We have set forth below a summary of our principal office space (locations greater than 100,000 square feet). We believe that our facilities will be sufficient to meet our needs for the foreseeable future.
Through December 31, 2006, we managed our operations through three reportable segments: Health Care, Specialty and Other.
We maintain a common stock repurchase program as authorized by our Board of Directors. Repurchases may be made from time to time at prevailing market prices, subject to certain restrictions on volume, pricing and timing. During the year ended December 31, 2006, we repurchased and retired approximately 60.7 million shares at an average share price of $74.91, for an aggregate cost of $4.6 billion. On March 15, May 16, August 17 and
Net realized losses in 2006 primarily related to other-than-temporary impairments of investments and the sale of fixed maturity securities at a loss due to the restructuring of the combined portfolio after our acquisition of WellChoice at the end of 2005. Other-than-temporary impairments-credit related were primarily due to the length of time that equity securities’ fair value was below their cost basis. Other-than-temporary impairments-interest related were primarily due to the prevailing interest rate environment and our intent to hold fixed maturity securities until their anticipated recovery. See Critical Accounting Policies and Estimates in this MD&A for a discussion of our investment impairment review process. These losses were partially offset by realized gains on the sale of equity securities during 2006.
A reconciliation of the beginning and ending balance for medical claims payable for the years ended December 31, 2006, 2005 and 2004 is as follows:
We follow Statement of Financial Accounting Standards No. 141, Business Combinations, and Statement of Accounting Standards No. 142, Goodwill and Other Intangible Assets. FAS 141 specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill. Under FAS 142, goodwill and other intangible assets (with indefinite lives) are not amortized but are tested for impairment at least annually. We completed our annual impairment tests of existing goodwill and other intangible assets (with indefinite lives) for each of the years ended December 31, 2006, 2005 and 2004 and based upon these tests we have not incurred any impairment losses related to any goodwill and other intangible assets (with indefinite lives).
During December 2006, WellPoint initiated a program whereby it generally purchases corporate-owned life insurance policies on participants in the deferred compensation plans. The cash surrender value of the corporate-owned life insurance policies is reported in “Other invested assets, long-term” in the consolidated balance sheets. The change in cash surrender value is reported as an offset to premium expense classified as general and administrative expense.
There were no other new accounting pronouncements issued during 2006 that had a material impact on our financial position, operating results or disclosures.
The purchase of investment securities in 2005 increased from 2004 resulting from increased cash flows from operations driven by improved net income, including the impact of our merger with WHN. The increase in 2005 subsidiary purchases resulted primarily from the use of cash for the WellChoice and Lumenos acquisitions, as compared to cash used for the WHN merger in 2004. The increase in 2005 sale of subsidiaries resulted primarily from the receipt of cash for the sale of certain subsidiaries, as compared to no activity in 2004. The increase in securities lending collateral reflects increased amounts under this program. The offset to this is an increase in securities lending payable which is reported with cash provided by financing activities.
Net cash flow provided by financing activities was $3,299.1 million in 2005 compared to cash provided by financing activities of $2,046.1 million in 2004. The table below outlines the increase in cash flow provided by financing activities of $1,253.0 million between the two years:
increases of $1.0 billion, $1.0 billion, $0.5 billion and $1.0 billion, respectively, in our common stock repurchase program, which increased the total authorized common stock repurchases to $5.5 billion since the current program’s inception in 2005. As of December 31, 2006, we had $0.9 billion of authorization remaining under this program. Subsequent to December 31, 2006, we repurchased and retired approximately 6.0 million shares for an aggregate cost of approximately $463.5 million, leaving approximately $486.3 million for authorized future repurchases at February 12, 2007. Our stock repurchase program is discretionary as we are under no obligation to repurchase shares. We repurchase shares because we believe it is a prudent use of surplus capital.
We have agreed to guarantee up to $37.0 million of debt incurred by an unaffiliated entity to partially finance the purchase of a hospital.
As a result of the merger, each WHN stockholder received twenty-three dollars and eighty cents ($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 $15,773.6 and included cash of $3,718.8, the issuance of approximately 310.6 shares of WellPoint common stock, valued at $11,293.8, WHN stock options converted to WellPoint stock options and other stock awards for approximately 43.7 shares, valued at $563.6, and $197.4 of transaction costs. The fair value of common stock issued was based on $36.35 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.
The December 31, 2005 summary of available-for-sale investments includes certain rabbi trust assets with a cost or amortized cost of $281.6 and estimated fair value of $307.0. These assets were classified as available-for-sale at December 31, 2005 and classified as trading securities at January 1, 2006 and are reported in other invested assets, current on the balance sheets. In December 2006, the Company invested the majority of its rabbi trust assets in corporate-owned life insurance policies. The cash surrender value of the corporate-owned life insurance policies is reported in other invested assets, long-term on the balance sheet.
At December 31, 2006, no investments other than investments in U.S. government agency securities exceeded 10% of shareholders’ equity.
Non-financial instruments such as real estate, property and equipment, other current assets, deferred income taxes and intangible assets, and certain financial instruments such as policy liabilities are excluded from the fair value disclosures. Therefore, the fair value amounts cannot be aggregated to determine the underlying economic value of the Company.
Property and equipment includes assets purchased under noncancelable capital leases of $54.9 and $54.7 at December 31, 2006 and 2005, respectively. Total accumulated amortization on leased assets at December 31, 2006 and 2005 was $30.1 and $17.0, respectively. Depreciation expense for 2006, 2005 and 2004 was $133.0, $118.7 and $78.1, respectively. Amortization expense on leased assets, computer software and leasehold improvements for 2006, 2005 and 2004 was $137.4, $109.9, and $57.6, respectively, which includes amortization expense on computer software, both purchased and internally developed, for 2006, 2005 and 2004 of $122.9, $101.9 and $49.8, respectively. Capitalized costs related to the internal development of software of $470.5 and $409.9 at December 31, 2006 and 2005, respectively, are reported with computer software.
During the first quarter of 2005, a refund claim filed by the Company in 2003 was approved by the Congressional Joint Committee on Taxation. The claim relates to initially disallowed losses on the sale of certain subsidiaries in the late 1990s. A tax benefit of $28.4 related to this claim was recorded in the first quarter of 2005. Net income per basic and diluted share related to this claim was $0.04 for the year ended December 31, 2005.
In addition to the defined benefit plans, the Company maintains the WellPoint 401(k) Retirement Savings Plan, which name changed from the Anthem 401(k) Long Term Savings Investment Plan effective December 31, 2005, a qualified defined contribution plan covering substantially all employees. Voluntary employee contributions are matched by the Company subject to certain limitations. Contributions made by the Company totaled $85.2, $74.6 and $34.0 during 2006, 2005 and 2004, respectively.
government services business includes the Federal Employee Program and National Government Services, Inc., which acts as a Medicare contractor in several regions across the nation. The Company expects to revise its reportable segments in the first quarter of 2007 in accordance with the new organizational structure, which reflects how the chief operating decision maker evaluates the performance of the business beginning January 1, 2007.
WellPoint’s insurance subsidiaries report their accounts in conformity with accounting practices prescribed or permitted by state insurance regulatory authorities (“statutory”), which vary in certain respects from GAAP. Typical differences of GAAP reporting as compared to statutory reporting are the inclusion of unrealized gains or losses relating to fixed maturity securities in shareholders’ equity, recognition of all assets including those that are