Anthem Blue Cross 2002 Annual Report Download - page 55

MANAGEMENT’S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations (Continued)
50 Anthem, Inc. 2002 Annual Report
Retirement Benefits
Pension Benefits
We sponsor defined benefit pension plans for our
employees, and account for these plans 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 use a calculated value of plan assets (described
below). Further, the effects on our computation of pen-
sion expense of the performance of the pension plans’
assets and changes in pension liabilities are amortized
over future periods.
The most important factor in determining our
pension expense is the expected return on plan assets.
During 2002, we lowered our expected rate of return
on plan assets to 8.50% (from 9.00% for 2002 expense
recognition). We believe our assumption of future returns
of 8.50% is reasonable. 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 pro-
duces the expected return on plan assets that is included
in pension expense. The difference between this expected
return and the actual return on plan assets is deferred
over three years. The net deferral of past asset gains or
losses affects the calculated value of plan assets and, ulti-
mately, future pension expense. The plan assets have
earned a rate of return substantially less than 8.50% over
the last two years. Should this trend continue, future pen-
sion expense would likely increase.
At the end of each year, we determine the discount
rate to be used to discount plan liabilities. The discount
rate reflects the current rate at which the pension liabili-
ties could be effectively settled at the end of the year. Our
discount rate is developed using a benchmark rate of the
Moody’s Aa Corporate Bonds index at our measurement
date (September 30, 2002). At our measurement date, we
selected a discount rate of 6.75%. Changes in the dis-
count rates over the past three years have not materially
affected pension expense, and the net effect of changes in
the discount rate, as well as the net effect of other
changes in actuarial assumptions and experience, have
been deferred and amortized in accordance with FAS 87.
At December 31, 2002, our consolidated prepaid
pension asset was $146.2 million, an increase from $60.5
million at December 31, 2001. The increase was primarily
due to our funding of the Anthem Cash Balance Pension
Plan in the amount of $136.9 million during the third
quarter of 2002. For the year ended December 31, 2002,
we recognized consolidated pretax pension expense of
$14.3 million, a slight increase from $10.5 million for the
year ended December 31, 2001.
Other Postretirement Benefits
We provide most employees certain life, medical,
vision and dental benefits upon retirement. We use vari-
ous actuarial assumptions including the discount rate and
the expected trend in health care costs to estimate the
costs and benefit obligations for our retiree health plan.
Our discount rate is developed using a benchmark
rate of the Moody’s Aa Corporate Bonds index at our
measurement date (September 30, 2002). At our meas-
urement date, we selected a discount rate of 6.75%.
The health care cost trend rate used in measuring
the other benefit obligations is generally 10% in 2002,
decreasing 1% per year to 5% in 2007.
New Accounting Pronouncements
During 2002, we adopted Statement of Financial
Accounting Standards No. 141, Business Combinations
and Statement of Accounting Standards No. 142, Good-
will and Other Intangible Assets. See “Goodwill and Other
Intangible Assets” above and for additional information
regarding the pro forma effect of adopting these state-
ments, see Note 3 to our audited consolidated financial
statements for the years ended December 31, 2002, 2001
and 2000.
There were no other new accounting pronounce-
ments issued during 2002 that had a material impact on
our financial position or operating results.
Liquidity and Capital Resources
Introduction
Our cash receipts consist primarily of premiums,
administrative fees, investment income, other revenue
and proceeds from the sale or maturity of our investment