Anthem Blue Cross 2001 Annual Report Download - page 41

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Risk-based capital standards will be used by regulators to set in motion appropriate regulatory actions
relating to insurers that show indications of weak or deteriorating conditions. It also provides an additional
standard for minimum capital requirements that companies should meet to avoid being placed in
rehabilitation or liquidation.
Anthem’s risk based capital as of December 31, 2001, continues to be substantially in excess of all
mandatory RBC thresholds.
Quantitative and Qualitative Disclosure About Market Risk
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 Anthem’s financial positions as of
December 31, 2001. Actual results could vary significantly from these estimates. Our primary objective is
the preservation of the asset base and the maximization of total return given an acceptable level of risk.
Our portfolio is exposed to three primary sources of risk: interest rate risk, credit risk, and market valuation
risk for equity holdings.
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 income security and the
potential loss attributable to that downgrade. We manage this risk through our investment policy, which
establishes credit quality limitations on the overall portfolio as well as dollar limits of our investment in
securities of any individual issuer. Since we are advised immediately of circumstances surrounding credit
rating downgrades, we are able to promptly avoid or minimize exposure to losses by selling the subject
security. The result is a well-diversified portfolio of fixed income securities, with an average credit rating of
approximately double-A. Interest rate risk is defined as the potential for economic losses on fixed-rate
securities, due to a change in market interest rates. Our fixed maturity portfolio consists exclusively of U.S.
dollar-denominated assets, invested primarily in U.S. government securities, corporate bonds, asset-backed
bonds and mortgage-related securities, all of which represent an exposure to changes in the level of market
interest rates. We manage interest rate risk by maintaining a duration commensurate with our insurance
liabilities and shareholder’s equity. Additionally, we have the capability of holding any security to maturity,
which would allow us to realize full par value. Our investment policy prohibits use of derivatives to manage
interest rate risk.
Our portfolio consists of corporate securities (approximately 36% of the total fixed income portfolio at
December 31, 2001) which are subject to credit/default risk. In a declining economic environment,
corporate yields will usually increase prompted by concern over the ability of corporations to make interest
payments, thus causing a decrease in the price of corporate securities, and the decline in value of the
corporate fixed income portfolio. This risk is managed externally by our money managers—through
fundamental credit analysis, diversification of issuers and industries, and an average credit rating of the
corporate fixed income portfolio of approximately double-A.
Our equity portfolio is exposed 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 index mutual funds that replicate the risk and performance of
the S&P 500 and S&P 400 indices, resulting in a diversified equity portfolio.
All of our current investments are classified as available-for-sale. As of December 31, 2001, approximately
95% of these were fixed maturity securities. Market risk is addressed by actively managing the duration,
allocation and diversification of our investment portfolio. We have evaluated the impact on the fixed income
portfolio’s fair value considering an immediate 100 basis point change in interest rates. A 100 basis point
increase in interest rates would result in an approximate $194.6 million decrease in fair value, whereas a 100
basis point decrease in interest rates would result in an approximate $190.7 million increase in fair value.
As of December 31, 2001, no portion of our fixed income portfolio was invested in non-US dollar
denominated investments.
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