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, 2015
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, 2015, there were 951,904,261 shares of the registrant’s Common Stock, $.01 par value per share, issued and outstanding.
UNITEDHEALTH GROUP
Table of Contents
Page | ||||
8. | ||||
PART I
ITEM 1. FINANCIAL STATEMENTS
UnitedHealth Group
Condensed Consolidated Balance Sheets
(Unaudited)
(in millions, except per share data) | March 31, 2015 | December 31, 2014 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 8,650 | $ | 7,495 | ||||
Short-term investments | 1,780 | 1,741 | ||||||
Accounts receivable, net | 5,040 | 4,252 | ||||||
Other current receivables, net | 5,346 | 5,498 | ||||||
Assets under management | 2,921 | 2,962 | ||||||
Deferred income taxes | 405 | 556 | ||||||
Prepaid expenses and other current assets | 2,632 | 1,052 | ||||||
Total current assets | 26,774 | 23,556 | ||||||
Long-term investments | 19,416 | 18,827 | ||||||
Property, equipment and capitalized software, net | 4,245 | 4,418 | ||||||
Goodwill | 32,782 | 32,940 | ||||||
Other intangible assets, net | 3,441 | 3,669 | ||||||
Other assets | 3,061 | 2,972 | ||||||
Total assets | $ | 89,719 | $ | 86,382 | ||||
Liabilities and shareholders’ equity | ||||||||
Current liabilities: | ||||||||
Medical costs payable | $ | 13,537 | $ | 12,040 | ||||
Accounts payable and accrued liabilities | 10,518 | 9,247 | ||||||
Other policy liabilities | 6,392 | 5,965 | ||||||
Commercial paper and current maturities of long-term debt | 2,797 | 1,399 | ||||||
Unearned revenues | 1,734 | 1,972 | ||||||
Total current liabilities | 34,978 | 30,623 | ||||||
Long-term debt, less current maturities | 15,577 | 16,007 | ||||||
Future policy benefits | 2,483 | 2,488 | ||||||
Deferred income taxes | 2,056 | 2,065 | ||||||
Other liabilities | 1,295 | 1,357 | ||||||
Total liabilities | 56,389 | 52,540 | ||||||
Commitments and contingencies (Note 9) | ||||||||
Redeemable noncontrolling interests | 1,452 | 1,388 | ||||||
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; 952 and 954 issued and outstanding | 10 | 10 | ||||||
Retained earnings | 34,153 | 33,836 | ||||||
Accumulated other comprehensive loss | (2,285 | ) | (1,392 | ) | ||||
Total shareholders’ equity | 31,878 | 32,454 | ||||||
Total liabilities and shareholders’ equity | $ | 89,719 | $ | 86,382 | ||||
See Notes to the Condensed Consolidated Financial Statements
1
UnitedHealth Group
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31, | ||||||||
(in millions, except per share data) | 2015 | 2014 | ||||||
Revenues: | ||||||||
Premiums | $ | 31,674 | $ | 28,115 | ||||
Services | 2,706 | 2,404 | ||||||
Products | 1,230 | 998 | ||||||
Investment and other income | 146 | 191 | ||||||
Total revenues | 35,756 | 31,708 | ||||||
Operating costs: | ||||||||
Medical costs | 25,689 | 23,208 | ||||||
Operating costs | 5,949 | 5,194 | ||||||
Cost of products sold | 1,100 | 892 | ||||||
Depreciation and amortization | 378 | 360 | ||||||
Total operating costs | 33,116 | 29,654 | ||||||
Earnings from operations | 2,640 | 2,054 | ||||||
Interest expense | (150 | ) | (160 | ) | ||||
Earnings before income taxes | 2,490 | 1,894 | ||||||
Provision for income taxes | (1,077 | ) | (795 | ) | ||||
Net earnings | $ | 1,413 | $ | 1,099 | ||||
Earnings per share: | ||||||||
Basic | $ | 1.48 | $ | 1.12 | ||||
Diluted | $ | 1.46 | $ | 1.10 | ||||
Basic weighted-average number of common shares outstanding | 954 | 983 | ||||||
Dilutive effect of common share equivalents | 15 | 13 | ||||||
Diluted weighted-average number of common shares outstanding | 969 | 996 | ||||||
Anti-dilutive shares excluded from the calculation of dilutive effect of common share equivalents | 9 | 9 | ||||||
Cash dividends declared per common share | $ | 0.3750 | $ | 0.2800 | ||||
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) | 2015 | 2014 | ||||||
Net earnings | $ | 1,413 | $ | 1,099 | ||||
Other comprehensive (loss) income: | ||||||||
Gross unrealized gains on investment securities during the period | 105 | 166 | ||||||
Income tax effect | (37 | ) | (61 | ) | ||||
Total unrealized gains, net of tax | 68 | 105 | ||||||
Gross reclassification adjustment for net realized gains included in net earnings | (3 | ) | (46 | ) | ||||
Income tax effect | 1 | 17 | ||||||
Total reclassification adjustment, net of tax | (2 | ) | (29 | ) | ||||
Total foreign currency translation (losses) gains | (959 | ) | 259 | |||||
Other comprehensive (loss) income | (893 | ) | 335 | |||||
Comprehensive income | $ | 520 | $ | 1,434 | ||||
See Notes to the Condensed Consolidated Financial Statements
3
UnitedHealth Group
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Total Shareholders’ Equity | |||||||||||||||||||||||
(in millions) | Shares | Amount | Net Unrealized Gains on Investments | Foreign Currency Translation (Losses) Gains | |||||||||||||||||||||||
Balance at January 1, 2015 | 954 | $ | 10 | $ | — | $ | 33,836 | $ | 223 | $ | (1,615 | ) | $ | 32,454 | |||||||||||||
Net earnings | 1,413 | 1,413 | |||||||||||||||||||||||||
Other comprehensive income (loss) | 66 | (959 | ) | (893 | ) | ||||||||||||||||||||||
Issuances of common shares, and related tax effects | 6 | — | — | — | |||||||||||||||||||||||
Share-based compensation, and related tax benefits | 206 | 206 | |||||||||||||||||||||||||
Noncontrolling interests fair value and other adjustments | (49 | ) | (49 | ) | |||||||||||||||||||||||
Common share repurchases | (8 | ) | — | (157 | ) | (739 | ) | (896 | ) | ||||||||||||||||||
Cash dividends paid on common shares | (357 | ) | (357 | ) | |||||||||||||||||||||||
Balance at March 31, 2015 | 952 | $ | 10 | $ | — | $ | 34,153 | $ | 289 | $ | (2,574 | ) | $ | 31,878 | |||||||||||||
Balance at January 1, 2014 | 988 | $ | 10 | $ | — | $ | 33,047 | $ | 54 | $ | (962 | ) | $ | 32,149 | |||||||||||||
Net earnings | 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 | |||||||||||||
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) | 2015 | 2014 | ||||||
Operating activities | ||||||||
Net earnings | $ | 1,413 | $ | 1,099 | ||||
Noncash items: | ||||||||
Depreciation and amortization | 378 | 360 | ||||||
Deferred income taxes | 122 | 99 | ||||||
Share-based compensation | 125 | 105 | ||||||
Other, net | (44 | ) | (65 | ) | ||||
Net change in other operating items, net of effects from acquisitions and changes in AARP balances: | ||||||||
Accounts receivable | (758 | ) | (990 | ) | ||||
Other assets | (2,162 | ) | (1,281 | ) | ||||
Medical costs payable | 1,610 | 387 | ||||||
Accounts payable and other liabilities | 1,648 | 1,665 | ||||||
Other policy liabilities | 154 | (203 | ) | |||||
Unearned revenues | (217 | ) | 232 | |||||
Cash flows from operating activities | 2,269 | 1,408 | ||||||
Investing activities | ||||||||
Purchases of investments | (1,891 | ) | (2,914 | ) | ||||
Sales of investments | 503 | 2,235 | ||||||
Maturities of investments | 843 | 825 | ||||||
Cash paid for acquisitions, net of cash assumed | (575 | ) | (345 | ) | ||||
Purchases of property, equipment and capitalized software | (373 | ) | (353 | ) | ||||
Other, net | (32 | ) | (51 | ) | ||||
Cash flows used for investing activities | (1,525 | ) | (603 | ) | ||||
Financing activities | ||||||||
Common stock repurchases | (896 | ) | (911 | ) | ||||
Cash dividends paid | (357 | ) | (276 | ) | ||||
Proceeds from common stock issuances | 192 | 216 | ||||||
Repayments of long-term debt | (416 | ) | (172 | ) | ||||
Proceeds from commercial paper, net | 1,194 | 9 | ||||||
Customer funds administered | 1,049 | 818 | ||||||
Other, net | (270 | ) | (257 | ) | ||||
Cash flows from (used for) financing activities | 496 | (573 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | (85 | ) | 6 | |||||
Increase in cash and cash equivalents | 1,155 | 238 | ||||||
Cash and cash equivalents, beginning of period | 7,495 | 7,276 | ||||||
Cash and cash equivalents, end of period | $ | 8,650 | $ | 7,514 | ||||
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 (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 the health system work better for everyone. Through its diversified family of businesses, the Company leverages core competencies in advanced, enabling technology; health care data, information and intelligence; and clinical care management and coordination to help meet the demands of the health system. 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, 2014 as filed with the SEC (2014 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 estimates and judgments for medical costs payable and 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 change in estimates is included in earnings in the period in which the estimate is adjusted.
The accounting policies disclosed in Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2014 10-K remain unchanged.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09). ASU 2014-09 will supersede existing revenue recognition standards with a single model unless those contracts are within the scope of other standards (e.g., an insurance entity’s insurance contracts). The revenue recognition principle in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, new and enhanced disclosures will be required. Companies can adopt the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. In April 2015, the FASB announced its intention to delay ASU 2014-09 for one year and is expected to become effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption at the original effective date, interim and annual periods beginning after December 15, 2016, will be permitted. The Company is currently evaluating the effect of the new revenue recognition guidance.
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.
6
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, 2015 | ||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | $ | 1,663 | $ | 19 | $ | — | $ | 1,682 | ||||||||
State and municipal obligations | 6,464 | 232 | (3 | ) | 6,693 | |||||||||||
Corporate obligations | 7,668 | 158 | (10 | ) | 7,816 | |||||||||||
U.S. agency mortgage-backed securities | 2,011 | 48 | (3 | ) | 2,056 | |||||||||||
Non-U.S. agency mortgage-backed securities | 858 | 16 | (2 | ) | 872 | |||||||||||
Total debt securities - available-for-sale | 18,664 | 473 | (18 | ) | 19,119 | |||||||||||
Equity securities - available-for-sale | 1,526 | 37 | (33 | ) | 1,530 | |||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||
U.S. government and agency obligations | 178 | 4 | — | 182 | ||||||||||||
State and municipal obligations | 15 | — | — | 15 | ||||||||||||
Corporate obligations | 354 | — | — | 354 | ||||||||||||
Total debt securities - held-to-maturity | 547 | 4 | — | 551 | ||||||||||||
Total investments | $ | 20,737 | $ | 514 | $ | (51 | ) | $ | 21,200 | |||||||
December 31, 2014 | ||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | $ | 1,614 | $ | 7 | $ | (1 | ) | $ | 1,620 | |||||||
State and municipal obligations | 6,456 | 217 | (5 | ) | 6,668 | |||||||||||
Corporate obligations | 7,241 | 112 | (26 | ) | 7,327 | |||||||||||
U.S. agency mortgage-backed securities | 2,022 | 39 | (5 | ) | 2,056 | |||||||||||
Non-U.S. agency mortgage-backed securities | 872 | 12 | (4 | ) | 880 | |||||||||||
Total debt securities - available-for-sale | 18,205 | 387 | (41 | ) | 18,551 | |||||||||||
Equity securities - available-for-sale | 1,511 | 36 | (25 | ) | 1,522 | |||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||
U.S. government and agency obligations | 178 | 2 | — | 180 | ||||||||||||
State and municipal obligations | 19 | — | — | 19 | ||||||||||||
Corporate obligations | 298 | — | — | 298 | ||||||||||||
Total debt securities - held-to-maturity | 495 | 2 | — | 497 | ||||||||||||
Total investments | $ | 20,211 | $ | 425 | $ | (66 | ) | $ | 20,570 | |||||||
The amortized cost and fair value of available-for-sale debt securities as of March 31, 2015, by contractual maturity, were as follows:
(in millions) | Amortized Cost | Fair Value | ||||||
Due in one year or less | $ | 1,856 | $ | 1,862 | ||||
Due after one year through five years | 6,927 | 7,035 | ||||||
Due after five years through ten years | 5,205 | 5,387 | ||||||
Due after ten years | 1,807 | 1,907 | ||||||
U.S. agency mortgage-backed securities | 2,011 | 2,056 | ||||||
Non-U.S. agency mortgage-backed securities | 858 | 872 | ||||||
Total debt securities - available-for-sale | $ | 18,664 | $ | 19,119 | ||||
7
The amortized cost and fair value of held-to-maturity debt securities as of March 31, 2015, by contractual maturity, were as follows:
(in millions) | Amortized Cost | Fair Value | ||||||
Due in one year or less | $ | 127 | $ | 127 | ||||
Due after one year through five years | 207 | 209 | ||||||
Due after five years through ten years | 109 | 110 | ||||||
Due after ten years | 104 | 105 | ||||||
Total debt securities - held-to-maturity | $ | 547 | $ | 551 | ||||
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, 2015 | ||||||||||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||||||||||
State and municipal obligations | $ | 481 | $ | (2 | ) | $ | 27 | $ | (1 | ) | $ | 508 | $ | (3 | ) | |||||||||
Corporate obligations | 1,509 | (7 | ) | 235 | (3 | ) | 1,744 | (10 | ) | |||||||||||||||
U.S. agency mortgage-backed securities | 151 | (1 | ) | 133 | (2 | ) | 284 | (3 | ) | |||||||||||||||
Non-U.S. agency mortgage-backed securities | 186 | (2 | ) | — | — | 186 | (2 | ) | ||||||||||||||||
Total debt securities - available-for-sale | $ | 2,327 | $ | (12 | ) | $ | 395 | $ | (6 | ) | $ | 2,722 | $ | (18 | ) | |||||||||
Equity securities - available-for-sale | $ | 76 | $ | (7 | ) | $ | 83 | $ | (26 | ) | $ | 159 | $ | (33 | ) | |||||||||
December 31, 2014 | ||||||||||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||||||||||
U.S. government and agency obligations | $ | 420 | $ | (1 | ) | $ | — | $ | — | $ | 420 | $ | (1 | ) | ||||||||||
State and municipal obligations | 711 | (4 | ) | 99 | (1 | ) | 810 | (5 | ) | |||||||||||||||
Corporate obligations | 2,595 | (17 | ) | 464 | (9 | ) | 3,059 | (26 | ) | |||||||||||||||
U.S. agency mortgage-backed securities | — | — | 272 | (5 | ) | 272 | (5 | ) | ||||||||||||||||
Non-U.S. agency mortgage-backed securities | 254 | (2 | ) | 114 | (2 | ) | 368 | (4 | ) | |||||||||||||||
Total debt securities - available-for-sale | $ | 3,980 | $ | (24 | ) | $ | 949 | $ | (17 | ) | $ | 4,929 | $ | (41 | ) | |||||||||
Equity securities - available-for-sale | $ | 107 | $ | (6 | ) | $ | 88 | $ | (19 | ) | $ | 195 | $ | (25 | ) | |||||||||
The Company’s unrealized losses from all securities as of March 31, 2015 were generated from approximately 4,000 positions out of a total of 23,000 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). As of March 31, 2015, the Company did not have the intent to sell any of the securities in an unrealized loss position. Therefore, the Company believes these losses to be temporary.
The Company’s investments in equity securities consist of investments in Brazilian real denominated fixed-income funds, employee savings plan related investments, venture capital 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.
8
Net realized gains reclassified out of accumulated other comprehensive income were from the following sources:
Three Months Ended March 31, | ||||||||
(in millions) | 2015 | 2014 | ||||||
Total OTTI | $ | (1 | ) | $ | (3 | ) | ||
Portion of loss recognized in other comprehensive income | — | — | ||||||
Net OTTI recognized in earnings | (1 | ) | (3 | ) | ||||
Gross realized losses from sales | (6 | ) | (10 | ) | ||||
Gross realized gains from sales | 10 | 59 | ||||||
Net realized gains (included in investment and other income on the Condensed Consolidated Statements of Operations) | 3 | 46 | ||||||
Income tax effect (included in provision for income taxes on the Condensed Consolidated Statements of Operations) | (1 | ) | (17 | ) | ||||
Realized gains, net of taxes | $ | 2 | $ | 29 | ||||
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.
For a description of the methods and assumptions that are used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument, see Note 4 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2014 10-K.
9
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 assets and liabilities, related to a Supplemental Health Insurance Program (AARP Program), 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, 2015 | ||||||||||||||||
Cash and cash equivalents | $ | 8,617 | $ | 33 | $ | — | $ | 8,650 | ||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | 1,466 | 216 | — | 1,682 | ||||||||||||
State and municipal obligations | — | 6,693 | — | 6,693 | ||||||||||||
Corporate obligations | 7 | 7,736 | 73 | 7,816 | ||||||||||||
U.S. agency mortgage-backed securities | — | 2,056 | — | 2,056 | ||||||||||||
Non-U.S. agency mortgage-backed securities | — | 866 | 6 | 872 | ||||||||||||
Total debt securities - available-for-sale | 1,473 | 17,567 | 79 | 19,119 | ||||||||||||
Equity securities - available-for-sale | 1,209 | 12 | 309 | 1,530 | ||||||||||||
Interest rate swap assets | — | 230 | — | 230 | ||||||||||||
Total assets at fair value | $ | 11,299 | $ | 17,842 | $ | 388 | $ | 29,529 | ||||||||
Percentage of total assets at fair value | 38 | % | 61 | % | 1 | % | 100 | % | ||||||||
Interest rate swap liabilities | $ | — | $ | 1 | $ | — | $ | 1 | ||||||||
December 31, 2014 | ||||||||||||||||
Cash and cash equivalents | $ | 7,472 | $ | 23 | $ | — | $ | 7,495 | ||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | 1,427 | 193 | — | 1,620 | ||||||||||||
State and municipal obligations | — | 6,668 | — | 6,668 | ||||||||||||
Corporate obligations | 2 | 7,257 | 68 | 7,327 | ||||||||||||
U.S. agency mortgage-backed securities | — | 2,056 | — | 2,056 | ||||||||||||
Non-U.S. agency mortgage-backed securities | — | 874 | 6 | 880 | ||||||||||||
Total debt securities - available-for-sale | 1,429 | 17,048 | 74 | 18,551 | ||||||||||||
Equity securities - available-for-sale | 1,200 | 12 | 310 | 1,522 | ||||||||||||
Interest rate swap assets | — | 62 | — | 62 | ||||||||||||
Total assets at fair value | $ | 10,101 | $ | 17,145 | $ | 384 | $ | 27,630 | ||||||||
Percentage of total assets at fair value | 37 | % | 62 | % | 1 | % | 100 | % | ||||||||
Interest rate swap liabilities | $ | — | $ | 55 | $ | — | $ | 55 | ||||||||
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 the three months ended March 31, 2015 or 2014.
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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, 2015 | ||||||||||||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||||||
U.S. government and agency obligations | $ | 182 | $ | — | $ | — | $ | 182 | $ | 178 | ||||||||||
State and municipal obligations | — | — | 15 | 15 | 15 | |||||||||||||||
Corporate obligations | 93 | 10 | 251 | 354 | 354 | |||||||||||||||
Total debt securities - held-to-maturity | $ | 275 | $ | 10 | $ | 266 | $ | 551 | $ | 547 | ||||||||||
Other assets | $ | — | $ | 490 | $ | — | $ | 490 | $ | 489 | ||||||||||
Long-term debt and other financing obligations | $ | — | $ | 18,826 | $ | — | $ | 18,826 | $ | 16,859 | ||||||||||
December 31, 2014 | ||||||||||||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||||||
U.S. government and agency obligations | $ | 180 | $ | — | $ | — | $ | 180 | $ | 178 | ||||||||||
State and municipal obligations | — | — | 19 | 19 | 19 | |||||||||||||||
Corporate obligations | 46 | 10 | 242 | 298 | 298 | |||||||||||||||
Total debt securities - held-to-maturity | $ | 226 | $ | 10 | $ | 261 | $ | 497 | $ | 495 | ||||||||||
Other assets | $ | — | $ | 478 | $ | — | $ | 478 | $ | 484 | ||||||||||
Long-term debt and other financing obligations | $ | — | $ | 18,863 | $ | — | $ | 18,863 | $ | 17,085 | ||||||||||
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, 2015 or 2014.
The carrying amounts reported on the Condensed Consolidated Balance Sheets for other current 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, 2015 | March 31, 2014 | |||||||||||||||||||||||
(in millions) | Debt Securities | Equity Securities | Total | Debt Securities | Equity Securities | Total | ||||||||||||||||||
Balance at beginning of period | $ | 74 | $ | 310 | $ | 384 | $ | 42 | $ | 269 | $ | 311 | ||||||||||||
Purchases | 4 | 4 | 8 | 3 | 44 | 47 | ||||||||||||||||||
Sales | — | (1 | ) | (1 | ) | — | (4 | ) | (4 | ) | ||||||||||||||
Net unrealized gains (losses) in accumulated other comprehensive income | 1 | (5 | ) | (4 | ) | 1 | 4 | 5 | ||||||||||||||||
Net realized gains in investment and other income | — | 1 | 1 | — | — | — | ||||||||||||||||||
Balance at end of period | $ | 79 | $ | 309 | $ | 388 | $ | 46 | $ | 313 | $ | 359 | ||||||||||||
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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, 2015 | ||||||||||||
Equity securities - available-for-sale | ||||||||||||
Venture capital portfolios | $ | 259 | Market approach - comparable companies | Revenue multiple | 1.0 | 7.0 | ||||||
EBITDA multiple | 8.0 | 10.0 | ||||||||||
50 | Market approach - recent transactions | Inactive market transactions | N/A | N/A | ||||||||
Total equity securities available-for-sale | $ | 309 | ||||||||||
Also included in the Company’s assets measured at fair value on a recurring basis using Level 3 inputs were $79 million of available-for-sale debt securities as of March 31, 2015, which were not significant.
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 Part II, Item 8, “Financial Statements” in the Company’s 2014 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, 2015 | ||||||||||||
Cash and cash equivalents | $ | 262 | $ | — | $ | 262 | ||||||
Debt securities: | ||||||||||||
U.S. government and agency obligations | 407 | 214 | 621 | |||||||||
State and municipal obligations | — | 96 | 96 | |||||||||
Corporate obligations | — | 1,279 | 1,279 | |||||||||
U.S. agency mortgage-backed securities | — | 375 | 375 | |||||||||
Non-U.S. agency mortgage-backed securities | — | 203 | 203 | |||||||||
Total debt securities | 407 | 2,167 | 2,574 | |||||||||
Other investments | — | 85 | 85 | |||||||||
Total assets at fair value | $ | 669 | $ | 2,252 | $ | 2,921 | ||||||
Other liabilities | $ | 8 | $ | 24 | $ | 32 | ||||||
December 31, 2014 | ||||||||||||
Cash and cash equivalents | $ | 415 | $ | — | $ | 415 | ||||||
Debt securities: | ||||||||||||
U.S. government and agency obligations | 409 | 245 | 654 | |||||||||
State and municipal obligations | — | 95 | 95 | |||||||||
Corporate obligations | — | 1,200 | 1,200 | |||||||||
U.S. agency mortgage-backed securities | — | 340 | 340 | |||||||||
Non-U.S. agency mortgage-backed securities | — | 177 | 177 | |||||||||
Total debt securities | 409 | 2,057 | 2,466 | |||||||||
Other investments | — | 81 | 81 | |||||||||
Total assets at fair value | $ | 824 | $ | 2,138 | $ | 2,962 | ||||||
Other liabilities | $ | 5 | $ | 13 | $ | 18 | ||||||
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4. | Medicare Part D Pharmacy Benefits |
The Condensed Consolidated Balance Sheets include the following amounts associated with the Medicare Part D program:
March 31, 2015 | December 31, 2014 | |||||||||||||||||||||||
(in millions) | Subsidies | Drug Discount | Risk-Share | Subsidies | Drug Discount | Risk-Share | ||||||||||||||||||
Other current receivables | $ | 1,448 | $ | 239 | $ | 46 | $ | 1,801 | $ | 719 | $ | 20 | ||||||||||||
Other policy liabilities | — | — | — | — | 302 | — | ||||||||||||||||||
As of March 31, 2015, the Centers for Medicare and Medicaid Services (CMS) had underfunded the payment for drug discounts and accordingly, the Company recorded a receivable from CMS along with the receivables from pharmaceutical manufacturers. See Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the Company’s 2014 10-K for further detail on Medicare Part D.
5. | Medical Costs Reserve Development |
Favorable medical cost reserve development was $140 million and $220 million for the three months ended March 31, 2015 and 2014, respectively. In both periods, favorable development was driven by a number of individual factors that were not material.
6. | Health Insurance 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) includes an annual, nondeductible insurance industry tax (Health Insurance Industry Tax). As of March 31, 2015, the liability recorded in accounts payable and accrued liabilities related to the Health Insurance Industry Tax was $1.8 billion. The corresponding deferred cost recorded in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets was $1.4 billion. There was no liability or asset related to the Health Insurance Industry Tax recorded as of December 31, 2014 as the Health Insurance Industry Tax was paid in September 2014. See Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the Company’s 2014 10-K for further detail on the Health Insurance Industry Tax.
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7. Commercial Paper and Long-Term Debt
Commercial paper and senior unsecured long-term debt consisted of the following:
March 31, 2015 | December 31, 2014 | |||||||||||||||||||||||
(in millions, except percentages) | Par Value | Carrying Value | Fair Value | Par Value | Carrying Value | Fair Value | ||||||||||||||||||
Commercial paper | $ | 1,515 | $ | 1,515 | $ | 1,515 | $ | 321 | $ | 321 | $ | 321 | ||||||||||||
4.875% notes due March 2015 (a) | — | — | — | 416 | 419 | 419 | ||||||||||||||||||
0.850% notes due October 2015 (a) | 625 | 626 | 626 | 625 | 625 | 627 | ||||||||||||||||||
5.375% notes due March 2016 (a) | 601 | 620 | 627 | 601 | 623 | 634 | ||||||||||||||||||
1.875% notes due November 2016 (a) | 400 | 400 | 407 | 400 | 397 | 406 | ||||||||||||||||||
5.360% notes due November 2016 | 95 | 95 | 102 | 95 | 95 | 103 | ||||||||||||||||||
6.000% notes due June 2017 (a) | 441 | 467 | 488 | 441 | 466 | 489 | ||||||||||||||||||
1.400% notes due October 2017 (a) | 625 | 624 | 631 | 625 | 616 | 624 | ||||||||||||||||||
6.000% notes due November 2017 (a) | 156 | 165 | 175 | 156 | 164 | 175 | ||||||||||||||||||
1.400% notes due December 2017 (a) | 750 | 755 | 756 | 750 | 745 | 749 | ||||||||||||||||||
6.000% notes due February 2018 (a) | 1,100 | 1,120 | 1,245 | 1,100 | 1,106 | 1,238 | ||||||||||||||||||
1.625% notes due March 2019 (a) | 500 | 506 | 501 | 500 | 496 | 493 | ||||||||||||||||||
2.300% notes due December 2019 (a) | 500 | 508 | 510 | 500 | 496 | 502 | ||||||||||||||||||
3.875% notes due October 2020 (a) | 450 | 463 | 492 | 450 | 450 | 477 | ||||||||||||||||||
4.700% notes due February 2021 (a) | 400 | 424 | 456 | 400 | 413 | 450 | ||||||||||||||||||
3.375% notes due November 2021 (a) | 500 | 512 | 534 | 500 | 496 | 519 | ||||||||||||||||||
2.875% notes due December 2021 (a) | 750 | 773 | 770 | 750 | 748 | 759 | ||||||||||||||||||
2.875% notes due March 2022 (a) | 1,100 | 1,082 | 1,119 | 1,100 | 1,042 | 1,104 | ||||||||||||||||||
0.000% notes due November 2022 | 15 | 10 | 11 | 15 | 10 | 11 | ||||||||||||||||||
2.750% notes due February 2023 (a) | 625 | 628 | 631 | 625 | 604 | 613 | ||||||||||||||||||
2.875% notes due March 2023 (a) | 750 | 806 | 768 | 750 | 777 | 745 | ||||||||||||||||||
5.800% notes due March 2036 | 850 | 845 | 1,096 | 850 | 845 | 1,052 | ||||||||||||||||||
6.500% notes due June 2037 | 500 | 495 | 703 | 500 | 495 | 670 | ||||||||||||||||||
6.625% notes due November 2037 | 650 | 646 | 927 | 650 | 646 | 888 | ||||||||||||||||||
6.875% notes due February 2038 | 1,100 | 1,085 | 1,584 | 1,100 | 1,085 | 1,544 | ||||||||||||||||||
5.700% notes due October 2040 | 300 | 298 | 387 | 300 | 298 | 378 | ||||||||||||||||||
5.950% notes due February 2041 | 350 | 348 | 471 | 350 | 348 | 455 | ||||||||||||||||||
4.625% notes due November 2041 | 600 | 593 | 677 | 600 | 593 | 646 | ||||||||||||||||||
4.375% notes due March 2042 | 502 | 486 | 553 | 502 | 486 | 536 | ||||||||||||||||||
3.950% notes due October 2042 | 625 | 611 | 640 | 625 | 611 | 621 | ||||||||||||||||||
4.250% notes due March 2043 | 750 | 740 | 811 | 750 | 740 | 786 | ||||||||||||||||||
Total commercial paper and long-term debt | $ | 18,125 | $ | 18,246 | $ | 20,213 | $ | 17,347 | $ | 17,256 | $ | 19,034 | ||||||||||||
(a) | Fixed-rate debt instruments hedged with interest rate swap contracts. See below for more information on the Company’s interest rate swaps. |
The Company’s long-term debt obligations also included $128 million and $150 million of other financing obligations, of which $36 million and $34 million were current as of March 31, 2015 and December 31, 2014, respectively.
Commercial Paper and Bank Credit Facilities
Commercial paper consists of short-duration, senior unsecured debt privately placed on a discount basis through broker-dealers. As of March 31, 2015, the Company’s outstanding commercial paper had a weighted-average annual interest rate of 0.3%.
The Company has $3.0 billion five-year and $1.0 billion 364-day revolving bank credit facilities with 23 banks, which mature in November 2019 and November 2015, respectively. These facilities provide liquidity support for the Company’s commercial paper program and are available for general corporate purposes. There were no amounts outstanding under these facilities as of March 31, 2015. The interest rates on borrowings are variable based on term and are 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, 2015, the annual interest rates on the bank credit facilities, had they been drawn, would have ranged from 1.0% to 1.2%.
On May 1, 2015, the Company entered into an additional $2.0 billion 364-day revolving bank credit facility to provide liquidity support for the Company’s commercial paper program. In addition, on the same date, the Company entered into a $1.5 billion delayed draw term loan. The commercial paper and term loan proceeds will be used to fund a portion of the purchase of
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Catamaran Corporation (Catamaran). No amounts have been drawn on the $2.0 billion bank credit facility or the $1.5 billion term loan. For more information on the purchase of Catamaran, see Note 9.
Debt Covenants
The Company’s bank credit facilities contain various covenants including requiring the Company to maintain a debt to debt-plus-equity ratio of not more than 50%. The Company was in compliance with its debt covenants as of March 31, 2015.
Interest Rate Swap Contracts
The Company uses interest rate swap contracts to convert a portion of its interest rate exposure from fixed rates to floating rates to more closely align interest expense with interest income received on its variable rate financial assets. The floating rates are benchmarked to LIBOR. The swaps are designated as fair value hedges on the Company’s fixed-rate debt. Since the critical terms of the swaps match those of the debt being hedged, they are considered to be highly effective hedges and all changes in the fair values of the swaps are recorded as adjustments to the carrying value of the related debt with no net impact recorded on the Condensed Consolidated Statements of Operations. Both the hedge fair value changes and the offsetting debt adjustments are recorded in interest expense on the Condensed Consolidated Statements of Operations. The following table summarizes the location and fair value of the interest rate swap fair value hedges on the Company’s Condensed Consolidated Balance Sheet:
Type of Fair Value Hedge | Notional Amount | Fair Value | Balance Sheet Location | |||||||
(in billions) | (in millions) | |||||||||
March 31, 2015 | ||||||||||
Interest rate swap contracts | $ | 10.3 | $ | 2 | Prepaid expenses and other current assets | |||||
228 | Other assets | |||||||||
1 | Other liabilities | |||||||||
December 31, 2014 | ||||||||||
Interest rate swap contracts | $ | 10.7 | $ | 62 | Other assets | |||||
55 | Other liabilities | |||||||||
The following table provides a summary of the effect of changes in fair value of fair value hedges on the Company’s Condensed Consolidated Statements of Operations:
Three Months Ended March 31, | ||||||||
(in millions) | 2015 | |||||||