ELV

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2004, for Anthem, Inc. (now Elevance Health). Anthem is a leading health benefits company and an independent licensee of the Blue Cross Blue Shield Association, operating in Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Maine, Colorado, Nevada, and Virginia. As of September 30, 2004, the company served approximately 12.7 million members.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenue increased 13% ($543.1 million) for the quarter and 12% ($1,468.2 million) for the nine months compared to the prior year periods. This was driven by premium rate increases and membership growth, particularly in National Accounts and Individual businesses.
• Profitability: Net income rose 23% ($45.6 million) for the quarter and 37% ($210.1 million) for the nine months. The nine-month increase was significantly aided by a $44.8 million tax benefit from Indiana legislation changes and higher net realized investment gains ($40.7 million vs. $7.7 million in 2003).
• Cost Trends: Benefit expense increased 15% for the quarter and 13% for the nine months. The benefit expense ratio increased slightly (170 bps for the quarter, 90 bps for nine months) as cost trends returned to more sustainable levels after lower-than-anticipated trends in 2003.
• Membership: Total membership grew 8% (890,000 members) year-over-year, with self-funded membership increasing 11%.

Guidance, Outlook, and Risks

• WellPoint Merger: Anthem is pursuing a merger with WellPoint Health Networks Inc. valued at approximately $16.4 billion. While most regulatory approvals are secured, the California Department of Insurance disapproved the merger in July 2004. Anthem filed a Writ of Mandate in California Superior Court, with a trial date set for February 25, 2005. The transaction closing date remains uncertain.
• Liquidity for Merger: Anthem anticipates cash requirements of approximately $4.0 billion for the WellPoint transaction. The company has a $3.0 billion bridge loan commitment and plans to issue up to $2.0 billion in debt securities post-closing.
• Cost of Care Outlook: Management expects the aggregate cost of care trend for the full year 2004 to be between 9.5% and 10.5%, an increase from 2003 due to rising pharmacy and outpatient costs.
• Legal Contingencies: The company faces significant litigation, including Multi-District Litigation (MDL) regarding provider reimbursement practices and RICO claims. The Eleventh Circuit affirmed class certification for RICO claims in September 2004, and defendants have petitioned the U.S. Supreme Court for review. Anthem believes these matters will not have a material adverse effect on its financial position.
• Stock Repurchases: The Board authorized an additional $500 million for stock repurchases in October 2004, extending the program to February 2006. Total available for repurchase is now $700.5 million.

Investor Verification Checklist

• Merger Status: Monitor the outcome of the California Department of Insurance litigation and the February 2005 trial date regarding the WellPoint merger.
• Investment Portfolio: Verify the impact of interest rate changes on the $7.2 billion investment portfolio and the realization of gains from portfolio reallocation.
• Claim Reserves: Review the sensitivity of the $1.9 billion unpaid claims liability to changes in completion factors and medical cost trends, as small variances can materially impact net income.
• Regulatory Environment: Track ongoing federal and state investigations into Medicare fiscal intermediary operations and provider reimbursement practices.
• Debt Structure: Confirm the execution of the planned $2.0 billion debt issuance and the refinancing of the $3.0 billion bridge loan upon the potential closing of the WellPoint transaction.