UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________
Form 10-Q
__________________________________________________________
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission file number: 1-10864
__________________________________________________________
UnitedHealth Group Incorporated
(Exact name of registrant as specified in its charter)
__________________________________________________________
Minnesota | 41-1321939 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
UnitedHealth Group Center 9900 Bren Road East Minnetonka, Minnesota | 55343 | |
(Address of principal executive offices) | (Zip Code) | |
(952) 936-1300
(Registrant’s telephone number, including area code)
__________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | o | Non-accelerated filer | o | Smaller reporting company | o | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of April 30, 2012, there were 1,037,448,473 shares of the registrant’s Common Stock, $.01 par value per share, issued and outstanding.
UNITEDHEALTH GROUP
Table of Contents
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UnitedHealth Group
Condensed Consolidated Balance Sheets
(Unaudited)
See Notes to the Condensed Consolidated Financial Statements
(in millions, except per share data) | March 31, 2012 | December 31, 2011 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 11,661 | $ | 9,429 | ||||
Short-term investments | 2,665 | 2,577 | ||||||
Accounts receivable, net | 2,688 | 2,294 | ||||||
Other current receivables, net | 1,978 | 2,255 | ||||||
Assets under management | 2,568 | 2,708 | ||||||
Deferred income taxes | 432 | 472 | ||||||
Prepaid expenses and other current assets | 698 | 615 | ||||||
Total current assets | 22,690 | 20,350 | ||||||
Long-term investments | 16,492 | 16,166 | ||||||
Property, equipment and capitalized software, net | 2,560 | 2,515 | ||||||
Goodwill | 25,754 | 23,975 | ||||||
Other intangible assets, net | 3,103 | 2,795 | ||||||
Other assets | 2,091 | 2,088 | ||||||
Total assets | $ | 72,690 | $ | 67,889 | ||||
Liabilities and shareholders’ equity | ||||||||
Current liabilities: | ||||||||
Medical costs payable | $ | 10,221 | $ | 9,799 | ||||
Accounts payable and accrued liabilities | 6,197 | 6,853 | ||||||
Other policy liabilities | 5,457 | 5,063 | ||||||
Commercial paper and current maturities of long-term debt | 1,771 | 982 | ||||||
Unearned revenues | 3,816 | 1,225 | ||||||
Total current liabilities | 27,462 | 23,922 | ||||||
Long-term debt, less current maturities | 11,083 | 10,656 | ||||||
Future policy benefits | 2,444 | 2,445 | ||||||
Deferred income taxes and other liabilities | 2,845 | 2,574 | ||||||
Total liabilities | 43,834 | 39,597 | ||||||
Commitments and contingencies (Note 8) | ||||||||
Shareholders’ equity: | ||||||||
Preferred stock, $0.001 par value - 10 shares authorized; no shares issued or outstanding | — | — | ||||||
Common stock, $0.01 par value - 3,000 shares authorized; 1,033 and 1,039 issued and outstanding | 10 | 10 | ||||||
Retained earnings | 28,388 | 27,821 | ||||||
Accumulated other comprehensive income | 458 | 461 | ||||||
Total shareholders’ equity | 28,856 | 28,292 | ||||||
Total liabilities and shareholders’ equity | $ | 72,690 | $ | 67,889 | ||||
1
UnitedHealth Group
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31, | ||||||||
(in millions, except per share data) | 2012 | 2011 | ||||||
Revenues: | ||||||||
Premiums | $ | 24,631 | $ | 23,003 | ||||
Services | 1,791 | 1,598 | ||||||
Products | 688 | 649 | ||||||
Investment and other income | 172 | 182 | ||||||
Total revenues | 27,282 | 25,432 | ||||||
Operating costs: | ||||||||
Medical costs | 19,939 | 18,725 | ||||||
Operating costs | 4,096 | 3,617 | ||||||
Cost of products sold | 634 | 599 | ||||||
Depreciation and amortization | 296 | 270 | ||||||
Total operating costs | 24,965 | 23,211 | ||||||
Earnings from operations | 2,317 | 2,221 | ||||||
Interest expense | (148 | ) | (118 | ) | ||||
Earnings before income taxes | 2,169 | 2,103 | ||||||
Provision for income taxes | (781 | ) | (757 | ) | ||||
Net earnings | $ | 1,388 | $ | 1,346 | ||||
Basic net earnings per common share | $ | 1.34 | $ | 1.24 | ||||
Diluted net earnings per common share | $ | 1.31 | $ | 1.22 | ||||
Basic weighted-average number of common shares outstanding | 1,039 | 1,086 | ||||||
Dilutive effect of common stock equivalents | 21 | 13 | ||||||
Diluted weighted-average number of common shares outstanding | 1,060 | 1,099 | ||||||
Anti-dilutive shares excluded from the calculation of dilutive effect of common stock equivalents | 24 | 60 | ||||||
Cash dividends declared per common share | $ | 0.1625 | $ | 0.1250 | ||||
See Notes to the Condensed Consolidated Financial Statements
2
UnitedHealth Group
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended March 31, | ||||||||
(in millions) | 2012 | 2011 | ||||||
Net earnings | $ | 1,388 | $ | 1,346 | ||||
Other comprehensive loss: | ||||||||
Gross unrealized holding gains (losses) on investment securities during the period | 30 | (37 | ) | |||||
Income tax (expense) benefit | (11 | ) | 14 | |||||
Total unrealized gains (losses), net of tax | 19 | (23 | ) | |||||
Gross reclassification adjustment for net realized gains included in net earnings | (39 | ) | (48 | ) | ||||
Income tax benefit | 14 | 17 | ||||||
Total reclassification adjustment, net of tax | (25 | ) | (31 | ) | ||||
Foreign currency translation adjustments | 3 | 9 | ||||||
Other comprehensive loss | (3 | ) | (45 | ) | ||||
Comprehensive income | $ | 1,385 | $ | 1,301 | ||||
3
UnitedHealth Group
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||||||
Additional Paid-In Capital | Retained Earnings | Total Shareholders' Equity | |||||||||||||||||||||||||
Common Stock | Net Unrealized Gains (Losses) on Investments | Foreign Currency Translation (Losses) Gains | |||||||||||||||||||||||||
(in millions) | Shares | Amount | |||||||||||||||||||||||||
Balance at January 1, 2012 | 1,039 | $ | 10 | $ | — | $ | 27,821 | $ | 476 | $ | (15 | ) | $ | 28,292 | |||||||||||||
Net earnings | 1,388 | 1,388 | |||||||||||||||||||||||||
Other comprehensive (loss) income | (6 | ) | 3 | (3 | ) | ||||||||||||||||||||||
Issuances of common stock, and related tax effects | 13 | — | 129 | 129 | |||||||||||||||||||||||
Share-based compensation, and related tax benefits | 209 | 209 | |||||||||||||||||||||||||
Common stock repurchases | (19 | ) | — | (338 | ) | (653 | ) | (991 | ) | ||||||||||||||||||
Common stock dividends | (168 | ) | (168 | ) | |||||||||||||||||||||||
Balance at March 31, 2012 | 1,033 | $ | 10 | $ | — | $ | 28,388 | $ | 470 | $ | (12 | ) | $ | 28,856 | |||||||||||||
Balance at January 1, 2011 | 1,086 | $ | 11 | $ | — | $ | 25,562 | $ | 280 | $ | (28 | ) | $ | 25,825 | |||||||||||||
Net earnings | 1,346 | 1,346 | |||||||||||||||||||||||||
Other comprehensive (loss) income | (54 | ) | 9 | (45 | ) | ||||||||||||||||||||||
Issuances of common stock, and related tax effects | 6 | — | 61 | 61 | |||||||||||||||||||||||
Share-based compensation, and related tax benefits | 139 | 139 | |||||||||||||||||||||||||
Common stock repurchases | (15 | ) | — | (200 | ) | (420 | ) | (620 | ) | ||||||||||||||||||
Common stock dividends | (135 | ) | (135 | ) | |||||||||||||||||||||||
Balance at March 31, 2011 | 1,077 | $ | 11 | $ | — | $ | 26,353 | $ | 226 | $ | (19 | ) | $ | 26,571 | |||||||||||||
See Notes to the Condensed Consolidated Financial Statements
4
UnitedHealth Group
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, | ||||||||
(in millions) | 2012 | 2011 | ||||||
Operating activities | ||||||||
Net earnings | $ | 1,388 | $ | 1,346 | ||||
Noncash items: | ||||||||
Depreciation and amortization | 296 | 270 | ||||||
Deferred income taxes | 126 | 165 | ||||||
Share-based compensation | 140 | 123 | ||||||
Other, net | (88 | ) | (23 | ) | ||||
Net change in other operating items, net of effects from acquisitions and changes in AARP balances: | ||||||||
Accounts receivable | (316 | ) | (385 | ) | ||||
Other assets | (221 | ) | (304 | ) | ||||
Medical costs payable | 246 | 143 | ||||||
Accounts payable and other liabilities | (202 | ) | 48 | |||||
Other policy liabilities | (248 | ) | (8 | ) | ||||
Unearned revenues | 2,465 | (151 | ) | |||||
Cash flows from operating activities | 3,586 | 1,224 | ||||||
Investing activities | ||||||||
Purchases of investments | (2,326 | ) | (2,716 | ) | ||||
Sales of investments | 1,034 | 1,085 | ||||||
Maturities of investments | 1,098 | 1,048 | ||||||
Cash paid for acquisitions, net of cash assumed | (1,935 | ) | (541 | ) | ||||
Purchases of property, equipment and capitalized software | (269 | ) | (213 | ) | ||||
Cash flows used for investing activities | (2,398 | ) | (1,337 | ) | ||||
Financing activities | ||||||||
Common stock repurchases | (991 | ) | (620 | ) | ||||
Proceeds from common stock issuances | 257 | 96 | ||||||
Dividends paid | (168 | ) | (135 | ) | ||||
Proceeds from commercial paper, net | 244 | 759 | ||||||
Proceeds from issuance of long-term debt | 995 | 747 | ||||||
Repayments of long-term debt | — | (955 | ) | |||||
Customer funds administered | 1,137 | 1,050 | ||||||
Checks outstanding in excess of bank deposits | (247 | ) | (183 | ) | ||||
Other, net | (183 | ) | 21 | |||||
Cash flows from financing activities | 1,044 | 780 | ||||||
Increase in cash and cash equivalents | 2,232 | 667 | ||||||
Cash and cash equivalents, beginning of period | 9,429 | 9,123 | ||||||
Cash and cash equivalents, end of period | $ | 11,661 | $ | 9,790 | ||||
See Notes to the Condensed Consolidated Financial Statements
5
UNITEDHEALTH GROUP
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | Basis of Presentation |
UnitedHealth Group Incorporated (also referred to as “UnitedHealth Group” and the “Company”) is a diversified health and well-being company dedicated to helping people live healthier lives and making health care work better. We offer a broad spectrum of products and services through two distinct platforms: UnitedHealthcare, which provides health care coverage and benefits services; and Optum, which provides information and technology-enabled health services.
The Company has prepared the Condensed Consolidated Financial Statements according to U.S. Generally Accepted Accounting Principles (GAAP) and has included the accounts of UnitedHealth Group and its subsidiaries. The Company has eliminated intercompany balances and transactions. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC), the Company has omitted certain footnote disclosures that would substantially duplicate the disclosures contained in its annual audited Consolidated Financial Statements. Therefore, these Condensed Consolidated Financial Statements should be read together with the Consolidated Financial Statements and the Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the SEC (2011 10-K). The accompanying Condensed Consolidated Financial Statements include all normal recurring adjustments necessary to present the interim financial statements fairly.
Use of Estimates
These Condensed Consolidated Financial Statements include certain amounts based on the Company’s best estimates and judgments. The Company’s most significant estimates relate to medical costs payable and medical costs, premium rebates and risk-sharing provisions related to revenues, valuation and impairment analysis of goodwill and other intangible assets, other policy liabilities, other current receivables, valuation of investments, income taxes and contingent liabilities. These estimates require the application of complex assumptions and judgments, often because they involve matters that are inherently uncertain and will likely change in subsequent periods. The impact of any changes in estimates is included in earnings in the period in which the estimate is adjusted.
Accounting Policies
Following is an expanded portion of the Company's revenue policy related to premium rebates. All other accounting policies disclosed in Note 2 of Notes to the Consolidated Financial Statements in the 2011 10-K remain unchanged.
Effective in 2011, premium revenues subject to premium rebates of the Patient Protection and Affordable Care Act and a reconciliation measure, the Health Care and Education Reconciliation Act of 2010 (Health Reform Legislation) are recognized based on the estimated premium earned net of the projected rebates over the period of the contract because the Company is able to reasonably estimate ultimate premium. Each period the Company estimates premium rebates based on expected refunds required. The most significant factors in estimating these rebates are financial performance within each aggregation set (e.g. by state, group size and licensed subsidiary), including medical claim experience and effective tax rates, as well as changes in business mix and regulatory requirements. The estimated ultimate premium is revised each period to reflect current experience.
Recently Adopted Accounting Standards
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). This update provides guidance on how fair value measurement should be applied where existing GAAP already requires or permits fair value measurements. In addition, ASU 2011-04 requires expanded disclosures regarding fair value measurements. ASU 2011-04 became effective for the Company's fiscal year 2012. The adoption of the measurement guidance of ASU 2011-04 did not have a material impact on the Condensed Consolidated Financial Statements. The new disclosures have been included with the Company's fair value disclosures in Note 3 of Notes to the Condensed Consolidated Financial Statements.
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income” (ASU 2011-05). ASU 2011-05 requires entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements and eliminates the option to present the components of other comprehensive income as a part of the statement of equity. In December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (ASU 2011-12). ASU 2011-12 defers the requirement to present reclassification
6
adjustments for each component of other comprehensive income on the face of the financial statements. ASU 2011-05 and ASU 2011-12 became effective for the Company's fiscal year 2012. The Company presented the components of other comprehensive income in separate Condensed Consolidated Statements of Comprehensive Income, which appear consecutive to the Condensed Consolidated Statements of Operations.
The Company has determined that there have been no other recently adopted or issued accounting standards that had or will have a material impact on its Condensed Consolidated Financial Statements.
2. | Investments |
A summary of short-term and long-term investments is as follows:
(in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
March 31, 2012 | ||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | $ | 2,535 | $ | 40 | $ | (5 | ) | $ | 2,570 | |||||||
State and municipal obligations | 6,135 | 363 | (2 | ) | 6,496 | |||||||||||
Corporate obligations | 5,970 | 224 | (6 | ) | 6,188 | |||||||||||
U.S. agency mortgage-backed securities | 2,310 | 78 | (1 | ) | 2,387 | |||||||||||
Non-U.S. agency mortgage-backed securities | 459 | 34 | — | 493 | ||||||||||||
Total debt securities - available-for-sale | 17,409 | 739 | (14 | ) | 18,134 | |||||||||||
Equity securities - available-for-sale | 556 | 23 | (2 | ) | 577 | |||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||
U.S. government and agency obligations | 171 | 6 | — | 177 | ||||||||||||
State and municipal obligations | 33 | — | — | 33 | ||||||||||||
Corporate obligations | 242 | — | (3 | ) | 239 | |||||||||||
Total debt securities - held-to-maturity | 446 | 6 | (3 | ) | 449 | |||||||||||
Total investments | $ | 18,411 | $ | 768 | $ | (19 | ) | $ | 19,160 | |||||||
December 31, 2011 | ||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | $ | 2,319 | $ | 54 | $ | — | $ | 2,373 | ||||||||
State and municipal obligations | 6,363 | 403 | (1 | ) | 6,765 | |||||||||||
Corporate obligations | 5,825 | 205 | (23 | ) | 6,007 | |||||||||||
U.S. agency mortgage-backed securities | 2,279 | 74 | — | 2,353 | ||||||||||||
Non-U.S. agency mortgage-backed securities | 476 | 28 | — | 504 | ||||||||||||
Total debt securities - available-for-sale | 17,262 | 764 | (24 | ) | 18,002 | |||||||||||
Equity securities - available-for-sale | 529 | 23 | (8 | ) | 544 | |||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||
U.S. government and agency obligations | 166 | 7 | — | 173 | ||||||||||||
State and municipal obligations | 13 | — | — | 13 | ||||||||||||
Corporate obligations | 18 | — | — | 18 | ||||||||||||
Total debt securities - held-to-maturity | 197 | 7 | — | 204 | ||||||||||||
Total investments | $ | 17,988 | $ | 794 | $ | (32 | ) | $ | 18,750 | |||||||
Included in the Company’s investment portfolio were securities collateralized by sub-prime home equity lines of credit with fair values of $2 million at both March 31, 2012 and December 31, 2011. Also included were Alt-A securities with fair values of $9 million at both March 31, 2012 and December 31, 2011.
7
The fair values of the Company’s mortgage-backed securities by credit rating (when multiple credit ratings are available for an individual security, the average of the available ratings is used) and origination as of March 31, 2012 were as follows:
(in millions) | AAA | AA | A | Non-Investment Grade | Total Fair Value | |||||||||||||||
2012 | $ | 6 | $ | — | $ | — | $ | — | $ | 6 | ||||||||||
2011 | 26 | — | — | — | 26 | |||||||||||||||
2010 | — | 3 | — | — | 3 | |||||||||||||||
2007 | 86 | — | — | 3 | 89 | |||||||||||||||
2006 | 166 | — | — | 10 | 176 | |||||||||||||||
Pre - 2006 | 187 | — | 3 | 3 | 193 | |||||||||||||||
U.S. agency mortgage-backed securities | 2,387 | — | — | — | 2,387 | |||||||||||||||
Total | $ | 2,858 | $ | 3 | $ | 3 | $ | 16 | $ | 2,880 | ||||||||||
The amortized cost and fair value of available-for-sale debt securities as of March 31, 2012, by contractual maturity, were as follows:
(in millions) | Amortized Cost | Fair Value | ||||||
Due in one year or less | $ | 2,730 | $ | 2,742 | ||||
Due after one year through five years | 5,945 | 6,155 | ||||||
Due after five years through ten years | 4,281 | 4,563 | ||||||
Due after ten years | 1,684 | 1,794 | ||||||
U.S. agency mortgage-backed securities | 2,310 | 2,387 | ||||||
Non-U.S. agency mortgage-backed securities | 459 | 493 | ||||||
Total debt securities - available-for-sale | $ | 17,409 | $ | 18,134 | ||||
The amortized cost and fair value of held-to-maturity debt securities as of March 31, 2012, by contractual maturity, were as follows:
(in millions) | Amortized Cost | Fair Value | ||||||
Due in one year or less | $ | 70 | $ | 70 | ||||
Due after one year through five years | 135 | 138 | ||||||
Due after five years through ten years | 198 | 195 | ||||||
Due after ten years | 43 | 46 | ||||||
Total debt securities - held-to-maturity | $ | 446 | $ | 449 | ||||
8
The fair value of available-for-sale investments with gross unrealized losses by investment type and length of time that individual securities have been in a continuous unrealized loss position were as follows:
Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
(in millions) | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||
March 31, 2012 | ||||||||||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||||||||||
U.S. government and agency obligations | $ | 845 | $ | (5 | ) | $ | — | $ | — | $ | 845 | $ | (5 | ) | ||||||||||
State and municipal obligations | 246 | (2 | ) | — | — | 246 | (2 | ) | ||||||||||||||||
Corporate obligations | 764 | (5 | ) | 25 | (1 | ) | 789 | (6 | ) | |||||||||||||||
U.S. agency mortgage-back securities | 176 | (1 | ) | — | — | 176 | (1 | ) | ||||||||||||||||
Total debt securities - available-for-sale | $ | 2,031 | $ | (13 | ) | $ | 25 | $ | (1 | ) | $ | 2,056 | $ | (14 | ) | |||||||||
Equity securities - available-for-sale | $ | 2 | $ | (1 | ) | $ | 5 | $ | (1 | ) | $ | 7 | $ | (2 | ) | |||||||||
December 31, 2011 | ||||||||||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||||||||||
State and municipal obligations | $ | 85 | $ | (1 | ) | $ | 21 | $ | — | $ | 106 | $ | (1 | ) | ||||||||||
Corporate obligations | 1,496 | (22 | ) | 28 | (1 | ) | 1,524 | (23 | ) | |||||||||||||||
Total debt securities - available-for-sale | $ | 1,581 | $ | (23 | ) | $ | 49 | $ | (1 | ) | $ | 1,630 | $ | (24 | ) | |||||||||
Equity securities - available-for-sale | $ | 24 | $ | (7 | ) | $ | 3 | $ | (1 | ) | $ | 27 | $ | (8 | ) | |||||||||
The unrealized losses from all securities as of March 31, 2012 were generated from 1,600 positions out of a total of 16,100 positions. The Company believes that it will collect the principal and interest due on its investments that have an amortized cost in excess of fair value. The unrealized losses were primarily caused by interest rate increases and not by unfavorable changes in the credit ratings associated with these securities. At each reporting period, the Company evaluates securities for impairment when the fair value of the investment is less than its amortized cost. The Company evaluated the underlying credit quality and credit ratings of the issuers, noting neither a significant deterioration since purchase nor other factors leading to an other-than-temporary impairment (OTTI). As of March 31, 2012, the Company did not have the intent to sell any of the securities in an unrealized loss position.
As of March 31, 2012, the Company’s holdings of non-U.S. agency mortgage-backed securities included $7 million of commercial mortgage loans in default. These loans represented less than 1% of the Company’s total mortgage-backed security holdings as of March 31, 2012.
A portion of the Company’s investments in equity securities and venture capital funds consists of investments held in various public and nonpublic companies concentrated in the areas of health care services and related information technologies. Market conditions that affect the value of health care and related technology stocks will likewise impact the value of the Company’s equity portfolio. The equity securities and venture capital funds were evaluated for severity and duration of unrealized loss, overall market volatility and other market factors.
Net realized gains included in Investment and Other Income on the Condensed Consolidated Statements of Operations were from the following sources:
Three Months Ended March 31, | ||||||||
(in millions) | 2012 | 2011 | ||||||
Total OTTI | $ | (3 | ) | $ | (4 | ) | ||
Portion of loss recognized in other comprehensive income | — | — | ||||||
Net OTTI recognized in earnings | (3 | ) | (4 | ) | ||||
Gross realized losses from sales | (1 | ) | (1 | ) | ||||
Gross realized gains from sales | 43 | 53 | ||||||
Net realized gains | $ | 39 | $ | 48 | ||||
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3. | Fair Value |
Certain assets and liabilities are measured at fair value in the Condensed Consolidated Financial Statements or have fair values disclosed in the Notes to the Condensed Consolidated Financial Statements. These assets and liabilities are classified into one of three levels of a hierarchy defined by GAAP. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement is categorized in its entirety based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
The fair value hierarchy is summarized as follows:
Level 1 — Quoted prices (unadjusted) for identical assets/liabilities in active markets.
Level 2 — Other observable inputs, either directly or indirectly, including:
• | Quoted prices for similar assets/liabilities in active markets; |
• | Quoted prices for identical or similar assets/liabilities in non-active markets (e.g., few transactions, limited information, non-current prices, high variability over time); |
• | Inputs other than quoted prices that are observable for the asset/liability (e.g., interest rates, yield curves, implied volatilities, credit spreads); and |
• | Inputs that are corroborated by other observable market data. |
Level 3 — Unobservable inputs that cannot be corroborated by observable market data.
Transfers between levels, if any, are recorded as of the beginning of the reporting period in which the transfer occurs; there were no transfers between Levels 1, 2 or 3 of any financial assets or liabilities during 2012 or 2011.
The following methods and assumptions were used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument included in the tables below:
Cash and Cash Equivalents. The carrying value of cash and cash equivalents approximates fair value as maturities are less than three months. Fair values of cash equivalent instruments that do not trade on a regular basis in active markets are classified as Level 2.
Debt and Equity Securities. Fair values of debt and equity securities are based on quoted market prices, where available. The Company obtains one price for each security primarily from a third-party pricing service (pricing service), which generally uses quoted or other observable inputs for the determination of fair value. The pricing service normally derives the security prices through recently reported trades for identical or similar securities, making adjustments through the reporting date based upon available observable market information. For securities not actively traded, the pricing service may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include, but are not limited to, benchmark yields, credit spreads, default rates, prepayment speeds and non-binding broker quotes. As the Company is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Company compares the prices received from the pricing service to a secondary pricing source, prices reported by its custodian, its investment consultant and third-party investment advisors. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verification procedures and review of fair value methodology documentation provided by independent pricing services have not historically resulted in adjustment in the prices obtained from the pricing service.
Fair values of debt securities that do not trade on a regular basis in active markets but are priced using other observable inputs are classified as Level 2. The Company’s Level 3 debt securities consist mainly of low income housing investments that are unique and non-transferable. The fair values of the Company's Level 3 debt securities are based on discounted cash flows from the investments.
Fair value estimates for Level 1 and Level 2 equity securities are based on quoted market prices for actively traded equity securities and/or other market data for the same or comparable instruments and transactions in establishing the prices.
The Company's Level 3 equity securities are primarily investments in venture capital securities. The fair values of Level 3 investments in venture capital portfolios are estimated using a market valuation technique that relies heavily on management assumptions and qualitative observations. Under the market approach, the fair values of the Company's various venture capital investments are computed using limited quantitative and qualitative observations of activity for similar companies in the current market. The Company's market modeling utilizes, as applicable, transactions for comparable companies in similar
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industries and having similar revenue and growth characteristics; and similar preferences in their capital structure. Key significant unobservable inputs in the market technique include implied earnings before interest, taxes, depreciation and amortization (EBITDA) multiples and revenue multiples. Additionally, the fair value of certain of the Company's venture capital securities are based off of recent transactions in inactive markets for identical or similar securities. Significant changes in any of these inputs could result in significantly lower or higher fair value measurements.
Throughout the procedures discussed above in relation to the Company's processes for validating third party pricing information, the Company validates the understanding of assumptions and inputs used in security pricing and determines the proper classification in the hierarchy based on that understanding.
AARP Program-related Investments. AARP Program-related investments consist of debt and equity securities held to fund costs associated with the AARP Program and are priced and classified using the same methodologies as the Company’s other securities.
Interest Rate Swaps. Fair values of the Company’s interest rate swaps are estimated using the terms of the swaps and publicly
available market yield curves. Because the swaps are unique and not actively traded, the fair values are classified as Level 2.
Senior Unsecured Notes. The fair values of the senior unsecured notes are estimated and classified using the same methodologies as the Company's investments in debt securities.
AARP Program-related Other Liabilities. AARP Program-related other liabilities consist of liabilities that represent the amount of net investment gains and losses related to AARP Program-related investments that accrue to the benefit of the AARP policyholders.
The following table presents a summary of fair value measurements by level for assets and liabilities measured at fair value on a recurring basis in the Condensed Consolidated Balance Sheets excluding AARP related assets and liabilities, which are discussed below:
(in millions) | Quoted Prices in Active Markets (Level 1) | Other Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | Total Fair Value | Total Carrying Value | |||||||||||||||
March 31, 2012 | ||||||||||||||||||||
Cash and cash equivalents | $ | 10,111 | $ | 1,550 | $ | — | $ | 11,661 | $ | 11,661 | ||||||||||
Debt securities - available-for-sale: | ||||||||||||||||||||
U.S. government and agency obligations | 1,700 | 870 | — | 2,570 | 2,570 | |||||||||||||||
State and municipal obligations | — | 6,496 | — | 6,496 | 6,496 | |||||||||||||||
Corporate obligations | 19 | 6,169 | — | 6,188 | 6,188 | |||||||||||||||
U.S. agency mortgage-backed securities | — | 2,387 | — | 2,387 | 2,387 | |||||||||||||||
Non-U.S. agency mortgage-backed securities | — | 486 | 7 | 493 | 493 | |||||||||||||||
Total debt securities - available-for-sale | 1,719 | 16,408 | 7 | 18,134 | 18,134 | |||||||||||||||
Equity securities - available-for-sale | 371 | 2 | 204 | 577 | 577 | |||||||||||||||
Total assets at fair value | $ | 12,201 | $ | 17,960 | $ | 211 | $ | 30,372 | N/A | |||||||||||
Percentage of total assets at fair value | 40 | % | 59 | % | 1 | % | 100 | % | N/A | |||||||||||
Interest rate swap liabilities | $ | — | $ | 10 | $ | — | $ | 10 | $ | 10 | ||||||||||
December 31, 2011 | ||||||||||||||||||||
Cash and cash equivalents | $ | 8,569 | $ | 860 | $ | — | $ | 9,429 | $ | 9,429 | ||||||||||
Debt securities - available-for-sale: | ||||||||||||||||||||
U.S. government and agency obligations | 1,551 | 822 | — | 2,373 | 2,373 | |||||||||||||||
State and municipal obligations | — | 6,750 | 15 | 6,765 | 6,765 | |||||||||||||||
Corporate obligations | 16 | 5,805 | 186 | 6,007 | 6,007 | |||||||||||||||
U.S. agency mortgage-backed securities | — | 2,353 | — | 2,353 | 2,353 | |||||||||||||||
Non-U.S. agency mortgage-backed securities | — | 497 | 7 | 504 | 504 | |||||||||||||||
Total debt securities - available-for-sale | 1,567 | 16,227 | 208 | 18,002 | 18,002 | |||||||||||||||
Equity securities - available-for-sale | 333 | 2 | 209 | 544 | 544 | |||||||||||||||
Total assets at fair value | $ | 10,469 | $ | 17,089 | $ | 417 | $ | 27,975 | N/A | |||||||||||
Percentage of total assets at fair value | 37 | % | 61 | % | 2 | % | 100 | % | N/A | |||||||||||
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The following table presents a summary of fair value measurements by level and carrying values for certain financial instruments not measured at fair value on a recurring basis in the Condensed Consolidated Balance Sheets for which it is practicable to estimate fair value:
(in millions) | Quoted Prices in Active Markets (Level 1) | Other Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | Total Fair Value | Total Carrying Value | |||||||||||||||
March 31, 2012 | ||||||||||||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||||||
U.S. government and agency obligations | $ | 177 | $ | — | $ | — | $ | 177 | $ | 171 | ||||||||||
State and municipal obligations | — | 2 | 31 | 33 | 33 | |||||||||||||||
Corporate obligations | 9 | 12 | 218 | 239 | 242 | |||||||||||||||
Total debt securities - held-to-maturity | $ | 186 | $ | 14 | $ | 249 | $ | 449 | $ | 446 | ||||||||||
Senior unsecured notes | $ | — | $ | 14,037 | $ | — | $ | 14,037 | $ | 12,609 | ||||||||||
December 31, 2011 | ||||||||||||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||||||
U.S. government and agency obligations | $ | 173 | $ | — | $ | — | $ | 173 | $ | 166 | ||||||||||
State and municipal obligations | — | 1 | 12 | 13 | 13 | |||||||||||||||
Corporate obligations | 9 | 9 | — | 18 | 18 | |||||||||||||||
Total debt securities - held-to-maturity | $ | 182 | $ | 10 | $ | 12 | $ | 204 | $ | 197 | ||||||||||
Senior unsecured notes | $ | — | $ | 13,149 | $ | — | $ | 13,149 | $ | 11,638 | ||||||||||
The carrying amounts reported in the Condensed Consolidated Balance Sheets for accounts and other current receivables, unearned revenues, commercial paper, accounts payable and accrued liabilities approximate fair value because of their short-term nature. These assets and liabilities are not listed in the table above.
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A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs is as follows:
March 31, 2012 | March 31, 2011 | |||||||||||||||||||||||
(in millions) | Debt Securities | Equity Securities | Total | Debt Securities | Equity Securities | Total | ||||||||||||||||||
Balance at beginning of period | $ | 208 | $ | 209 | $ | 417 | $ | 141 | $ | 208 | $ | 349 | ||||||||||||
Purchases | — | 18 | 18 | — | 4 | 4 | ||||||||||||||||||
Sales | — | (2 | ) | (2 | ) | — | (9 | ) | (9 | ) | ||||||||||||||
Settlements | — | — | — | (6 | ) | — | (6 | ) | ||||||||||||||||
Net unrealized losses in accumulated other comprehensive income | — | — | — | — | (2 | ) | (2 | ) | ||||||||||||||||
Transfers to held-to-maturity | (201 | ) | (21 | ) | (222 | ) | — | — | — | |||||||||||||||
Balance at end of period | $ | 7 | $ | 204 | $ | 211 | $ | 135 | $ | 201 | $ | 336 | ||||||||||||
The following table presents quantitative information regarding unobservable inputs that were significant to the valuation of assets measured at fair value on a recurring basis using Level 3 inputs:
Range | ||||||||||||
(in millions) | Fair Value | Valuation Technique | Unobservable Input | Low | High | |||||||
March 31, 2012 | ||||||||||||
Equity securities - available-for-sale | ||||||||||||
Venture capital portfolios | $ | 174 | Market approach - comparable companies | Revenue multiple | 1.0 | 10.0 | ||||||
EBITDA multiple | 8.0 | 10.0 | ||||||||||
30 | Market approach - recent transactions | Inactive market transactions | N/A | N/A | ||||||||
Total equity securities available-for-sale | $ | 204 | ||||||||||
Also included in the Company's assets measured at fair value on a recurring basis using Level 3 inputs were $7 million of available-for-sale debt securities at March 31, 2012, which were not significant.
Non-financial assets and liabilities or financial assets and liabilities that are measured at fair value on a nonrecurring basis are subject to fair value adjustments only in certain circumstances, such as when the Company records an impairment. There were no significant fair value adjustments for these assets and liabilities recorded during the three months ended March 31, 2012 and 2011.
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The Company provides health insurance products and services to members of AARP under a Supplemental Health Insurance
Program (the AARP Program). The Company elected to measure the entirety of the AARP Assets Under Management at fair value pursuant to the fair value option. See Note 2 of Notes to the Consolidated Financial Statements in the Company’s 2011 10-K for further detail on AARP. The following table presents fair value information about the AARP Program-related financial
assets and liabilities:
(in millions) | Quoted Prices in Active Markets (Level 1) | Other Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | Total Fair Value | ||||||||||||
March 31, 2012 | ||||||||||||||||
Cash and cash equivalents | $ | 93 | $ | 6 | $ | — | $ | 99 | ||||||||
Debt securities: | ||||||||||||||||
U.S. government and agency obligations | 575 | 222 | — | 797 | ||||||||||||
State and municipal obligations | — | 24 | — | 24 | ||||||||||||
Corporate obligations | — | 1,054 | — | 1,054 | ||||||||||||
U.S. agency mortgage-backed securities | — | 442 | — | 442 | ||||||||||||
Non-U.S. agency mortgage-backed securities | — | 150 | — | 150 | ||||||||||||
Total debt securities | 575 | 1,892 | — | 2,467 | ||||||||||||
Equity securities - available-for-sale | — | 2 | — | 2 | ||||||||||||
Total assets at fair value | $ | 668 | $ | 1,900 | $ | — | $ | 2,568 | ||||||||
Other liabilities | $ | 22 | $ | 56 | $ | — | $ | 78 | ||||||||
Total liabilities at fair value | $ | 22 | $ | 56 | $ | — | $ | 78 | ||||||||
December 31, 2011 | ||||||||||||||||
Cash and cash equivalents | $ | 257 | $ | 10 | $ | — | $ | 267 | ||||||||
Debt securities: | ||||||||||||||||
U.S. government and agency obligations | 566 | 214 | — | 780 | ||||||||||||
State and municipal obligations | — | 25 | — | 25 | ||||||||||||
Corporate obligations | — | 1,048 | — | 1,048 | ||||||||||||
U.S. agency mortgage-backed securities | — | 436 | — | 436 | ||||||||||||
Non-U.S. agency mortgage-backed securities | — | 150 | — | 150 | ||||||||||||
Total debt securities | 566 | 1,873 | — | 2,439 | ||||||||||||
Equity securities - available-for-sale | — | 2 | — | 2 | ||||||||||||
Total assets at fair value | $ | 823 | $ | 1,885 | $ | — | $ | 2,708 | ||||||||
Other liabilities | $ | 27 | $ | 49 | $ | — | $ | 76 | ||||||||
Total liabilities at fair value | $ | 27 | $ | 49 | $ | — | $ | 76 | ||||||||
4. | CMS Prepayments and Medicare Part D Pharmacy Benefits |
CMS Prepayments
On March 30, 2012, the Company received approximately $2.5 billion for its April monthly premium payment and approximately $500 million for the Catastrophic Reinsurance and Low-Income Member Cost Sharing Subsidies (Subsidies) and drug discount from the Centers for Medicare & Medicaid Services (CMS). CMS generally pays on the first calendar day of the applicable month. If the first calendar day of the month falls on a weekend or a holiday, CMS has typically paid the Company on the last business day of the preceding calendar month. The Company recorded the premium payment as unearned revenues in both its Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows. The treatment of the Subsidies and drug discount is described below.
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Medicare Part D Pharmacy Benefits Contract
The Condensed Consolidated Balance Sheets include the following amounts associated with the Medicare Part D program:
March 31, 2012 | December 31, 2011 | |||||||||||||||||||||||
(in millions) | Subsidies | Drug Discount | Risk-Share | Subsidies | Drug Discount | Risk-Share | ||||||||||||||||||
Other current receivables | $ | — | $ | 91 | $ | 135 | $ | — | $ | 509 | $ | — | ||||||||||||
Other policy liabilities | 902 | 304 | — | 70 | 649 | 170 | ||||||||||||||||||
The Subsidies and drug discount represent cost reimbursements under the Medicare Part D program. The Company is fully reimbursed by CMS for costs incurred for these contract elements and, accordingly, there is no insurance risk to the Company. Amounts received for these Subsidies are not reflected as premium revenues, but rather are accounted for as a reduction of receivables and/or increase in deposit liabilities. For the drug discount, the Company records a liability when amounts are received from CMS and a receivable when the Company bills the pharmaceutical manufacturers. Related cash flows are presented as customer funds administered within financing activities in the Condensed Consolidated Statements of Cash Flows.
Premiums from CMS are subject to risk-sharing provisions based on a comparison of the Company’s annual bid estimates of prescription drug costs and the actual costs incurred. Variances may result in CMS making additional payments to the Company or require the Company to remit funds to CMS subsequent to the end of the year. The Company records risk-share adjustments to premium revenue and other current receivables or other policy liabilities in the Condensed Consolidated Balance Sheets.
5. | Medical Costs and Medical Costs Payable |
For the three months ended March 31, 2012, there was $530 million of net favorable medical cost development related to prior fiscal years. The favorable development in 2012 was driven by lower than expected health system utilization levels and other factors that were individually immaterial.
For the three months ended March 31, 2011, there was $440 million of net favorable medical cost development related to prior fiscal years. The favorable development in 2011 was primarily driven by lower than expected health system utilization levels and continued improvements in claims submission timeliness, which results in higher completion factors.
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6. | Commercial Paper and Long-Term Debt |
Commercial paper and long-term debt consisted of the following:
March 31, 2012 | December 31, 2011 | |||||||||||||||||||||||
(in millions) | Par Value | Carrying Value | Fair Value | Par Value | Carrying Value | Fair Value | ||||||||||||||||||
Commercial paper | $ | 245 | $ | 245 | $ | 245 | $ | — | $ | — | $ | — | ||||||||||||
5.500% senior unsecured notes due November 2012 | 352 | 360 | 363 | 352 | 363 | 366 | ||||||||||||||||||
4.875% senior unsecured notes due February 2013 | 534 | 538 | 553 | 534 | 540 | 556 | ||||||||||||||||||
4.875% senior unsecured notes due April 2013 | 409 | 418 | 426 | 409 | 421 | 427 | ||||||||||||||||||
4.750% senior unsecured notes due February 2014 | 172 | 183 | 184 | 172 | 184 | 185 | ||||||||||||||||||
5.000% senior unsecured notes due August 2014 | 389 | 420 | 426 | 389 | 423 | 424 | ||||||||||||||||||
4.875% senior unsecured notes due March 2015 | 416 | 455 | 459 | 416 | 458 | 460 | ||||||||||||||||||
5.375% senior unsecured notes due March 2016 | 601 | 673 | 686 | 601 | 678 | 689 | ||||||||||||||||||
1.875% senior unsecured notes due November 2016 | 400 | 397 | 404 | 400 | 397 | 400 | ||||||||||||||||||
5.360% senior unsecured notes due November 2016 | 95 | 95 | 110 | 95 | 95 | 110 | ||||||||||||||||||
6.000% senior unsecured notes due June 2017 | 441 | 497 | 530 | 441 | 499 | 518 | ||||||||||||||||||
6.000% senior unsecured notes due November 2017 | 156 | 173 | 189 | 156 | 173 | 183 | ||||||||||||||||||
6.000% senior unsecured notes due February 2018 | 1,100 | 1,122 | 1,329 | 1,100 | 1,123 | 1,308 | ||||||||||||||||||
3.875% senior unsecured notes due October 2020 | 450 | 442 | 475 | 450 | 442 | 478 | ||||||||||||||||||
4.700% senior unsecured notes due February 2021 | 400 | 419 | 449 | 400 | 419 | 450 | ||||||||||||||||||
3.375% senior unsecured notes due November 2021 | 500 | 487 | 513 | 500 | 497 | 517 | ||||||||||||||||||
2.875% senior unsecured notes due March 2022 | 600 | 596 | 587 | — | — | — | ||||||||||||||||||
Zero coupon senior unsecured notes due November 2022 | 1,095 | 628 | 737 | 1,095 | 619 | 696 | ||||||||||||||||||
5.800% senior unsecured notes due March 2036 | 850 | 844 | 978 | 850 | 844 | 1,017 | ||||||||||||||||||
6.500% senior unsecured notes due June 2037 | 500 | 495 | 616 | 500 | 495 | 636 | ||||||||||||||||||
6.625% senior unsecured notes due November 2037 | 650 | 645 | 822 | 650 | 645 | 834 | ||||||||||||||||||
6.875% senior unsecured notes due February 2038 | 1,100 | 1,084 | 1,443 | 1,100 | 1,084 | 1,475 | ||||||||||||||||||
5.700% senior unsecured notes due October 2040 | 300 | 298 | 348 | 300 | 298 | 359 | ||||||||||||||||||
5.950% senior unsecured notes due February 2041 | 350 | 348 | 424 | 350 | 348 | 430 | ||||||||||||||||||
4.625% senior unsecured notes due November 2041 | 600 | 593 | 600 | 600 | 593 | 631 | ||||||||||||||||||
4.375% senior unsecured notes due March 2042 | 400 | 399 | 386 | — | — | — | ||||||||||||||||||
Total commercial paper and long-term debt | $ | 13,105 | $ | 12,854 | $ | 14,282 | $ | 11,860 | $ | 11,638 | $ | 13,149 | ||||||||||||
Commercial Paper and Bank Credit Facility
Commercial paper consists of short-duration, senior unsecured debt privately placed on a discount basis through broker-dealers. As of March 31, 2012, the Company's outstanding commercial paper had a weighted-average annual interest rate of 0.5%.
The Company has a $3.0 billion five-year revolving bank credit facility with 21 banks, which will mature in December 2016. This facility supports the Company’s commercial paper program and is available for general corporate purposes. There were no amounts outstanding under this facility as of March 31, 2012. The interest rate on borrowings is variable based on term and amount and is calculated based on the London Interbank Offered Rate (LIBOR) plus a credit spread based on the Company’s senior unsecured credit ratings. As of March 31, 2012, the annual interest rate on this facility, had it been drawn, would have ranged from 1.1% to 1.6%.