WELLPOINT, INC | 2013 | FY | 3


Capital Stock 
Stock Incentive Plans
On March 15, 2006, our Board of Directors adopted the WellPoint 2006 Incentive Compensation Plan, or the 2006 Plan, which was approved by our shareholders on May 16, 2006. On March 4, 2009, our Board of Directors approved an amendment and restatement of the 2006 Plan to increase the number of shares available by 33.0 shares, to rename the plan as the WellPoint Incentive Compensation Plan, or Incentive Plan, and to extend the term of the Incentive Plan such that no awards may be granted on or after May 20, 2019, which was approved by our shareholders on May 20, 2009. 
The Incentive Plan gives authority to the Compensation Committee of the Board of Directors to make incentive awards to our non-employee directors, employees and consultants, consisting of stock options, stock, restricted stock, restricted stock units, cash-based awards, stock appreciation rights, performance shares and performance units. The Incentive Plan, as amended and restated, increases the number of available shares for issuance to 60.1 shares, subject to adjustment as set forth in the Incentive Plan.
Stock options are granted for a fixed number of shares with an exercise price at least equal to the fair value of the shares at the grant date. Stock options vest over three years in equal semi-annual installments and generally have a term of seven years from the grant date. 
Certain option grants contain provisions whereby the employee continues to vest in the award subsequent to termination due to retirement. Our attribution method for newly granted awards considers all vesting and other provisions, including retirement eligibility, in determining the requisite service period over which the fair value of the awards will be recognized.
Restricted stock awards are issued at the fair value of the stock on the grant date and may also include one or more performance measures that must be met for the restricted stock award to vest. The restrictions lapse in three equal annual installments. 
For the years ended December 31, 2013, 2012 and 2011, we recognized share-based compensation cost of $146.0, $146.5 and $134.8, respectively, as well as related tax benefits of $52.6, $52.0 and $48.6, respectively.
A summary of stock option activity for the year ended December 31, 2013 is as follows:
 
Number of
Shares
 
Weighted-Average
Option Price per
Share
 
Weighted-Average
Remaining
Contractual Life
(Years)
 
Aggregate
Intrinsic
Value
Outstanding at January 1, 2013
17.8

 
$
64.67

 
 
 
 
Granted
2.0

 
62.55

 
 
 
 
Exercised
(8.4
)
 
62.34

 
 
 
 
Forfeited or expired
(1.4
)
 
70.77

 
 
 
 
Outstanding at December 31, 2013
10.0

 
65.38

 
3.3
 
$
270.9

Exercisable at December 31, 2013
7.6

 
66.04

 
2.6
 
$
199.9


The intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 amounted to $176.0, $65.4 and $115.8, respectively. We recognized tax benefits of $56.8, $22.9 and $42.9 in 2013, 2012 and 2011, respectively, from option exercises and disqualifying dispositions. During the years ended December 31, 2013, 2012 and 2011 we received cash of $524.7, $110.8 and $245.0, respectively, from exercises of stock options.
The total fair value of restricted stock awards that vested during the years ended December 31, 2013, 2012 and 2011 was $46.7, $222.3 and $120.2, respectively.
A summary of the status of nonvested restricted stock activity, including restricted stock units, for the year ended December 31, 2013 is as follows:
 
Restricted
Stock Shares
and Units
 
Weighted-Average
Grant Date
Fair Value
per Share
Nonvested at January 1, 2013
2.6

 
$
63.87

Granted
2.7

 
63.06

Vested
(0.6
)
 
59.95

Forfeited
(0.5
)
 
64.84

Nonvested at December 31, 2013
4.2

 
63.83


During the year ended December 31, 2013, we granted approximately 0.9 restricted stock units under the Incentive Plan that were contingent upon us achieving specified operating gain targets for 2013. We expect to issue approximately 1.2 restricted stock units under this performance plan as certain performance targets were exceeded. These restricted stock units have been included in the activity shown above.
As of December 31, 2013, the total remaining unrecognized compensation cost related to nonvested stock options and restricted stock amounted to $10.5 and $88.1, respectively, which will be amortized over the weighted-average remaining requisite service periods of 11 months and 12 months, respectively.
As of December 31, 2013, there were approximately 24.9 shares of common stock available for future grants under the Incentive Plan.
 Fair Value
We use a binomial lattice valuation model to estimate the fair value of all stock options granted. Expected volatility assumptions used in the binomial lattice model are based on an analysis of implied volatilities of publicly traded options on our stock and historical volatility of our stock price. The risk-free interest rate is derived from the U.S. Treasury strip rates at the time of the grant. The expected term of the options was derived from the outputs of the binomial lattice model, which incorporates post-vesting forfeiture assumptions based on an analysis of historical data. The dividend yield was based on our estimate of future dividend yields. Similar groups of employees that have dissimilar exercise behavior are considered separately for valuation purposes. We utilize the “multiple-grant” approach for recognizing compensation expense associated with each separately vesting portion of the share-based award.
The following weighted-average assumptions were used to estimate the fair values of options granted during the years ended December 31:
 
2013
 
2012
 
2011
Risk-free interest rate
1.25
%
 
1.41
%
 
2.84
%
Volatility factor
35.00
%
 
34.00
%
 
34.00
%
Dividend yield (annual)
2.40
%
 
1.60
%
 
1.50
%
Weighted-average expected life (years)
4.0

 
4.1

 
4.0


 
The following weighted-average fair values were determined for the years ending December 31:
 
2013
 
2012
 
2011
Options granted during the year
$
14.64

 
$
16.50

 
$
17.84

Restricted stock and stock awards granted during the year
63.06

 
65.91

 
66.16


The binomial lattice option-pricing model requires the input of highly subjective assumptions including the expected stock price volatility. Because our stock option grants have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in our opinion, existing models do not necessarily provide a reliable single measure of the fair value of our stock option grants.
Employee Stock Purchase Plan
We have registered 14.0 shares of common stock for the Employee Stock Purchase Plan, or the Stock Purchase Plan, which is intended to provide a means to encourage and assist employees in acquiring a stock ownership interest in WellPoint. The Stock Purchase Plan was suspended effective January 1, 2011, and no shares were issued during 2013, 2012 or 2011. Effective January 1, 2014, the Stock Purchase Plan is being reinstated. Pursuant to terms of the Stock Purchase Plan, an employee is permitted to purchase no more than $23,750 (actual dollars) worth of stock in any calendar year, based on the fair value of the stock at the end of each plan quarter. Employees become participants by electing payroll deductions from 1% to 15% of gross compensation. Once purchased, the stock is accumulated in the employee's investment account. The Stock Purchase Plan allows participants to purchase shares of our common stock at a price per share of 95% of the fair value of a share of common stock on the last trading day of the plan quarter. As of December 31, 2013, 6.1 shares were available for issuance under the Stock Purchase Plan.
Use of Capital and Stock Repurchase Program
We regularly review the appropriate use of capital, including common stock and debt security repurchases and dividends to shareholders. The declaration and payment of any dividends or repurchases of our common stock or debt are at the discretion of our Board of Directors and depend upon our financial condition, results of operations, future liquidity needs, regulatory and capital requirements and other factors deemed relevant by our Board of Directors. Historically our common stock repurchase program, discussed below, has been our primary use of capital. Beginning in 2011, our Board of Directors established a quarterly dividend to shareholders.
A summary of the cash dividend activity for the years ended December 31, 2013 and 2012 is as follows: 
Declaration Date
 
Record Date
 
Payment Date
 
Cash Dividend per
Share
 
Total
Year Ended December 31, 2013
 
 
 
 
 
 
 
 
February 20, 2013
 
March 8, 2013
 
March 25, 2013
 
$
0.3750

 
$
113.4

May 15, 2013
 
June 10, 2013
 
June 25, 2013
 
0.3750

 
112.7

July 23, 2013

September 10, 2013

September 25, 2013
 
0.3750

 
111.4

October 22, 2013
 
December 9, 2013
 
December 23, 2013
 
0.3750

 
110.5

 
 
 
 
 
 
 
 
 
Year Ended December 31, 2012
 
 
 
 
 
 
 
 
January 24, 2012
 
March 9, 2012
 
March 23, 2012
 
$
0.2875

 
$
95.8

May 16, 2012
 
June 8, 2012
 
June 25, 2012
 
0.2875

 
93.5

July 24, 2012
 
September 10, 2012
 
September 25, 2012
 
0.2875

 
90.7

November 6, 2012
 
December 7, 2012
 
December 21, 2012
 
0.2875

 
87.1


On January 28, 2014, the Board of Directors declared a quarterly cash dividend to shareholders of $0.4375 per share on the outstanding shares of our common stock. This quarterly dividend will be paid on March 25, 2014 to the shareholders of record as of March 10, 2014.
Under our Board of Directors’ authorization, we maintain a common stock repurchase program. On September 25, 2013, the Board of Directors authorized a $3,500.0 increase to the common stock repurchase program. Repurchases may be made from time to time at prevailing market prices, subject to certain restrictions on volume, pricing and timing. The repurchases are effected from time to time in the open market, through negotiated transactions, including accelerated share repurchase agreements, and through plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. Our stock repurchase program is discretionary as we are under no obligation to repurchase shares. We repurchase shares under the program when we believe it is a prudent use of capital. The excess cost of the repurchased shares over par value is charged on a pro rata basis to additional paid-in capital and retained earnings.
A summary of common stock repurchases for the period January 1, 2014 through February 7, 2014 (subsequent to December 31, 2013) and for the years ended December 31, 2013 and 2012 is as follows:
 
January 1, 2014
through
February 7, 2014
 
Years Ended December 31
 
2013
 
2012
Shares repurchased
5.4

 
20.7

 
39.7

Average price per share
$
84.96

 
$
78.08

 
$
62.96

Aggregate cost
$
457.6

 
$
1,620.1

 
$
2,496.8

Authorization remaining at the end of each period
$
2,633.4

 
$
3,691.0

 
$
1,836.9


During 2013, we purchased call options on 3.0 shares of our common stock. The call options allow us to repurchase shares at a predetermined strike price up through the expiration dates. The purpose of the call options is to reduce share price volatility on potential future common stock repurchases. The aggregate premium paid was $25.8, of which $7.9 was recorded as a reduction of shareholders' equity and the remaining $17.9 was recorded as a derivative asset based on FASB guidance. The aggregate premium is reported in financing activities in our consolidated statements of cash flow. The call options had strike prices ranging from $77.50 to $83.10 per share. The aggregate fair value of the call options reported as a derivative asset was $27.5 at December 31, 2013. The call options were exercised on various dates throughout January and February 2014.
On February 4, 2014, we entered into an accelerated share repurchase, or ASR, program with a counterparty. The agreement provides for a repurchase of a number of shares, equal to $600.0, as determined by the dollar volume weighted-average share price during a period up through at least March 14, 2014, but not to exceed March 31, 2014. At the end of the term of the ASR, the initial amount of shares will be adjusted up or down based on the dollar volume weighted-average price during the same period. On February 4, 2014, we repurchased 6.0 shares under this program. These ASR shares are not included in the shares repurchased subsequent to December 31, 2013 shown in the table above as the final shares to be repurchased will not be determined until the completion of the program in March 2014. However the $600.0 has been removed from the authorization remaining as of February 7, 2014 in the table above.

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