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, 2014
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:
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, 2014, there were 979,860,669 shares of the registrant’s Common Stock, $.01 par value per share, issued and outstanding.
UNITEDHEALTH GROUP
Table of Contents
Page | ||||
PART I
ITEM 1. FINANCIAL STATEMENTS
UnitedHealth Group
Condensed Consolidated Balance Sheets
(Unaudited)
(in millions, except per share data) | March 31, 2014 | December 31, 2013 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 7,514 | $ | 7,276 | ||||
Short-term investments | 1,869 | 1,937 | ||||||
Accounts receivable, net | 4,202 | 3,052 | ||||||
Other current receivables, net | 3,624 | 3,998 | ||||||
Assets under management | 2,780 | 2,757 | ||||||
Deferred income taxes | 319 | 430 | ||||||
Prepaid expenses and other current assets | 2,056 | 930 | ||||||
Total current assets | 22,364 | 20,380 | ||||||
Long-term investments | 19,377 | 19,605 | ||||||
Property, equipment and capitalized software, net | 4,065 | 4,010 | ||||||
Goodwill | 32,150 | 31,604 | ||||||
Other intangible assets, net | 3,867 | 3,844 | ||||||
Other assets | 2,799 | 2,439 | ||||||
Total assets | $ | 84,622 | $ | 81,882 | ||||
Liabilities and shareholders’ equity | ||||||||
Current liabilities: | ||||||||
Medical costs payable | $ | 12,230 | $ | 11,575 | ||||
Accounts payable and accrued liabilities | 9,160 | 7,458 | ||||||
Other policy liabilities | 5,247 | 5,279 | ||||||
Commercial paper and current maturities of long-term debt | 2,241 | 1,969 | ||||||
Unearned revenues | 1,838 | 1,600 | ||||||
Total current liabilities | 30,716 | 27,881 | ||||||
Long-term debt, less current maturities | 14,524 | 14,891 | ||||||
Future policy benefits | 2,472 | 2,465 | ||||||
Deferred income taxes | 1,831 | 1,796 | ||||||
Other liabilities | 1,262 | 1,525 | ||||||
Total liabilities | 50,805 | 48,558 | ||||||
Commitments and contingencies (Note 8) | ||||||||
Redeemable noncontrolling interests | 1,268 | 1,175 | ||||||
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; 984 and 988 issued and outstanding | 10 | 10 | ||||||
Retained earnings | 33,112 | 33,047 | ||||||
Accumulated other comprehensive loss | (573 | ) | (908 | ) | ||||
Total shareholders’ equity | 32,549 | 32,149 | ||||||
Total liabilities and shareholders’ equity | $ | 84,622 | $ | 81,882 | ||||
See Notes to the Condensed Consolidated Financial Statements
UnitedHealth Group
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31, | ||||||||
(in millions, except per share data) | 2014 | 2013 | ||||||
Revenues: | ||||||||
Premiums | $ | 28,115 | $ | 27,274 | ||||
Services | 2,404 | 2,112 | ||||||
Products | 998 | 751 | ||||||
Investment and other income | 191 | 203 | ||||||
Total revenues | 31,708 | 30,340 | ||||||
Operating costs: | ||||||||
Medical costs | 23,208 | 22,569 | ||||||
Operating costs | 5,194 | 4,614 | ||||||
Cost of products sold | 892 | 682 | ||||||
Depreciation and amortization | 360 | 336 | ||||||
Total operating costs | 29,654 | 28,201 | ||||||
Earnings from operations | 2,054 | 2,139 | ||||||
Interest expense | (160 | ) | (178 | ) | ||||
Earnings before income taxes | 1,894 | 1,961 | ||||||
Provision for income taxes | (795 | ) | (721 | ) | ||||
Net earnings | 1,099 | 1,240 | ||||||
Earnings attributable to noncontrolling interests | — | (48 | ) | |||||
Net earnings attributable to UnitedHealth Group common shareholders | $ | 1,099 | $ | 1,192 | ||||
Earnings per share attributable to UnitedHealth Group common shareholders: | ||||||||
Basic | $ | 1.12 | $ | 1.17 | ||||
Diluted | $ | 1.10 | $ | 1.16 | ||||
Basic weighted-average number of common shares outstanding | 983 | 1,016 | ||||||
Dilutive effect of common share equivalents | 13 | 13 | ||||||
Diluted weighted-average number of common shares outstanding | 996 | 1,029 | ||||||
Anti-dilutive shares excluded from the calculation of dilutive effect of common share equivalents | 9 | 16 | ||||||
Cash dividends declared per common share | $ | 0.2800 | $ | 0.2125 | ||||
See Notes to the Condensed Consolidated Financial Statements
1
UnitedHealth Group
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended March 31, | ||||||||
(in millions) | 2014 | 2013 | ||||||
Net earnings | $ | 1,099 | $ | 1,240 | ||||
Other comprehensive income (loss): | ||||||||
Gross unrealized holding gains (losses) on investment securities during the period | 166 | (48 | ) | |||||
Income tax effect | (61 | ) | 16 | |||||
Total unrealized gains (losses), net of tax | 105 | (32 | ) | |||||
Gross reclassification adjustment for net realized gains included in net earnings | (46 | ) | (57 | ) | ||||
Income tax effect | 17 | 21 | ||||||
Total reclassification adjustment, net of tax | (29 | ) | (36 | ) | ||||
Total foreign currency translation gains | 259 | 18 | ||||||
Other comprehensive income (loss) | 335 | (50 | ) | |||||
Comprehensive income | 1,434 | 1,190 | ||||||
Comprehensive income attributable to noncontrolling interests | — | (48 | ) | |||||
Comprehensive income attributable to UnitedHealth Group common shareholders | $ | 1,434 | $ | 1,142 | ||||
See Notes to the Condensed Consolidated Financial Statements
UnitedHealth Group
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||||||
(in millions) | Shares | Amount | Net Unrealized Gains (Losses) on Investments | Foreign Currency Translation (Losses) Gains | |||||||||||||||||||||||
Balance at January 1, 2014 | 988 | $ | 10 | $ | — | $ | 33,047 | $ | 54 | $ | (962 | ) | $ | 32,149 | |||||||||||||
Net earnings attributable to UnitedHealth Group common shareholders | 1,099 | 1,099 | |||||||||||||||||||||||||
Other comprehensive income | 76 | 259 | 335 | ||||||||||||||||||||||||
Issuances of common shares, and related tax effects | 8 | — | (6 | ) | (6 | ) | |||||||||||||||||||||
Share-based compensation, and related tax benefits | 159 | 159 | |||||||||||||||||||||||||
Common share repurchases | (12 | ) | — | (153 | ) | (758 | ) | (911 | ) | ||||||||||||||||||
Cash dividends paid on common shares | (276 | ) | (276 | ) | |||||||||||||||||||||||
Balance at March 31, 2014 | 984 | $ | 10 | $ | — | $ | 33,112 | $ | 130 | $ | (703 | ) | $ | 32,549 | |||||||||||||
Balance at January 1, 2013 | 1,019 | $ | 10 | $ | 66 | $ | 30,664 | $ | 516 | $ | (78 | ) | $ | 31,178 | |||||||||||||
Net earnings attributable to UnitedHealth Group common shareholders | 1,192 | 1,192 | |||||||||||||||||||||||||
Other comprehensive (loss) income | (68 | ) | 18 | (50 | ) | ||||||||||||||||||||||
Issuances of common shares, and related tax effects | 4 | — | 84 | 84 | |||||||||||||||||||||||
Share-based compensation, and related tax benefits | 112 | 112 | |||||||||||||||||||||||||
Common share repurchases | (10 | ) | — | (262 | ) | (281 | ) | (543 | ) | ||||||||||||||||||
Cash dividends paid on common shares | (216 | ) | (216 | ) | |||||||||||||||||||||||
Balance at March 31, 2013 | 1,013 | $ | 10 | $ | — | $ | 31,359 | $ | 448 | $ | (60 | ) | $ | 31,757 | |||||||||||||
See Notes to the Condensed Consolidated Financial Statements
2
UnitedHealth Group
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, | ||||||||
(in millions) | 2014 | 2013 | ||||||
Operating activities | ||||||||
Net earnings | $ | 1,099 | $ | 1,240 | ||||
Noncash items: | ||||||||
Depreciation and amortization | 360 | 336 | ||||||
Deferred income taxes | 99 | 131 | ||||||
Share-based compensation | 105 | 99 | ||||||
Other, net | (65 | ) | (41 | ) | ||||
Net change in other operating items, net of effects from acquisitions and changes in AARP balances: | ||||||||
Accounts receivable | (990 | ) | (463 | ) | ||||
Other assets | (1,281 | ) | (556 | ) | ||||
Medical costs payable | 387 | 673 | ||||||
Accounts payable and other liabilities | 1,665 | (237 | ) | |||||
Other policy liabilities | (203 | ) | — | |||||
Unearned revenues | 232 | (129 | ) | |||||
Cash flows from operating activities | 1,408 | 1,053 | ||||||
Investing activities | ||||||||
Purchases of investments | (2,914 | ) | (2,824 | ) | ||||
Sales of investments | 2,235 | 1,282 | ||||||
Maturities of investments | 825 | 1,195 | ||||||
Cash paid for acquisitions, net of cash assumed | (345 | ) | (279 | ) | ||||
Purchases of property, equipment and capitalized software | (353 | ) | (323 | ) | ||||
Other, net | (51 | ) | 45 | |||||
Cash flows used for investing activities | (603 | ) | (904 | ) | ||||
Financing activities | ||||||||
Common stock repurchases | (911 | ) | (543 | ) | ||||
Cash dividends paid | (276 | ) | (216 | ) | ||||
Proceeds from common stock issuances | 216 | 116 | ||||||
Repayments of long-term debt | (172 | ) | (1,077 | ) | ||||
Proceeds from commercial paper, net | 9 | 130 | ||||||
Proceeds from issuance of long-term debt | — | 2,235 | ||||||
Customer funds administered | 818 | 962 | ||||||
Other, net | (257 | ) | (104 | ) | ||||
Cash flows (used for) from financing activities | (573 | ) | 1,503 | |||||
Effect of exchange rate changes on cash and cash equivalents | 6 | (20 | ) | |||||
Increase in cash and cash equivalents | 238 | 1,632 | ||||||
Cash and cash equivalents, beginning of period | 7,276 | 8,406 | ||||||
Cash and cash equivalents, end of period | $ | 7,514 | $ | 10,038 | ||||
See Notes to the Condensed Consolidated Financial Statements
3
UnitedHealth Group
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1.Basis of Presentation
Basis of Presentation
UnitedHealth Group Incorporated (individually and together with its subsidiaries, “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. The Company offers 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 year-end condensed consolidated balance sheet 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 Part II, Item 8, “Financial Statements” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the SEC (2013 10-K). The accompanying Condensed Consolidated Financial Statements include all normal recurring adjustments necessary to present the interim financial statements fairly.
On January 1, 2014, the Company realigned certain of its businesses to respond to changes in the markets it serves and the opportunities that are emerging as the health system evolves. The Company’s Optum business platform took responsibility for certain technology operations and business processing activities with the intention of pursuing additional third-party commercial opportunities in addition to continuing to serve UnitedHealthcare. These activities, which were historically a corporate function, are now included in OptumInsight’s results of operations. The Company’s reportable segments remain the same and prior period segment financial information has been recast to conform to the 2014 presentation. See Note 9 for segment financial information.
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, revenues, valuation and impairment analysis of goodwill and other intangible assets, estimates of other policy liabilities and other current receivables, valuations of certain investments, and estimates and judgments related to income taxes and contingent liabilities. Certain of 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
Industry Tax. The Patient Protection and Affordable Care Act and a reconciliation measure, the Health Care and Education Reconciliation Act of 2010 (together, Health Reform Legislation or ACA) include an annual, nondeductible insurance industry tax (Industry Tax) to be levied proportionally across the insurance industry for risk-based products beginning on January 1, 2014.
The Company estimates its liability for the Industry Tax based on a ratio of the Company’s net premiums written compared to the U.S. health insurance industry total net premiums, both for the previous calendar year. The Company records in full the estimated liability for the Industry Tax at the beginning of the calendar year with a corresponding deferred cost that is amortized to operating costs on the Condensed Consolidated Statements of Operations using a straight-line method of allocation over the calendar year. The liability is recorded in accounts payable and accrued liabilities and the corresponding deferred cost is recorded in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. The Industry Tax liability was $1.3 billion and as of March 31, 2014 the unamortized asset was $1.0 billion. The Company has experienced a higher effective income tax rate in 2014 as compared to 2013 due to the nondeductible nature of the Industry Tax.
Premium Stabilization Programs. Beginning in 2014, Health Reform Legislation includes three programs designed to stabilize health insurance markets (Premium Stabilization Programs): a permanent risk adjustment program; a temporary risk corridors program; and a transitional reinsurance program.
4
The risk-adjustment provisions of Health Reform Legislation are permanent regulations and apply to market reform compliant individual and small group plans in the commercial markets. Under the program, each covered member is assigned a risk score based upon demographic information and applicable diagnostic codes from the current year paid claims, in order to determine an average risk score for each plan in a particular state and market risk pool. Generally, a plan with an average risk score that is less than the state’s average risk score will pay into a pool, while a plan with an average risk score that is greater than the state’s average risk score will receive money from the pool.
The risk corridors provisions of Health Reform Legislation will be in place for three years and are intended to limit the gains and losses of individual and small group qualified health plans operating in the exchanges. Plans are required to calculate the U.S. Department of Health and Human Services (HHS) risk corridor ratio of allowable costs (defined as medical claims plus quality improvement costs adjusted for the impact of reinsurance recoveries and the risk adjustment program) to the defined target amount (defined as actual premiums less defined allowable administrative costs inclusive of taxes and profits). Qualified health plans with ratios below 97% are required to make payments to HHS, while plans with ratios greater than 103% will receive funds from HHS.
The transitional reinsurance program is a temporary three year program that is funded on a per capita basis from all commercial lines of business including insured and self-funded arrangements. Only issuers of market reform compliant individual plans are eligible for reinsurance recoveries from the risk pools.
None of the Premium Stabilization Programs are expected to have a material impact on the Condensed Consolidated Financial Statements.
All other accounting policies disclosed in Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2013 10-K remain unchanged.
2.Investments
A summary of short-term and long-term investments by major security type is as follows:
(in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
March 31, 2014 | ||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | $ | 1,851 | $ | 4 | $ | (14 | ) | $ | 1,841 | |||||||
State and municipal obligations | 6,623 | 162 | (30 | ) | 6,755 | |||||||||||
Corporate obligations | 7,109 | 134 | (33 | ) | 7,210 | |||||||||||
U.S. agency mortgage-backed securities | 2,261 | 20 | (42 | ) | 2,239 | |||||||||||
Non-U.S. agency mortgage-backed securities | 818 | 13 | (5 | ) | 826 | |||||||||||
Total debt securities - available-for-sale | 18,662 | 333 | (124 | ) | 18,871 | |||||||||||
Equity securities - available-for-sale | 1,835 | 18 | (15 | ) | 1,838 | |||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||
U.S. government and agency obligations | 182 | 2 | — | 184 | ||||||||||||
State and municipal obligations | 28 | — | — | 28 | ||||||||||||
Corporate obligations | 327 | — | — | 327 | ||||||||||||
Total debt securities - held-to-maturity | 537 | 2 | — | 539 | ||||||||||||
Total investments | $ | 21,034 | $ | 353 | $ | (139 | ) | $ | 21,248 | |||||||
December 31, 2013 | ||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | $ | 2,211 | $ | 5 | $ | (21 | ) | $ | 2,195 | |||||||
State and municipal obligations | 6,902 | 147 | (72 | ) | 6,977 | |||||||||||
Corporate obligations | 7,265 | 130 | (60 | ) | 7,335 | |||||||||||
U.S. agency mortgage-backed securities | 2,256 | 23 | (61 | ) | 2,218 | |||||||||||
Non-U.S. agency mortgage-backed securities | 697 | 12 | (7 | ) | 702 | |||||||||||
Total debt securities - available-for-sale | 19,331 | 317 | (221 | ) | 19,427 | |||||||||||
Equity securities - available-for-sale | 1,576 | 9 | (13 | ) | 1,572 | |||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||
U.S. government and agency obligations | 181 | 1 | — | 182 | ||||||||||||
State and municipal obligations | 28 | — | — | 28 | ||||||||||||
Corporate obligations | 334 | — | — | 334 | ||||||||||||
Total debt securities - held-to-maturity | 543 | 1 | — | 544 | ||||||||||||
Total investments | $ | 21,450 | $ | 327 | $ | (234 | ) | $ | 21,543 | |||||||
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 date as of March 31, 2014 were as follows:
(in millions) | AAA | AA | Non-Investment Grade | Total Fair Value | ||||||||||||
2014 | $ | 100 | $ | — | $ | — | $ | 100 | ||||||||
2013 | 157 | — | — | 157 | ||||||||||||
2012 | 109 | — | — | 109 | ||||||||||||
2011 | 18 | — | — | 18 | ||||||||||||
2010 | 25 | — | — | 25 | ||||||||||||
2009 | 7 | — | — | 7 | ||||||||||||
Pre - 2009 | 395 | 2 | 13 | 410 | ||||||||||||
U.S. agency mortgage-backed securities | 2,237 | 2 | — | 2,239 | ||||||||||||
Total | $ | 3,048 | $ | 4 | $ | 13 | $ | 3,065 | ||||||||
The Company includes any securities backed by Alt-A or subprime mortgages and any commercial mortgage loans in default in the non-investment grade column in the table above.
The amortized cost and fair value of available-for-sale debt securities as of March 31, 2014, by contractual maturity, were as follows:
(in millions) | Amortized Cost | Fair Value | ||||||
Due in one year or less | $ | 2,007 | $ | 2,019 | ||||
Due after one year through five years | 6,944 | 7,052 | ||||||
Due after five years through ten years | 4,900 | 4,962 | ||||||
Due after ten years | 1,732 | 1,773 | ||||||
U.S. agency mortgage-backed securities | 2,261 | 2,239 | ||||||
Non-U.S. agency mortgage-backed securities | 818 | 826 | ||||||
Total debt securities - available-for-sale | $ | 18,662 | $ | 18,871 | ||||
The amortized cost and fair value of held-to-maturity debt securities as of March 31, 2014, by contractual maturity, were as follows:
(in millions) | Amortized Cost | Fair Value | ||||||
Due in one year or less | $ | 81 | $ | 81 | ||||
Due after one year through five years | 235 | 235 | ||||||
Due after five years through ten years | 132 | 134 | ||||||
Due after ten years | 89 | 89 | ||||||
Total debt securities - held-to-maturity | $ | 537 | $ | 539 | ||||
The fair value of available-for-sale investments with gross unrealized losses by major security 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, 2014 | ||||||||||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||||||||||
U.S. government and agency obligations | $ | 796 | $ | (13 | ) | $ | 11 | $ | (1 | ) | $ | 807 | $ | (14 | ) | |||||||||
State and municipal obligations | 1,564 | (24 | ) | 128 | (6 | ) | 1,692 | (30 | ) | |||||||||||||||
Corporate obligations | 2,174 | (26 | ) | 116 | (7 | ) | 2,290 | (33 | ) | |||||||||||||||
U.S. agency mortgage-backed securities | 1,146 | (33 | ) | 108 | (9 | ) | 1,254 | (42 | ) | |||||||||||||||
Non-U.S. agency mortgage-backed securities | 289 | (4 | ) | 31 | (1 | ) | 320 | (5 | ) | |||||||||||||||
Total debt securities - available-for-sale | $ | 5,969 | $ | (100 | ) | $ | 394 | $ | (24 | ) | $ | 6,363 | $ | (124 | ) | |||||||||
Equity securities - available-for-sale | $ | 167 | $ | (15 | ) | $ | — | $ | — | $ | 167 | $ | (15 | ) | ||||||||||
December 31, 2013 | ||||||||||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||||||||||
U.S. government and agency obligations | $ | 1,055 | $ | (19 | ) | $ | 17 | $ | (2 | ) | $ | 1,072 | $ | (21 | ) | |||||||||
State and municipal obligations | 2,491 | (62 | ) | 128 | (10 | ) | 2,619 | (72 | ) | |||||||||||||||
Corporate obligations | 2,573 | (51 | ) | 103 | (9 | ) | 2,676 | (60 | ) | |||||||||||||||
U.S. agency mortgage-backed securities | 1,393 | (51 | ) | 105 | (10 | ) | 1,498 | (61 | ) | |||||||||||||||
Non-U.S. agency mortgage-backed securities | 289 | (6 | ) | 26 | (1 | ) | 315 | (7 | ) | |||||||||||||||
Total debt securities - available-for-sale | $ | 7,801 | $ | (189 | ) | $ | 379 | $ | (32 | ) | $ | 8,180 | $ | (221 | ) | |||||||||
Equity securities - available-for-sale | $ | 180 | $ | (13 | ) | $ | — | $ | — | $ | 180 | $ | (13 | ) | ||||||||||
The unrealized losses from all securities as of March 31, 2014 were generated from approximately 5,200 positions out of a total of 20,700 positions. The Company believes that it will collect the principal and interest due on its debt securities 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 quality 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). Therefore, the Company believes these losses to be temporary. As of March 31, 2014, the Company did not have the intent to sell any of the securities in an unrealized loss position.
The Company’s investments in equity securities consist of investments in Brazilian real denominated fixed-income funds, employee savings plan related investments, private equity funds, and dividend paying stocks. The Company evaluated its investments in equity securities for severity and duration of unrealized loss, overall market volatility and other market factors.
Net realized gains reclassified out of accumulated other comprehensive income were from the following sources:
Three Months Ended March 31, | ||||||||
(in millions) | 2014 | 2013 | ||||||
Total OTTI | $ | (3 | ) | $ | (3 | ) | ||
Portion of loss recognized in other comprehensive income | — | — | ||||||
Net OTTI recognized in earnings | (3 | ) | (3 | ) | ||||
Gross realized losses from sales | (10 | ) | (1 | ) | ||||
Gross realized gains from sales | 59 | 61 | ||||||
Net realized gains (included in investment and other income on the Condensed Consolidated Statements of Operations) | 46 | 57 | ||||||
Income tax effect (included in provision for income taxes on the Condensed Consolidated Statements of Operations) | (17 | ) | (21 | ) | ||||
Realized gains, net of taxes | $ | 29 | $ | 36 | ||||
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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 nonactive markets (e.g., few transactions, limited information, noncurrent 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 2014 or 2013.
Nonfinancial 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, 2014 or 2013.
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, and, if necessary, makes 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 nonbinding 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 prices reported by a secondary pricing source, such as 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 reviews 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.
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 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
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companies in similar industries that also have similar revenue and growth characteristics and 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 values 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. The Company provides health insurance products and services to members of AARP under a Supplemental Health Insurance Program (AARP Program). AARP Program-related investments consist of debt securities and other investments held to fund costs associated with the AARP Program and are priced and classified using the same methodologies as the Company’s investments in debt and equity securities.
Interest Rate Swaps. Fair values of the Company’s swaps are estimated using the terms of the swaps and publicly available information including market yield curves. Because the swaps are unique and not actively traded but are valued using other observable inputs, the fair values are classified as Level 2.
Long-term Debt. The fair value of the Company’s long-term debt is 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.
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The following table presents a summary of fair value measurements by level and carrying values for items measured at fair value on a recurring basis in the Condensed Consolidated Balance Sheets excluding AARP Program-related assets and liabilities, which are presented in a separate table below:
(in millions) | Quoted Prices in Active Markets (Level 1) | Other Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | Total Fair and Carrying Value | ||||||||||||
March 31, 2014 | ||||||||||||||||
Cash and cash equivalents | $ | 7,511 | $ | 3 | $ | — | $ | 7,514 | ||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | 1,531 | 310 | — | 1,841 | ||||||||||||
State and municipal obligations | — | 6,755 | — | 6,755 | ||||||||||||
Corporate obligations | 29 | 7,141 | 40 | 7,210 | ||||||||||||
U.S. agency mortgage-backed securities | — | 2,239 | — | 2,239 | ||||||||||||
Non-U.S. agency mortgage-backed securities | — | 820 | 6 | 826 | ||||||||||||
Total debt securities - available-for-sale | 1,560 | 17,265 | 46 | 18,871 | ||||||||||||
Equity securities - available-for-sale | 1,513 | 12 | 313 | 1,838 | ||||||||||||
Total assets at fair value | $ | 10,584 | $ | 17,280 | $ | 359 | $ | 28,223 | ||||||||
Percentage of total assets at fair value | 38 | % | 61 | % | 1 | % | 100 | % | ||||||||
Interest rate swap liabilities | $ | — | $ | 97 | $ | — | $ | 97 | ||||||||
December 31, 2013 | ||||||||||||||||
Cash and cash equivalents | $ | 7,005 | $ | 271 | $ | — | $ | 7,276 | ||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | 1,750 | 445 | — | 2,195 | ||||||||||||
State and municipal obligations | — | 6,977 | — | 6,977 | ||||||||||||
Corporate obligations | 25 | 7,274 | 36 | 7,335 | ||||||||||||
U.S. agency mortgage-backed securities | — | 2,218 | — | 2,218 | ||||||||||||
Non-U.S. agency mortgage-backed securities | — | 696 | 6 | 702 | ||||||||||||
Total debt securities - available-for-sale | 1,775 | 17,610 | 42 | 19,427 | ||||||||||||
Equity securities - available-for-sale | 1,291 | 12 | 269 | 1,572 | ||||||||||||
Total assets at fair value | $ | 10,071 | $ | 17,893 | $ | 311 | $ | 28,275 | ||||||||
Percentage of total assets at fair value | 36 | % | 63 | % | 1 | % | 100 | % | ||||||||
Interest rate swap liabilities | $ | — | $ | 163 | $ | — | $ | 163 | ||||||||
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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:
(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, 2014 | ||||||||||||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||||||
U.S. government and agency obligations | $ | 184 | $ | — | $ | — | $ | 184 | $ | 182 | ||||||||||
State and municipal obligations | — | — | 28 | 28 | 28 | |||||||||||||||
Corporate obligations | 49 | 9 | 269 | 327 | 327 | |||||||||||||||
Total debt securities - held-to-maturity | $ | 233 | $ | 9 | $ | 297 | $ | 539 | $ | 537 | ||||||||||
Long-term debt and other financing obligations | $ | — | $ | 16,910 | $ | — | $ | 16,910 | $ | 15,641 | ||||||||||
December 31, 2013 | ||||||||||||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||||||
U.S. government and agency obligations | $ | 182 | $ | — | $ | — | $ | 182 | $ | 181 | ||||||||||
State and municipal obligations | — | — | 28 | 28 | 28 | |||||||||||||||
Corporate obligations | 47 | 9 | 278 | 334 | 334 | |||||||||||||||
Total debt securities - held-to-maturity | $ | 229 | $ | 9 | $ | 306 | $ | 544 | $ | 543 | ||||||||||
Long-term debt and other financing obligations | $ | — | $ | 16,602 | $ | — | $ | 16,602 | $ | 15,745 | ||||||||||
The carrying amounts reported on the Condensed Consolidated Balance Sheets for other financial assets and liabilities approximate fair value because of their short-term nature. These assets and liabilities are not listed in the table above.
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, 2014 | March 31, 2013 | |||||||||||||||||||||||
(in millions) | Debt Securities | Equity Securities | Total | Debt Securities | Equity Securities | Total | ||||||||||||||||||
Balance at beginning of period | $ | 42 | $ | 269 | $ | 311 | $ | 17 | $ | 224 | $ | 241 | ||||||||||||
Purchases | 3 | 44 | 47 | 15 | 31 | 46 | ||||||||||||||||||
Sales | — | (4 | ) | (4 | ) | — | (21 | ) | (21 | ) | ||||||||||||||
Net unrealized gains (losses) in accumulated other comprehensive income | 1 | 4 | 5 | — | (2 | ) | (2 | ) | ||||||||||||||||
Net realized gains in investment and other income | — | — | — | — | 7 | 7 | ||||||||||||||||||
Balance at end of period | $ | 46 | $ | 313 | $ | 359 | $ | 32 | $ | 239 | $ | 271 | ||||||||||||
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, 2014 | ||||||||||||
Equity securities - available-for-sale | ||||||||||||
Venture capital portfolios | $ | 273 | Market approach - comparable companies | Revenue multiple | 1.0 | 6.0 | ||||||
EBITDA multiple | 8.0 | 9.0 | ||||||||||
40 | Market approach - recent transactions | Inactive market transactions | N/A | N/A | ||||||||
Total equity securities available-for-sale | $ | 313 | ||||||||||
Also included in the Company’s assets measured at fair value on a recurring basis using Level 3 inputs were $46 million of available-for-sale debt securities at March 31, 2014, which were not significant.
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The Company elected to measure the entirety of the AARP Program assets under management at fair value pursuant to the fair value option. See Note 2 of Notes to the Consolidated Financial Statements in Item II, Part 8, “Financial Statements” in the Company’s 2013 10-K for further detail on the AARP Program. 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) | Total Fair and Carrying Value | |||||||||
March 31, 2014 | ||||||||||||
Cash and cash equivalents | $ | 240 | $ | — | $ | 240 | ||||||
Debt securities: | ||||||||||||
U.S. government and agency obligations | 459 | 296 | 755 | |||||||||
State and municipal obligations | — | 67 | 67 | |||||||||
Corporate obligations | — | 1,097 | 1,097 | |||||||||
U.S. agency mortgage-backed securities | — | 394 | 394 | |||||||||
Non-U.S. agency mortgage-backed securities | — | 145 | 145 | |||||||||
Total debt securities | 459 | 1,999 | 2,458 | |||||||||
Other investments | — | 82 | 82 | |||||||||
Total assets at fair value | $ | 699 | $ | 2,081 | $ | 2,780 | ||||||
Other liabilities | $ | 4 | $ | 16 | $ | 20 | ||||||
December 31, 2013 | ||||||||||||
Cash and cash equivalents | $ | 265 | $ | — | $ | 265 | ||||||
Debt securities: | ||||||||||||
U.S. government and agency obligations | 426 | 301 | 727 | |||||||||
State and municipal obligations | — | 63 | 63 | |||||||||
Corporate obligations | — | 1,145 | 1,145 | |||||||||
U.S. agency mortgage-backed securities | — | 414 | 414 | |||||||||
Non-U.S. agency mortgage-backed securities | — | 139 | 139 | |||||||||
Total debt securities | 426 | 2,062 | 2,488 | |||||||||
Equity securities - available-for-sale | — | 4 | 4 | |||||||||
Total assets at fair value | $ | 691 | $ | 2,066 | $ | 2,757 | ||||||
Other liabilities | $ | 3 | $ | 11 | $ | 14 | ||||||
4. | Medicare Part D Pharmacy Benefits |
Medicare Part D Pharmacy Benefits
The Condensed Consolidated Balance Sheets include the following amounts associated with the Medicare Part D program:
March 31, 2014 | December 31, 2013 | |||||||||||||||||||||||
(in millions) | Subsidies | Drug Discount | Risk-Share | Subsidies | Drug Discount | Risk-Share | ||||||||||||||||||
Other current receivables | $ | 529 | $ | 184 | $ | — | $ | 881 | $ | 425 | $ | — | ||||||||||||
Other policy liabilities | — | 84 | 103 | — | 152 | 214 | ||||||||||||||||||
The Catastrophic Reinsurance and Low-Income Member Cost Sharing Subsidies (Subsidies) and drug discounts represent cost reimbursements under the Medicare Part D program. The Company is fully reimbursed by the Centers for Medicare & Medicaid Services (CMS) for costs incurred for these contract elements and, accordingly, there is no insurance risk to the Company. Amounts received for these contract elements are not reflected as premium revenues, but rather are accounted for as a reduction of receivables and/or increase in deposit liabilities. CMS provides prospective payments for the drug discounts, which the Company records as liabilities when received. The drug discounts are ultimately funded by the pharmaceutical manufacturers. The Company bills them for claims under the program and records those bills as receivables. Related cash flows are presented as customer funds administered within financing activities on the Condensed Consolidated Statements of Cash Flows.
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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 to other current receivables or other policy liabilities on the Condensed Consolidated Balance Sheets. See Note 2 of Notes to the Consolidated Financial Statements in Item II, Part 8, “Financial Statements” in the Company’s 2013 10-K for further detail on Medicare Part D.
5. | Medical Cost Reserve Development |
Favorable medical cost reserve development was $220 million and $280 million for the three months ended March 31, 2014 and 2013, respectively. In 2014, favorable development was driven by a number of individual factors that were not material. Lower than expected health system utilization levels were a significant driver in 2013.
6. Commercial Paper and Long-Term Debt
Commercial paper and senior unsecured long-term debt consisted of the following:
March 31, 2014 | December 31, 2013 | |||||||||||||||||||||||
(in millions, except percentages) | Par Value | Carrying Value | Fair Value | Par Value | Carrying Value | Fair Value | ||||||||||||||||||
Commercial paper | $ | 1,124 | $ | 1,124 | $ | 1,124 | $ | 1,115 | $ | 1,115 | $ | 1,115 | ||||||||||||
4.750% notes due February 2014 | — | — | — | 172 | 173 | 173 | ||||||||||||||||||
5.000% notes due August 2014 | 389 | 395 | 396 | 389 | 397 | 400 | ||||||||||||||||||
Floating-rate notes due August 2014 | 250 | 250 | 250 | 250 | 250 | 250 | ||||||||||||||||||
4.875% notes due March 2015 (a) | 416 | 429 | 433 | 416 | 431 | 436 | ||||||||||||||||||
0.850% notes due October 2015 (a) | 625 | 624 | 628 | 625 | 624 | 628 | ||||||||||||||||||
5.375% notes due March 2016 (a) | 601 | 637 | 654 | 601 | 641 | 657 | ||||||||||||||||||
1.875% notes due November 2016 | 400 | 398 | 409 | 400 | 398 | 408 | ||||||||||||||||||
5.360% notes due November 2016 | 95 | 95 | 106 | 95 | 95 | 107 | ||||||||||||||||||
6.000% notes due June 2017 | 441 | 476 | 502 | 441 | 479 | 506 | ||||||||||||||||||
1.400% notes due October 2017 (a) | 625 | 613 | 623 | 625 | 613 | 617 | ||||||||||||||||||
6.000% notes due November 2017 | 156 | 167 | 178 | 156 | 168 | 178 | ||||||||||||||||||
6.000% notes due February 2018 | 1,100 | 1,115 | 1,266 | 1,100 | 1,116 | 1,271 | ||||||||||||||||||
1.625% notes due March 2019 (a) | 500 | 491 | 486 | 500 | 489 | 481 | ||||||||||||||||||
3.875% notes due October 2020 (a) | 450 | 441 | 476 | 450 | 435 | 474 | ||||||||||||||||||
4.700% notes due February 2021 | 400 | 415 | 441 | 400 | 416 | 436 | ||||||||||||||||||
3.375% notes due November 2021 (a) | 500 | 480 | 507 | 500 | 472 | 494 | ||||||||||||||||||
2.875% notes due March 2022 (a) | 1,100 | 1,001 | 1,069 | 1,100 | 981 | 1,046 | ||||||||||||||||||
0.000% notes due November 2022 | 15 | 10 | 11 | 15 | 9 | 10 | ||||||||||||||||||
2.750% notes due February 2023 (a) | 625 | 577 | 588 | 625 | 563 | 572 | ||||||||||||||||||
2.875% notes due March 2023 (a) | 750 | 745 | 711 | 750 | 729 | 698 | ||||||||||||||||||
5.800% notes due March 2036 | 850 | 845 | 989 | 850 | 845 | 935 | ||||||||||||||||||
6.500% notes due June 2037 | 500 | 495 | 628 | 500 | 495 | 593 | ||||||||||||||||||
6.625% notes due November 2037 | 650 | 646 | 837 | 650 | 645 | 786 | ||||||||||||||||||
6.875% notes due February 2038 | 1,100 | 1,085 | 1,447 | 1,100 | 1,084 | 1,370 | ||||||||||||||||||
5.700% notes due October 2040 | 300 | 298 | 350 | 300 | 298 | 329 | ||||||||||||||||||
5.950% notes due February 2041 | 350 | 348 | 419 | 350 | 348 | 397 | ||||||||||||||||||
4.625% notes due November 2041 | 600 | 593 | 603 | 600 | 593 | 567 | ||||||||||||||||||
4.375% notes due March 2042 | 502 | 486 | 488 | 502 | 486 | 459 | ||||||||||||||||||
3.950% notes due October 2042 | 625 | 611 | 566 | 625 | 611 | 530 | ||||||||||||||||||
4.250% notes due March 2043 | 750 | 740 | 714 | 750 | 740 | 673 | ||||||||||||||||||
Total commercial paper and long-term debt | $ | 16,789 | ||||||||||||||||||||||