Anthem Blue Cross 2002 Annual Report Download - page 41

MANAGEMENT’S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations (Continued)
36 Anthem, Inc. 2002 Annual Report
Net realized gains from the sale of equity securities
decreased $68.4 million primarily due to our realization of
$65.2 million of gains in 2001 resulting from the restruc-
turing of our portfolio. In 2002, we realized a $3.1 million
loss on a limited partnership, and in 2001 we recognized
$28.9 million of impairment losses on equity securities.
Net realized gains or losses on investments are influenced
by market conditions when an investment is sold or
deemed to be impaired, and will vary from period to period.
Our gain on the sale of subsidiary operations of $0.7
million in 2002 related primarily to the sale of our third
party occupational health services businesses, and the
$25.0 million gain in 2001 relates to the sale of our TRI-
CARE operations on May 31, 2001.
Interest expense increased $38.3 million, or 64%,
primarily reflecting additional interest expense incurred
on the debt issued in conjunction with our Trigon acqui-
sition and the issuance of our 6.00% Equity Security
Units on November 2, 2001.
Amortization of goodwill and other intangible assets
decreased $1.3 million. Due to our adoption of FAS 142
on January 1, 2002, amortization decreased approximately
$17.5 million. This decrease was partially offset by $16.2
million of new amortization expense, including $15.8
million of amortization expense on intangible assets
resulting from our Trigon acquisition. See Notes 2 and 3
to our audited consolidated financial statements for the
years ended December 31, 2002, 2001 and 2000 for addi-
tional information concerning our adoption of FAS 142.
Demutualization expenses associated with our con-
version from a mutual insurance company to a stock-
holder owned company on November 2, 2001 totaled
$27.6 million in 2001.
Income tax expense increased $71.8 million, or
39%, primarily due to increased income before taxes. Our
effective income tax rate decreased to 31.6% in 2002
from 35.0% in 2001. This 340 basis point decrease in the
effective income tax rate is primarily due to the reduction
of a deferred tax valuation allowance in 2002 due to our
continued improvement in taxable earnings, nonde-
ductible demutualization expenses incurred during 2001
and the impact of FAS 142.
Net income increased $206.9 million, or 60%, pri-
marily due to our Trigon acquisition, the improvement in
our operating results in each health business segment as
described below, higher net investment income, lower
amortization of goodwill and other intangible assets result-
ing from the adoption of FAS 142 on January 1, 2002 and
our reduced effective tax rate. Assuming FAS 142 had
been in effect for the year ended December 31, 2001, our
net income would have increased $191.8 million, or 54%.
Both basic and fully diluted earnings per share
increased as a result of increased net income as described
above and the impact of our stock repurchases under our
stock repurchase program in 2002. These increases were
partially offset by an increase in the number of average
shares outstanding due to the stock issued in conjunction
with our Trigon acquisition on July 31, 2002, and an
increase in the effect of dilutive securities.
Midwest
Our Midwest segment is comprised of health benefit
and related business for members in Indiana, Kentucky
and Ohio. Our Midwest segment’s summarized results of
operations for the years ended December 31, 2002 and
2001 are as follows:
Years Ended
December 31
2002 2001 $ Change % Change
($ in Millions)
Operating
Revenue $6,051.4 $5,093.0 $958.4 19%
Operating Gain $ 271.6 $ 161.5 $110.1 68%
Operating
Margin 4.5% 3.2% 130 bp
Membership
(in 000s) 5,234 4,854 380 8%
Operating revenue increased $958.4 million, or
19%, primarily due to premium rate increases in our Local
Large Group and Small Group businesses and member-
ship increases in our Local Large Group fully-insured and
Individual businesses.