has agreed to indemnify RightCHOICE, the Missouri Foundation may not have sufficient assets to pay the liability. RightCHOICE would then bear all or a portion of the liability, which could have a material adverse effect on the financial condition of RightCHOICE and the Company.
The preparation of financial statements in conformity with generally accepted accounting principles requires the Company's management to make a variety of estimates and assumptions. These estimates and assumptions affect, among other things, the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. Actual results could differ from the amounts previously estimated, which were based on the information available at the time the estimates were made.
Medical claims payable includes claims in process as well as provisions for the estimate of incurred but not reported claims ("IBNR") and provisions for disputed claims obligations. As of December 31, 2003, approximately 90% of the Company's medical claims payable consisted of IBNR and claims in process. Such estimates are developed using actuarial principles and assumptions that consider, among other things, contractual requirements, historical utilization trends and payment patterns, benefits changes, medical inflation, product mix, seasonality, membership and other relevant factors. In developing IBNR, the Company applies different estimation methods depending on the period for which incurred claims are being estimated. For the most recent four months, the incurred claims are estimated from the trend analysis based on per member per month claims trends developed from the experience in preceding months. For periods prior to the most recent four months, the key assumption used in developing the Company's IBNR is that the completion factor pattern remains consistent over a rolling 12-month period. The completion factor is an actuarial estimate, based upon historical experience, of the percentage of claims incurred during a given period that have been adjudicated by the Company as of the date of estimation. This approach is consistently applied to each period presented.
The completion factors and claims per member per month trend factor are the most significant factors used in estimating the Company's IBNR. The following table illustrates the sensitivity of these factors using December 31, 2003 data and the estimated potential impact on the Company's operating results caused by these factors:
(a)Reflects estimated potential changes in medical claims payable caused by changes in completion factors in each of the most recent four months.
Other relevant factors include exceptional situations that might require judgmental adjustments in setting the outstanding reserves, such as system conversions, processing interruptions, environmental changes or other factors. None of these factors had a material impact on the development of the Company's claims payable estimates during any of the periods presented in this annual report on Form 10-K. All of these factors are used in estimating IBNR and are important to the Company's reserve methodology in trending the claims per member per month for purposes of estimating the reserves for the most recent four months.
In developing its best estimate of medical claims payable, the Company consistently applies the principles and assumptions listed above from year to year, while also giving due consideration to the potential variability of these factors. Because medical claims payable includes various actuarially developed estimates, the Company's actual health care services expense may be more or less than the Company's previously developed estimates. Claim processing expenses are also accrued based on an estimate of expenses necessary to process such claims. Such reserves are continually monitored and reviewed, with any adjustments reflected in current operations. (See Note 8 to the Consolidated Financial Statements for a table that provides a reconciliation of changes in medical claims payable.)
physicians, certain other medical service providers and hospitals participating in its HMO networks through the use of risk-sharing agreements and other programs. Payments under such agreements are made based on the providers' performance in managing health care costs while providing quality health care. Expenses related to these programs, which are based in part on estimates, are recorded in the period in which the related services are rendered. The Company believes that its reserves for medical claims payable are adequate to satisfy its ultimate claim liability. However, these estimates are inherently subject to a number of highly variable circumstances. Consequently, the actual results could differ materially from the amount recorded in the Consolidated Financial Statements.
For many of the Company's HMO plans (including substantially all of its California HMO plans), the Company contracts with physicians, hospitals and other health care providers through capitation fee arrangements as a means to manage health care costs. The Company has two general types of capitation arrangements. The predominant type is the so-called "professional" capitation arrangement. Under professional capitation arrangements, the Company pays the health care provider, such as a participating medical group, a fixed amount per member per month, and the health care provider assumes the risk of the member's utilization of certain specified health care services. Typically, under professional capitation arrangements, the health care provider does not assume the risk of the member's utilization of any hospital-based services. The second type is the so-called "global" capitation arrangement. Under global capitation arrangements, the Company also pays the health care provider, such as a participating medical group, a fixed amount per member per month. However, under global capitation arrangements, the health care provider generally assumes the risk of the member's utilization of all health care services (subject to certain limited exceptions and state regulatory requirements). As of December 31, 2003, 2002 and 2001, the Company had approximately eight, 10 and 16 global capitation arrangements, respectively, covering approximately 161,000, 179,000 and 185,000 members, respectively. In addition, one of the Company's subsidiaries owns a 51% equity interest in a community health partnership network (the "CHPN") operating in the greater Atlanta area (see "Item 1. Business-Managed Health Care Networks and Provider Relations-Blue Cross Blue Shield of Georgia"). The CHPN is a locally based equity venture between the Company's subsidiary and a local physician group. The Company's subsidiary has entered into a global capitation arrangement with the CHPN. As of December 31, 2003, 2002 and 2001, approximately 560,000, 535,000 and 479,000 members, respectively, were covered by this arrangement.
For the years ended December 31, 2003, 2002 and 2001, the Company's capitation expenses of $1,626.5 million, $1,496.9 million and $1,198.0 million represented 10.5%, 11.3% and 12.7%, respectively, of the Company's total health care services and other benefits expense. As of December 31, 2003 and 2002, the Company's capitation expenses payable of $145.9 million and $137.0 million represented 5.3% and 5.7%, respectively, of the Company's total medical claims payable. Medical claims payable attributable to the acquired Cobalt business as of December 31, 2003 was $168.1 million, including $0.3 million of capitation expenses payable.
The Company's future results of operations will depend in part on its ability to predict and manage health care costs through underwriting criteria, medical management, product design and negotiation of favorable provider and hospital contracts. The Company's ability to contain such costs may be adversely affected by changes in utilization rates, demographic characteristics, the regulatory environment, health care practices, inflation, new technologies, clusters of high-cost cases, continued consolidation of physician, hospital and other provider groups, acts of terrorism and bioterrorism or other catastrophes, including war and numerous other factors. The Company's inability to mitigate any or all of the above-listed or other factors may adversely affect the Company's future profitability.
The estimate of reserves for future policy benefits relates to life and disability insurance policies written in connection with health care contracts. Reserves for future life benefit coverage are based on projections of past experience. Reserves for future policy and contract benefits for certain long-term disability products and group paid-up life products are based upon interest, mortality and morbidity assumptions from published actuarial tables, modified based upon the Company's experience. Reserves are continually monitored and reviewed, and as settlements are made or reserves adjusted, differences are reflected in current operations. The current portion of reserves for future policy benefits relates to the portion of such reserves that the Company expects to pay within one year. The Company believes that its reserves for future policy benefits are adequate to satisfy its ultimate benefit liability. However, these estimates are inherently subject to a number of highly variable circumstances. Consequently, the actual results could differ materially from the amount recorded in the consolidated financial statements. As of December 31, 2003 and 2002, the reserves for future policy benefits were $417.3 million and $283.2 million, respectively. The reserves as of December 31, 2003 included reserves for future policy benefits attributable to the acquired Cobalt business of $119.7 million.
As of December 31, 2003, the Company's current investment securities (including securities on loan pursuant to securities lending transactions) at fair value, totaled $7.2 billion, of which 88.5% was invested in fixed-income securities and the remaining 11.5% was invested in equity securities. As of December 31, 2002, the Company's current investment securities (including securities on loan pursuant to securities lending transactions) at fair value totaled $5.3 billion, of which 89.6% was invested in fixed-income securities and the remaining 10.4% was invested in equity securities. These investment securities are generally used to support current operations and, accordingly, have been classified as current assets. The Company's long-term investments as of December 31, 2003 and December 31, 2002 were $161.8 million and $134.3 million, respectively, and consisted primarily of restricted assets, certain equities and other investments. Total current and long-term investments composed 50.1% and 47.2% of total assets as of December 31, 2003 and December 31, 2002, respectively.
As of December 31, 2003 and 2002, net unrealized gains from the Company's fixed-income securities totaled $131.6 million and $184.5 million, respectively, primarily resulting from a general decrease in interest rates. The Company had a net unrealized gain in its equity securities portfolio as of December 31, 2003 of $157.2 million and a net unrealized loss of $49.5 million as of December 31, 2002. The Company believes that fluctuations in the Company's net unrealized gains or losses from year to year are temporary as a result of current market conditions.
Membership data shown in the table reflect this change in methodology.
(B)As of December 31, 2003, the Company revised its methodology of calculating the number of medical members represented by each subscriber contract within the Company's rental networks and a Missouri joint venture. As a result, the weighted average members per subscriber changed from approximately 2.4 members to 2.1 members per subscriber. Membership data for dates prior to December 31, 2003 have not been revised to reflect this change in methodology.
(C)In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). With the rescission of FASB Statement No. 4, gains and losses from the extinguishment of debt should be classified as extraordinary items only if they meet the criteria in APB Opinion No. 30. The provisions of APB Opinion No. 30 distinguish between transactions that are part of an entity's recurring operations and those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. The provisions of SFAS No. 145 related to the rescission of FASB Statement No. 4 are required to be applied for fiscal years beginning after May 15, 2002. The Company has determined that the extinguishment of debt under its Zero Coupon Convertible Subordinated Debentures, which were redeemed as of October 28, 2002, does not meet the requirements of unusual or infrequent and therefore would not be included as an extraordinary item with the rescission of FASB Statement No. 4. For the quarter ended June 30, 2002, WellPoint reclassified an extraordinary loss, of $2.1 million, which includes a tax benefit of $0.8, million to interest expense. For the quarter ended September 30, 2002, WellPoint reclassified an extraordinary loss of $4.2 million, which included a tax benefit of $1.7 million, to interest expense.