UNH 2015.6.30 10-Q

 
 
 
 
 
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 JUNE 30, 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)
 __________________________________________________________ 
Delaware
 
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 July 24, 2015, there were 953,562,580 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)
 
June 30,
2015
 
December 31,
2014
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
7,887

 
$
7,495

Short-term investments
 
1,915

 
1,741

Accounts receivable, net
 
6,034

 
4,252

Other current receivables, net
 
6,160

 
5,498

Assets under management
 
2,863

 
2,962

Deferred income taxes
 
514

 
556

Prepaid expenses and other current assets
 
2,193

 
1,052

Total current assets
 
27,566

 
23,556

Long-term investments
 
18,996

 
18,827

Property, equipment and capitalized software, net
 
4,473

 
4,418

Goodwill
 
34,154

 
32,940

Other intangible assets, net
 
3,316

 
3,669

Other assets
 
2,918

 
2,972

Total assets
 
$
91,423

 
$
86,382

Liabilities and shareholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Medical costs payable
 
$
13,867

 
$
12,040

Accounts payable and accrued liabilities
 
10,901

 
9,247

Other policy liabilities
 
6,772

 
5,965

Commercial paper and current maturities of long-term debt
 
2,693

 
1,399

Unearned revenues
 
1,508

 
1,972

Total current liabilities
 
35,741

 
30,623

Long-term debt, less current maturities
 
15,378

 
16,007

Future policy benefits
 
2,491

 
2,488

Deferred income taxes
 
1,877

 
2,065

Other liabilities
 
1,301

 
1,357

Total liabilities
 
56,788

 
52,540

Commitments and contingencies (Note 10)
 
 
 


Redeemable noncontrolling interests
 
1,615

 
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

Additional paid in capital
 
55

 
—

Retained earnings
 
35,262

 
33,836

Accumulated other comprehensive loss
 
(2,307
)
 
(1,392
)
Total shareholders’ equity
 
33,020

 
32,454

Total liabilities and shareholders’ equity
 
$
91,423

 
$
86,382

See Notes to the Condensed Consolidated Financial Statements

1
Table of Contents

UnitedHealth Group
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions, except per share data)
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
 
Premiums
 
$
31,961

 
$
28,840

 
$
63,635

 
$
56,955

Services
 
2,865

 
2,447

 
5,571

 
4,851

Products
 
1,223

 
1,037

 
2,453

 
2,035

Investment and other income
 
214

 
250

 
360

 
441

Total revenues
 
36,263

 
32,574

 
72,019

 
64,282

Operating costs:
 
 
 
 
 
 
 
 
Medical costs
 
26,026

 
23,523

 
51,715

 
46,731

Operating costs
 
5,852

 
5,206

 
11,801

 
10,400

Cost of products sold
 
1,111

 
929

 
2,211

 
1,821

Depreciation and amortization
 
379

 
364

 
757

 
724

Total operating costs
 
33,368

 
30,022

 
66,484

 
59,676

Earnings from operations
 
2,895

 
2,552

 
5,535

 
4,606

Interest expense
 
(151
)
 
(155
)
 
(301
)
 
(315
)
Earnings before income taxes
 
2,744

 
2,397

 
5,234

 
4,291

Provision for income taxes
 
(1,159
)
 
(989
)
 
(2,236
)
 
(1,784
)
Net earnings
 
$
1,585

 
$
1,408

 
$
2,998

 
$
2,507

Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
1.66

 
$
1.44

 
$
3.15

 
$
2.56

Diluted
 
$
1.64

 
$
1.42

 
$
3.10

 
$
2.52

Basic weighted-average number of common shares outstanding
 
952

 
979

 
953

 
981

Dilutive effect of common share equivalents
 
14

 
12

 
14

 
13

Diluted weighted-average number of common shares outstanding
 
966

 
991

 
967

 
994

Anti-dilutive shares excluded from the calculation of dilutive effect of common share equivalents
 
8

 
8

 
8

 
9

Cash dividends declared per common share
 
$
0.5000

 
$
0.3750

 
$
0.8750

 
$
0.6550


See Notes to the Condensed Consolidated Financial Statements

2
Table of Contents


UnitedHealth Group
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
 
2015
 
2014
 
2015
 
2014
Net earnings
 
$
1,585

 
$
1,408

 
$
2,998

 
$
2,507

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Gross unrealized (losses) gains on investment securities during the period
 
(222
)
 
314

 
(117
)
 
480

Income tax effect
 
80

 
(114
)
 
43

 
(175
)
Total unrealized (losses) gains, net of tax
 
(142
)
 
200

 
(74
)
 
305

Gross reclassification adjustment for net realized gains included in net earnings
 
(68
)
 
(107
)
 
(71
)
 
(153
)
Income tax effect
 
25

 
39

 
26

 
56

Total reclassification adjustment, net of tax
 
(43
)
 
(68
)
 
(45
)
 
(97
)
Total foreign currency translation gains (losses)
 
163

 
151

 
(796
)
 
410

Other comprehensive (loss) income
 
(22
)
 
283

 
(915
)
 
618

Comprehensive income
 
$
1,563

 
$
1,691

 
$
2,083

 
$
3,125


See Notes to the Condensed Consolidated Financial Statements

3
Table of Contents

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 (Losses) on Investments
 
Foreign Currency Translation (Losses) Gains
 
Balance at January 1, 2015
 
954

 
$
10

 
$
—

 
$
33,836

 
$
223

 
$
(1,615
)
 
$
32,454

Net earnings
 
 
 
 
 
 
 
2,998

 
 
 
 
 
2,998

Other comprehensive loss
 
 
 
 
 
 
 
 
 
(119
)
 
(796
)
 
(915
)
Issuances of common shares, and related tax effects
 
7

 
—

 
23

 
 
 
 
 
 
 
23

Share-based compensation, and related tax benefits
 
 
 
 
 
319

 
 
 
 
 
 
 
319

Noncontrolling interests fair value and other adjustments
 
 
 
 
 
(73
)
 
 
 
 
 
 
 
(73
)
Common share repurchases
 
(9
)
 
—

 
(214
)
 
(739
)
 
 
 
 
 
(953
)
Cash dividends paid on common shares
 
 
 
 
 
 
 
(833
)
 
 
 
 
 
(833
)
Balance at June 30, 2015
 
952

 
$
10

 
$
55

 
$
35,262

 
$
104

 
$
(2,411
)
 
$
33,020

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
 
988

 
$
10

 
$
—

 
$
33,047

 
$
54

 
$
(962
)
 
$
32,149

Net earnings
 
 
 
 
 
 
 
2,507

 
 
 
 
 
2,507

Other comprehensive income
 
 
 
 
 
 
 
 
 
208

 
410

 
618

Issuances of common shares, and related tax effects
 
10

 
—

 
23

 
 
 
 
 
 
 
23

Share-based compensation, and related tax benefits
 
 
 
 
 
217

 
 
 
 
 
 
 
217

Common share repurchases
 
(25
)
 
—

 
(240
)
 
(1,697
)
 
 
 
 
 
(1,937
)
Cash dividends paid on common shares
 
 
 
 
 
 
 
(642
)
 
 
 
 
 
(642
)
Balance at June 30, 2014
 
973

 
$
10

 
$
—

 
$
33,215

 
$
262

 
$
(552
)
 
$
32,935



See Notes to the Condensed Consolidated Financial Statements

4
Table of Contents

UnitedHealth Group
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Six Months Ended
June 30,
(in millions)
 
2015
 
2014
Operating activities
 
 
 
 
Net earnings
 
$
2,998

 
$
2,507

Noncash items:
 
 
 
 
Depreciation and amortization
 
757

 
724

Deferred income taxes
 
(30
)
 
(16
)
Share-based compensation
 
211

 
188

Other, net
 
(160
)
 
(148
)
Net change in other operating items, net of effects from acquisitions and changes in AARP balances:
 
 
 
 
Accounts receivable
 
(1,725
)
 
(2,131
)
Other assets
 
(2,178
)
 
(1,135
)
Medical costs payable
 
1,988

 
560

Accounts payable and other liabilities
 
1,809

 
2,219

Other policy liabilities
 
208

 
(218
)
Unearned revenues
 
(446
)
 
(128
)
Cash flows from operating activities
 
3,432

 
2,422

Investing activities
 
 
 
 
Purchases of investments
 
(4,286
)
 
(5,477
)
Sales of investments
 
2,260

 
4,393

Maturities of investments
 
1,622

 
1,544

Cash paid for acquisitions, net of cash assumed
 
(1,778
)
 
(523
)
Purchases of property, equipment and capitalized software
 
(716
)
 
(716
)
Other, net
 
48

 
(99
)
Cash flows used for investing activities
 
(2,850
)
 
(878
)
Financing activities
 
 
 
 
Common stock repurchases
 
(953
)
 
(1,937
)
Cash dividends paid
 
(833
)
 
(642
)
Proceeds from common stock issuances
 
242

 
267

Repayments of long-term debt
 
(416
)
 
(172
)
Proceeds from (repayments of) commercial paper, net
 
1,086

 
(101
)
Customer funds administered
 
941

 
333

Other, net
 
(188
)
 
(170
)
Cash flows used for financing activities
 
(121
)
 
(2,422
)
Effect of exchange rate changes on cash and cash equivalents
 
(69
)
 
14

Increase (decrease) in cash and cash equivalents
 
392

 
(864
)
Cash and cash equivalents, beginning of period
 
7,495

 
7,276

Cash and cash equivalents, end of period
 
$
7,887

 
$
6,412


See Notes to the Condensed Consolidated Financial Statements

5
Table of Contents

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.
Subsequent Events
On July 1, 2015, UnitedHealth Group Incorporated changed its state of incorporation from Minnesota to Delaware pursuant to a plan of conversion. The reincorporation was approved by the Company’s shareholders at its 2015 Annual Meeting of Shareholders held on June 1, 2015. Upon reincorporation, the affairs of UnitedHealth Group Incorporated became subject to the Delaware General Corporation Law, a new certificate of incorporation and new bylaws, and each previously outstanding share of UnitedHealth Group Incorporated’s common stock as a Minnesota corporation (UNH Minnesota) converted into an outstanding share of common stock of UnitedHealth Group Incorporated as a Delaware corporation after the reincorporation (UNH Delaware). The reincorporation was a tax-free reorganization under the U.S. Internal Revenue Code and did not affect the Company’s business operations.
On July 23, 2015, the Company acquired all of the outstanding common shares of Catamaran Corporation (Catamaran) for $12.9 billion in cash and funded Catamaran’s payoff of its outstanding debt and credit facility in connection with the closing. The Company drew its $1.5 billion delayed draw term loan and issued commercial paper and senior unsecured notes to fund the Company’s purchase of Catamaran; see Note 7 of Notes to the Condensed Consolidated Financial Statements for detail on the related July 2015 debt issuance. Catamaran offers retail pharmacy network management, mail service pharmacy, pharmacy claims management and patient-centric specialty pharmacy services to a broad client portfolio, including health plans and employers serving 35 million people, and provides health care information technology solutions to the pharmacy benefits management industry. This acquisition diversifies OptumRx’s customer and business mix, while accelerating its technology leadership and flexible service offerings. As the Catamaran acquisition occurred in the third quarter of 2015, it is not yet practicable to provide disclosures related to the purchase price allocation or pro forma information.
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

6
Table of Contents

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 July 2015, the FASB approved the deferral of ASU 2014-09 for one year and it is 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.
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
June 30, 2015
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
1,859

 
$
6

 
$
(4
)
 
$
1,861

State and municipal obligations
 
6,196

 
127

 
(17
)
 
6,306

Corporate obligations
 
7,654

 
76

 
(31
)
 
7,699

U.S. agency mortgage-backed securities
 
2,091

 
25

 
(14
)
 
2,102

Non-U.S. agency mortgage-backed securities
 
837

 
8

 
(5
)
 
840

Total debt securities - available-for-sale
 
18,637

 
242

 
(71
)
 
18,808

Equity securities - available-for-sale
 
1,559

 
36

 
(38
)
 
1,557

Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
182

 
3

 
—

 
185

State and municipal obligations
 
15

 
—

 
—

 
15

Corporate obligations
 
349

 
—

 
—

 
349

Total debt securities - held-to-maturity
 
546

 
3

 
—

 
549

Total investments
 
$
20,742

 
$
281

 
$
(109
)
 
$
20,914

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


7
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The amortized cost and fair value of available-for-sale debt securities as of June 30, 2015, by contractual maturity, were as follows:
(in millions)
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
2,010

 
$
2,014

Due after one year through five years
 
6,943

 
7,009

Due after five years through ten years
 
5,016

 
5,067

Due after ten years
 
1,740

 
1,776

U.S. agency mortgage-backed securities
 
2,091

 
2,102

Non-U.S. agency mortgage-backed securities
 
837

 
840

Total debt securities - available-for-sale
 
$
18,637

 
$
18,808

The amortized cost and fair value of held-to-maturity debt securities as of June 30, 2015, by contractual maturity, were as follows:
(in millions)
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
126

 
$
126

Due after one year through five years
 
204

 
205

Due after five years through ten years
 
106

 
107

Due after ten years
 
110

 
111

Total debt securities - held-to-maturity
 
$
546

 
$
549

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
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
529

 
$
(4
)
 
$
—

 
$
—

 
$
529

 
$
(4
)
State and municipal obligations
 
1,561

 
(16
)
 
22

 
(1
)
 
1,583

 
(17
)
Corporate obligations
 
3,126

 
(27
)
 
229

 
(4
)
 
3,355

 
(31
)
U.S. agency mortgage-backed securities
 
752

 
(10
)
 
126

 
(4
)
 
878

 
(14
)
Non-U.S. agency mortgage-backed securities
 
364

 
(4
)
 
77

 
(1
)
 
441

 
(5
)
Total debt securities - available-for-sale
 
$
6,332

 
$
(61
)
 
$
454

 
$
(10
)
 
$
6,786

 
$
(71
)
Equity securities - available-for-sale
 
$
148

 
$
(9
)
 
$
82

 
$
(29
)
 
$
230

 
$
(38
)
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 June 30, 2015 were generated from approximately 7,100 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

8
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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 June 30, 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.
Net realized gains reclassified out of accumulated other comprehensive income were from the following sources:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
 
2015
 
2014
 
2015
 
2014
Total OTTI
 
$
(3
)
 
$
(4
)
 
$
(4
)
 
$
(7
)
Portion of loss recognized in other comprehensive income
 
—

 
—

 
—

 
—

Net OTTI recognized in earnings
 
(3
)
 
(4
)
 
(4
)

(7
)
Gross realized losses from sales
 
(5
)
 
(29
)
 
(11
)
 
(39
)
Gross realized gains from sales
 
76

 
140

 
86

 
199

Net realized gains (included in investment and other income on the Condensed Consolidated Statements of Operations)
 
68

 
107

 
71

 
153

Income tax effect (included in provision for income taxes on the Condensed Consolidated Statements of Operations)
 
(25
)
 
(39
)
 
(26
)
 
(56
)
Realized gains, net of taxes
 
$
43

 
$
68

 
$
45

 
$
97

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
Table of Contents

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
June 30, 2015
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
7,754

 
$
133

 
$
—

 
$
7,887

Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
1,650

 
211

 
—

 
1,861

State and municipal obligations
 
—

 
6,306

 
—

 
6,306

Corporate obligations
 
12

 
7,609

 
78

 
7,699

U.S. agency mortgage-backed securities
 
—

 
2,102

 
—

 
2,102

Non-U.S. agency mortgage-backed securities
 
—

 
834

 
6

 
840

Total debt securities - available-for-sale
 
1,662

 
17,062

 
84

 
18,808

Equity securities - available-for-sale
 
1,226

 
12

 
319

 
1,557

Interest rate swap assets
 
—

 
54

 
—

 
54

Total assets at fair value

$
10,642

 
$
17,261

 
$
403

 
$
28,306

Percentage of total assets at fair value
 
38
%
 
61
%
 
1
%
 
100
%
Interest rate swap liabilities
 
$
—

 
$
33

 
$
—

 
$
33

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 six months ended June 30, 2015 or 2014.



10
Table of Contents

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
June 30, 2015
 
 
 
 
 
 
 
 
 
 
Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
185

 
$
—

 
$
—

 
$
185

 
$
182

State and municipal obligations
 
—

 
—

 
15

 
15

 
15

Corporate obligations
 
92

 
10

 
247

 
349

 
349

Total debt securities - held-to-maturity
 
$
277

 
$
10

 
$
262

 
$
549

 
$
546

Other assets
 
$
—

 
$
473

 
$
—

 
$
473

 
$
472

Long-term debt and other financing obligations
 
$
—

 
$
17,755

 
$
—

 
$
17,755

 
$
16,664

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 six months ended June 30, 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:
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
Debt
Securities
 
Equity
Securities
 
Total
 
Debt
Securities
 
Equity
Securities
 
Total
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
79

 
$
309

 
$
388

 
$
74

 
$
310

 
$
384

Purchases
 
6

 
10

 
16

 
10

 
14

 
24

Sales
 
(2
)
 
(13
)
 
(15
)
 
(2
)
 
(14
)
 
(16
)
Net unrealized gains (losses) in accumulated other comprehensive income
 
1

 
—

 
1

 
2

 
(5
)
 
(3
)
Net realized gains in investment and other income
 
—

 
13

 
13

 
—

 
14

 
14

Balance at end of period
 
$
84

 
$
319

 
$
403

 
$
84

 
$
319

 
$
403

 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
46

 
$
313

 
$
359

 
$
42

 
$
269

 
$
311

Purchases
 
10

 
6

 
16

 
13

 
50

 
63

Sales
 
—

 
(147
)
 
(147
)
 
—

 
(151
)
 
(151
)
Net unrealized gains in accumulated other comprehensive income
 
1

 
6

 
7

 
2

 
10

 
12

Net realized gains in investment and other income
 
—

 
124

 
124

 
—

 
124

 
124

Balance at end of period
 
$
57

 
$
302

 
$
359

 
$
57

 
$
302

 
$
359


11
Table of Contents

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
June 30, 2015
 
 
 
 
 
 
 
 
 
 
Equity securities - available-for-sale
 
 
 
 
 
 
 
 
 
 
Venture capital portfolios
 
$
268

 
Market approach - comparable companies
 
Revenue multiple
 
1.0
 
5.0
 
 
 
 
 
 
EBITDA multiple
 
8.0
 
10.0
 
 
51

 
Market approach - recent transactions
 
Inactive market transactions
 
N/A
 
N/A
Total equity securities
     available-for-sale
 
$
319

 
 
 
 
 
 
 
 
Also included in the Company’s assets measured at fair value on a recurring basis using Level 3 inputs were $84 million of available-for-sale debt securities as of June 30, 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
June 30, 2015
 
 
 
 
 
 
Cash and cash equivalents
 
$
205

 
$
—

 
$
205

Debt securities:
 
 
 
 
 
 
U.S. government and agency obligations
 
431

 
164

 
595

State and municipal obligations
 
—

 
96

 
96

Corporate obligations
 
—

 
1,287

 
1,287

U.S. agency mortgage-backed securities
 
—

 
400

 
400

Non-U.S. agency mortgage-backed securities
 
—

 
195

 
195

Total debt securities
 
431

 
2,142

 
2,573

Other investments
 
—

 
85

 
85

Total assets at fair value
 
$
636

 
$
2,227

 
$
2,863

Other liabilities
 
$
4

 
$
6

 
$
10

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


12
Table of Contents

4.
Medicare Part D Pharmacy Benefits
The Condensed Consolidated Balance Sheets include the following amounts associated with the Medicare Part D program:
 
 
June 30, 2015
 
December 31, 2014
(in millions)
 
Subsidies
 
Drug Discount
 
Risk-Share
 
Subsidies
 
Drug Discount
 
Risk-Share
Other current receivables
 
$
1,776

 
$
266

 
$
20

 
$
1,801

 
$
719

 
$
20

Other policy liabilities
 
—

 
164

 
—

 
—

 
302

 
—

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
The following table provides details of the Company's medical cost reserve development:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
 
2015
 
2014
 
2015
 
2014
Related to Prior Years
 
$
(10
)
 
$
40

 
$
130

 
$
260

Related to Current Year
 
100

 
90

 
N/A

 
N/A

In the three and six months ended June 30, 2015 and 2014, the medical cost reserve 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 June 30, 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 $900 million. 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 and the asset was fully expensed by year end. 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.

13
Table of Contents

7.     Commercial Paper and Long-Term Debt
Commercial paper and senior unsecured long-term debt consisted of the following:
 
 
June 30, 2015
 
December 31, 2014
(in millions, except percentages)
 
Par
Value
 
Carrying
Value
 
Fair
Value
 
Par
Value
 
Carrying
Value
 
Fair
Value
Commercial paper
 
$
1,407

 
$
1,407

 
$
1,407

 
$
321

 
$
321

 
$
321

4.875% notes due March 2015 (a)
 
—

 
—

 
—

 
416

 
419

 
419

0.850% notes due October 2015 (a)
 
625

 
625

 
625

 
625

 
625

 
627

5.375% notes due March 2016 (a)
 
601

 
614

 
620

 
601

 
623

 
634

1.875% notes due November 2016 (a)
 
400

 
399

 
405

 
400

 
397

 
406

5.360% notes due November 2016
 
95

 
95

 
101

 
95

 
95

 
103

6.000% notes due June 2017 (a)
 
441

 
463

 
480

 
441

 
466

 
489

1.400% notes due October 2017 (a)
 
625

 
621

 
626

 
625

 
616

 
624

6.000% notes due November 2017 (a)
 
156

 
163

 
174