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 SEPTEMBER 30, 2015
or
[ ] | 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 [ ]
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 [ ]
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 | [ ] | Non-accelerated filer | [ ] | Smaller reporting company | [ ] | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of October 30, 2015, there were 953,108,435 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) | September 30, 2015 | December 31, 2014 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 7,983 | $ | 7,495 | ||||
Short-term investments | 1,942 | 1,741 | ||||||
Accounts receivable, net | 6,752 | 4,252 | ||||||
Other current receivables, net | 7,667 | 5,498 | ||||||
Assets under management | 2,948 | 2,962 | ||||||
Deferred income taxes | 670 | 556 | ||||||
Prepaid expenses and other current assets | 1,973 | 1,052 | ||||||
Total current assets | 29,935 | 23,556 | ||||||
Long-term investments | 18,535 | 18,827 | ||||||
Property, equipment and capitalized software, net | 4,532 | 4,418 | ||||||
Goodwill | 43,680 | 32,940 | ||||||
Other intangible assets, net | 8,405 | 3,669 | ||||||
Other assets | 3,185 | 2,972 | ||||||
Total assets | $ | 108,272 | $ | 86,382 | ||||
Liabilities and equity | ||||||||
Current liabilities: | ||||||||
Medical costs payable | $ | 13,906 | $ | 12,040 | ||||
Accounts payable and accrued liabilities | 11,300 | 9,247 | ||||||
Other policy liabilities | 7,249 | 5,965 | ||||||
Commercial paper and current maturities of long-term debt | 5,767 | 1,399 | ||||||
Unearned revenues | 1,731 | 1,972 | ||||||
Total current liabilities | 39,953 | 30,623 | ||||||
Long-term debt, less current maturities | 26,015 | 16,007 | ||||||
Future policy benefits | 2,489 | 2,488 | ||||||
Deferred income taxes | 3,593 | 2,065 | ||||||
Other liabilities | 1,529 | 1,357 | ||||||
Total liabilities | 73,579 | 52,540 | ||||||
Commitments and contingencies (Note 12) | ||||||||
Redeemable noncontrolling interests | 1,571 | 1,388 | ||||||
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; 953 and 954 issued and outstanding | 10 | 10 | ||||||
Additional paid in capital | 69 | — | ||||||
Retained earnings | 36,382 | 33,836 | ||||||
Accumulated other comprehensive loss | (3,347 | ) | (1,392 | ) | ||||
Nonredeemable noncontrolling interest | 8 | — | ||||||
Total equity | 33,122 | 32,454 | ||||||
Total liabilities and equity | $ | 108,272 | $ | 86,382 | ||||
See Notes to the Condensed Consolidated Financial Statements
1
UnitedHealth Group
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in millions, except per share data) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Revenues: | ||||||||||||||||
Premiums | $ | 31,801 | $ | 28,972 | $ | 95,436 | $ | 85,927 | ||||||||
Products | 6,482 | 1,080 | 8,935 | 3,115 | ||||||||||||
Services | 3,036 | 2,535 | 8,607 | 7,386 | ||||||||||||
Investment and other income | 170 | 172 | 530 | 613 | ||||||||||||
Total revenues | 41,489 | 32,759 | 113,508 | 97,041 | ||||||||||||
Operating costs: | ||||||||||||||||
Medical costs | 25,618 | 23,092 | 77,333 | 69,823 | ||||||||||||
Operating costs | 6,301 | 5,436 | 18,102 | 15,836 | ||||||||||||
Cost of products sold | 6,100 | 955 | 8,311 | 2,776 | ||||||||||||
Depreciation and amortization | 452 | 373 | 1,209 | 1,097 | ||||||||||||
Total operating costs | 38,471 | 29,856 | 104,955 | 89,532 | ||||||||||||
Earnings from operations | 3,018 | 2,903 | 8,553 | 7,509 | ||||||||||||
Interest expense | (229 | ) | (152 | ) | (530 | ) | (467 | ) | ||||||||
Earnings before income taxes | 2,789 | 2,751 | 8,023 | 7,042 | ||||||||||||
Provision for income taxes | (1,171 | ) | (1,149 | ) | (3,407 | ) | (2,933 | ) | ||||||||
Net earnings | 1,618 | 1,602 | 4,616 | 4,109 | ||||||||||||
Earnings attributable to noncontrolling interests | (21 | ) | — | (21 | ) | — | ||||||||||
Net earnings attributable to UnitedHealth Group common shareholders | $ | 1,597 | $ | 1,602 | $ | 4,595 | $ | 4,109 | ||||||||
Earnings per share attributable to UnitedHealth Group common shareholders: | ||||||||||||||||
Basic | $ | 1.68 | $ | 1.65 | $ | 4.82 | $ | 4.21 | ||||||||
Diluted | $ | 1.65 | $ | 1.63 | $ | 4.75 | $ | 4.15 | ||||||||
Basic weighted-average number of common shares outstanding | 953 | 969 | 953 | 977 | ||||||||||||
Dilutive effect of common share equivalents | 14 | 13 | 14 | 13 | ||||||||||||
Diluted weighted-average number of common shares outstanding | 967 | 982 | 967 | 990 | ||||||||||||
Anti-dilutive shares excluded from the calculation of dilutive effect of common share equivalents | 8 | 7 | 8 | 8 | ||||||||||||
Cash dividends declared per common share | $ | 0.5000 | $ | 0.3750 | $ | 1.3750 | $ | 1.0300 | ||||||||
See Notes to the Condensed Consolidated Financial Statements
2
UnitedHealth Group
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in millions) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Net earnings | $ | 1,618 | $ | 1,602 | $ | 4,616 | $ | 4,109 | ||||||||
Other comprehensive loss: | ||||||||||||||||
Gross unrealized gains (losses) on investment securities during the period | 66 | (53 | ) | (51 | ) | 427 | ||||||||||
Income tax effect | (26 | ) | 20 | 17 | (155 | ) | ||||||||||
Total unrealized gains (losses), net of tax | 40 | (33 | ) | (34 | ) | 272 | ||||||||||
Gross reclassification adjustment for net realized gains included in net earnings | (28 | ) | (30 | ) | (99 | ) | (183 | ) | ||||||||
Income tax effect | 11 | 11 | 37 | 67 | ||||||||||||
Total reclassification adjustment, net of tax | (17 | ) | (19 | ) | (62 | ) | (116 | ) | ||||||||
Total foreign currency translation losses | (1,063 | ) | (642 | ) | (1,859 | ) | (232 | ) | ||||||||
Other comprehensive loss | (1,040 | ) | (694 | ) | (1,955 | ) | (76 | ) | ||||||||
Comprehensive income | 578 | 908 | 2,661 | 4,033 | ||||||||||||
Comprehensive income attributable to noncontrolling interests | (21 | ) | — | (21 | ) | — | ||||||||||
Comprehensive income attributable to UnitedHealth Group common shareholders | $ | 557 | $ | 908 | $ | 2,640 | $ | 4,033 | ||||||||
See Notes to the Condensed Consolidated Financial Statements
3
UnitedHealth Group
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Nonredeemable Noncontrolling Interest | Total Equity | ||||||||||||||||||||||||||
(in millions) | Shares | Amount | Net Unrealized Gains (Losses) on Investments | Foreign Currency Translation Losses | |||||||||||||||||||||||||||
Balance at January 1, 2015 | 954 | $ | 10 | $ | — | $ | 33,836 | $ | 223 | $ | (1,615 | ) | $ | — | $ | 32,454 | |||||||||||||||
Net earnings | 4,595 | 11 | 4,606 | ||||||||||||||||||||||||||||
Other comprehensive loss | (96 | ) | (1,859 | ) | (1,955 | ) | |||||||||||||||||||||||||
Issuances of common shares, and related tax effects | 9 | — | 112 | 112 | |||||||||||||||||||||||||||
Share-based compensation, and related tax benefits | 477 | 477 | |||||||||||||||||||||||||||||
Common share repurchases | (10 | ) | — | (391 | ) | (739 | ) | (1,130 | ) | ||||||||||||||||||||||
Cash dividends paid on common shares | (1,310 | ) | (1,310 | ) | |||||||||||||||||||||||||||
Redeemable noncontrolling interests fair value and other adjustments | (129 | ) | (129 | ) | |||||||||||||||||||||||||||
Acquisition of nonredeemable noncontrolling interest | 9 | 9 | |||||||||||||||||||||||||||||
Distribution to nonredeemable noncontrolling interest | (12 | ) | (12 | ) | |||||||||||||||||||||||||||
Balance at September 30, 2015 | 953 | $ | 10 | $ | 69 | $ | 36,382 | $ | 127 | $ | (3,474 | ) | $ | 8 | $ | 33,122 | |||||||||||||||
Balance at January 1, 2014 | 988 | $ | 10 | $ | — | $ | 33,047 | $ | 54 | $ | (962 | ) | $ | — | $ | 32,149 | |||||||||||||||
Net earnings | 4,109 | — | 4,109 | ||||||||||||||||||||||||||||
Other comprehensive income (loss) | 156 | (232 | ) | (76 | ) | ||||||||||||||||||||||||||
Issuances of common shares, and related tax effects | 12 | — | 130 | 130 | |||||||||||||||||||||||||||
Share-based compensation, and related tax benefits | 320 | 320 | |||||||||||||||||||||||||||||
Common share repurchases | (38 | ) | — | (450 | ) | (2,574 | ) | (3,024 | ) | ||||||||||||||||||||||
Cash dividends paid on common shares | (1,004 | ) | (1,004 | ) | |||||||||||||||||||||||||||
Balance at September 30, 2014 | 962 | $ | 10 | $ | — | $ | 33,578 | $ | 210 | $ | (1,194 | ) | $ | — | $ | 32,604 | |||||||||||||||
See Notes to the Condensed Consolidated Financial Statements
4
UnitedHealth Group
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, | ||||||||
(in millions) | 2015 | 2014 | ||||||
Operating activities | ||||||||
Net earnings | $ | 4,616 | $ | 4,109 | ||||
Noncash items: | ||||||||
Depreciation and amortization | 1,209 | 1,097 | ||||||
Deferred income taxes | (49 | ) | (107 | ) | ||||
Share-based compensation | 306 | 269 | ||||||
Other, net | (208 | ) | (253 | ) | ||||
Net change in other operating items, net of effects from acquisitions and changes in AARP balances: | ||||||||
Accounts receivable | (907 | ) | (545 | ) | ||||
Other assets | (1,686 | ) | (819 | ) | ||||
Medical costs payable | 2,137 | 654 | ||||||
Accounts payable and other liabilities | 616 | 1,126 | ||||||
Other policy liabilities | 374 | — | ||||||
Unearned revenues | (179 | ) | 91 | |||||
Cash flows from operating activities | 6,229 | 5,622 | ||||||
Investing activities | ||||||||
Purchases of investments | (6,712 | ) | (7,823 | ) | ||||
Sales of investments | 4,041 | 5,810 | ||||||
Maturities of investments | 2,557 | 2,266 | ||||||
Cash paid for acquisitions, net of cash assumed | (16,183 | ) | (851 | ) | ||||
Purchases of property, equipment and capitalized software | (1,072 | ) | (1,121 | ) | ||||
Other, net | (51 | ) | (139 | ) | ||||
Cash flows used for investing activities | (17,420 | ) | (1,858 | ) | ||||
Financing activities | ||||||||
Common stock repurchases | (1,130 | ) | (3,024 | ) | ||||
Cash dividends paid | (1,310 | ) | (1,004 | ) | ||||
Proceeds from common stock issuances | 366 | 400 | ||||||
Proceeds from long-term debt | 11,982 | — | ||||||
Repayments of long-term debt | (416 | ) | (812 | ) | ||||
Proceeds from commercial paper, net | 2,665 | 1,355 | ||||||
Customer funds administered | 119 | (440 | ) | |||||
Other, net | (446 | ) | (285 | ) | ||||
Cash flows from (used for) financing activities | 11,830 | (3,810 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | (151 | ) | 3 | |||||
Increase (decrease) in cash and cash equivalents | 488 | (43 | ) | |||||
Cash and cash equivalents, beginning of period | 7,495 | 7,276 | ||||||
Cash and cash equivalents, end of period | $ | 7,983 | $ | 7,233 | ||||
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 pharmacy care services and 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.
Reincorporation
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.
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) as modified by ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.” 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. ASU 2014-09 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.
6
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. Business Combination
On July 23, 2015, the Company acquired all of the outstanding common shares of Catamaran Corporation (Catamaran) and funded Catamaran’s payoff of its outstanding debt and credit facility for $14.3 billion in cash. Catamaran offers pharmacy benefits management services similar to OptumRx 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.
The Company paid for the acquisition primarily with the proceeds of new indebtedness. Debt issuances included $10.5 billion of senior unsecured notes, approximately $2.4 billion of commercial paper and a $1.5 billion term loan. The total consideration exceeded the estimated fair value of the net tangible assets acquired by $15.6 billion, of which $5.4 billion has been allocated to finite-lived intangible assets and $10.2 billion to goodwill. The goodwill is not deductible for income tax purposes.
Acquired tangible assets (liabilities) for Catamaran at acquisition date were:
(in millions) | ||||
Accounts receivable and other current assets | $ | 1,947 | ||
Rebates receivable | 602 | |||
Property, equipment and other long-term assets | 215 | |||
Accounts payable and other current liabilities | (2,038 | ) | ||
Deferred income taxes and other long-term liabilities | (2,019 | ) | ||
Nonredeemable noncontrolling interest | (9 | ) | ||
Total net tangible liabilities | $ | (1,302 | ) | |
Since the Catamaran acquisition closed during the three months ended September 30, 2015, the preliminary purchase price allocation is subject to adjustment as valuation analyses, primarily related to intangible assets and contingent and tax liabilities, are finalized.
The acquisition date fair values and weighted-average useful lives assigned to Catamaran’s finite-lived intangible assets were:
(in millions, except years) | Fair Value | Weighted-Average Useful Life | ||||
Customer-related | $ | 5,278 | 19 years | |||
Trademarks and technology | 159 | 4 years | ||||
Total acquired finite-lived intangible assets | $ | 5,437 | 19 years | |||
The results of operations and financial condition of Catamaran have been included in the Company’s consolidated results and the results of the OptumRx segment as of July 23, 2015. Since then, the Catamaran business has generated $5.3 billion in revenue, and had an immaterial impact on net earnings.
Unaudited pro forma revenues for the nine months ended September 30, 2015 and 2014 as if the acquisition of Catamaran had occurred on January 1, 2014 were $128 billion and $113 billion, respectively. The pro forma effects of this acquisition on net earnings were immaterial for both periods.
7
3. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill, by reportable segment, were as follows:
(in millions) | UnitedHealthcare | OptumHealth | OptumInsight | OptumRx | Consolidated | |||||||||||||||
Balance at January 1, 2014 | $ | 24,251 | $ | 2,860 | $ | 3,653 | $ | 840 | $ | 31,604 | ||||||||||
Acquisitions | 266 | 978 | 591 | — | 1,835 | |||||||||||||||
Foreign currency effects and adjustments, net | (487 | ) | (4 | ) | (8 | ) | — | (499 | ) | |||||||||||
Balance at December 31, 2014 | 24,030 | 3,834 | 4,236 | 840 | 32,940 | |||||||||||||||
Acquisitions | 51 | 1,679 | 89 | 10,238 | 12,057 | |||||||||||||||
Foreign currency effects and adjustments, net | (1,288 | ) | (1 | ) | (28 | ) | — | (1,317 | ) | |||||||||||
Balance at September 30, 2015 | $ | 22,793 | $ | 5,512 | $ | 4,297 | $ | 11,078 | $ | 43,680 | ||||||||||
The increase in the Company’s goodwill is primarily due to the acquisition of Catamaran in July 2015. For more detail on the Catamaran acquisition, see Note 2 of the Notes to the Condensed Consolidated Financial Statements.
During the three months ended September 30, 2015, the Company changed its annual quantitative goodwill impairment testing date from January 1 to October 1 of each year. The change in the goodwill impairment test date better aligns the impairment testing procedures with the timing of the Company’s long-term planning process, which is a significant input to the testing. This change in testing date did not delay, accelerate, or avoid a goodwill impairment charge.
Estimated full year amortization expense relating to intangible assets for each of the next five years ending September 30 is as follows:
(in millions) | ||||
2016 | $ | 799 | ||
2017 | 768 | |||
2018 | 675 | |||
2019 | 617 | |||
2020 | 543 | |||
8
4. 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 | ||||||||||||
September 30, 2015 | ||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | $ | 1,890 | $ | 14 | $ | — | $ | 1,904 | ||||||||
State and municipal obligations | 5,993 | 155 | (6 | ) | 6,142 | |||||||||||
Corporate obligations | 7,441 | 77 | (47 | ) | 7,471 | |||||||||||
U.S. agency mortgage-backed securities | 2,026 | 27 | (6 | ) | 2,047 | |||||||||||
Non-U.S. agency mortgage-backed securities | 872 | 11 | (4 | ) | 879 | |||||||||||
Total debt securities - available-for-sale | 18,222 | 284 | (63 | ) | 18,443 | |||||||||||
Equity securities - available-for-sale | 1,526 | 44 | (58 | ) | 1,512 | |||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||
U.S. government and agency obligations | 162 | 2 | — | 164 | ||||||||||||
State and municipal obligations | 15 | — | — | 15 | ||||||||||||
Corporate obligations | 345 | — | — | 345 | ||||||||||||
Total debt securities - held-to-maturity | 522 | 2 | — | 524 | ||||||||||||
Total investments | $ | 20,270 | $ | 330 | $ | (121 | ) | $ | 20,479 | |||||||
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 September 30, 2015, by contractual maturity, were as follows:
(in millions) | Amortized Cost | Fair Value | ||||||
Due in one year or less | $ | 2,047 | $ | 2,051 | ||||
Due after one year through five years | 6,830 | 6,901 | ||||||
Due after five years through ten years | 4,720 | 4,793 | ||||||
Due after ten years | 1,727 | 1,772 | ||||||
U.S. agency mortgage-backed securities | 2,026 | 2,047 | ||||||
Non-U.S. agency mortgage-backed securities | 872 | 879 | ||||||
Total debt securities - available-for-sale | $ | 18,222 | $ | 18,443 | ||||
9
The amortized cost and fair value of held-to-maturity debt securities as of September 30, 2015, by contractual maturity, were as follows:
(in millions) | Amortized Cost | Fair Value | ||||||
Due in one year or less | $ | 121 | $ | 121 | ||||
Due after one year through five years | 203 | 204 | ||||||
Due after five years through ten years | 84 | 84 | ||||||
Due after ten years | 114 | 115 | ||||||
Total debt securities - held-to-maturity | $ | 522 | $ | 524 | ||||
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 | ||||||||||||||||||
September 30, 2015 | ||||||||||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||||||||||
State and municipal obligations | $ | 507 | $ | (5 | ) | $ | 17 | $ | (1 | ) | $ | 524 | $ | (6 | ) | |||||||||
Corporate obligations | 2,799 | (39 | ) | 270 | (8 | ) | 3,069 | (47 | ) | |||||||||||||||
U.S. agency mortgage-backed securities | 365 | (3 | ) | 122 | (3 | ) | 487 | (6 | ) | |||||||||||||||
Non-U.S. agency mortgage-backed securities | 317 | (3 | ) | 93 | (1 | ) | 410 | (4 | ) | |||||||||||||||
Total debt securities - available-for-sale | $ | 3,988 | $ | (50 | ) | $ | 502 | $ | (13 | ) | $ | 4,490 | $ | (63 | ) | |||||||||
Equity securities - available-for-sale | $ | 140 | $ | (16 | ) | $ | 82 | $ | (42 | ) | $ | 222 | $ | (58 | ) | |||||||||
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 September 30, 2015 were generated from approximately 6,000 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 September 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.
10
Net realized gains reclassified out of accumulated other comprehensive income were from the following sources:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in millions) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Total OTTI | $ | (4 | ) | $ | (18 | ) | $ | (8 | ) | $ | (25 | ) | ||||
Portion of loss recognized in other comprehensive income | — | — | — | — | ||||||||||||
Net OTTI recognized in earnings | (4 | ) | (18 | ) | (8 | ) | (25 | ) | ||||||||
Gross realized losses from sales | (9 | ) | (3 | ) | (20 | ) | (42 | ) | ||||||||
Gross realized gains from sales | 41 | 51 | 127 | 250 | ||||||||||||
Net realized gains (included in investment and other income on the Condensed Consolidated Statements of Operations) | 28 | 30 | 99 | 183 | ||||||||||||
Income tax effect (included in provision for income taxes on the Condensed Consolidated Statements of Operations) | (11 | ) | (11 | ) | (37 | ) | (67 | ) | ||||||||
Realized gains, net of taxes | $ | 17 | $ | 19 | $ | 62 | $ | 116 | ||||||||
5. 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.
11
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 | ||||||||||||
September 30, 2015 | ||||||||||||||||
Cash and cash equivalents | $ | 7,865 | $ | 118 | $ | — | $ | 7,983 | ||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | 1,705 | 199 | — | 1,904 | ||||||||||||
State and municipal obligations | — | 6,142 | — | 6,142 | ||||||||||||
Corporate obligations | 15 | 7,368 | 88 | 7,471 | ||||||||||||
U.S. agency mortgage-backed securities | — | 2,047 | — | 2,047 | ||||||||||||
Non-U.S. agency mortgage-backed securities | — | 874 | 5 | 879 | ||||||||||||
Total debt securities - available-for-sale | 1,720 | 16,630 | 93 | 18,443 | ||||||||||||
Equity securities - available-for-sale | 1,137 | 12 | 363 | 1,512 | ||||||||||||
Interest rate swap assets | — | 168 | — | 168 | ||||||||||||
Total assets at fair value | $ | 10,722 | $ | 16,928 | $ | 456 | $ | 28,106 | ||||||||
Percentage of total assets at fair value | 38 | % | 60 | % | 2 | % | 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 nine months ended September 30, 2015 or 2014.
12
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 | |||||||||||||||
September 30, 2015 | ||||||||||||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||||||
U.S. government and agency obligations | $ | 164 | $ | — | $ | — | $ | 164 | $ | 162 | ||||||||||
State and municipal obligations | — | — | 15 | 15 | 15 | |||||||||||||||
Corporate obligations | 91 | 13 | 241 | 345 | 345 | |||||||||||||||
Total debt securities - held-to-maturity | $ | 255 | $ | 13 | $ | 256 | $ | 524 | $ | 522 | ||||||||||
Other assets | $ | — | $ | 478 | $ | — | $ | 478 | $ | 480 | ||||||||||
Long-term debt and other financing obligations | $ | — | $ | 30,309 | $ | — | $ | 30,309 | $ | 28,796 | ||||||||||
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 nine months ended September 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.
13
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 | Nine Months Ended | |||||||||||||||||||||||
(in millions) | Debt Securities | Equity Securities | Total | Debt Securities | Equity Securities | Total | ||||||||||||||||||
September 30, 2015 | ||||||||||||||||||||||||
Balance at beginning of period | $ | 84 | $ | 319 | $ | 403 | $ | 74 | $ | 310 | $ | 384 | ||||||||||||
Purchases | 12 | 45 | 57 | 22 | 59 | 81 | ||||||||||||||||||
Sales | (2 | ) | (6 | ) | (8 | ) | (4 | ) | (20 | ) | (24 | ) | ||||||||||||
Net unrealized gains in accumulated other comprehensive income | — | 6 | 6 | 2 | 1 | 3 | ||||||||||||||||||
Net realized (losses) gains in investment and other income | (1 | ) | (1 | ) | (2 | ) | (1 | ) | 13 | 12 | ||||||||||||||
Balance at end of period | $ | 93 | $ | 363 | $ | 456 | $ | 93 | $ | 363 | $ | 456 | ||||||||||||
September 30, 2014 | ||||||||||||||||||||||||
Balance at beginning of period | $ | 57 | $ | 302 | $ | 359 | $ | 42 | $ | 269 | $ | 311 | ||||||||||||
Purchases | 11 | 36 | 47 | 24 | 86 | 110 | ||||||||||||||||||
Sales | — | (18 | ) | (18 | ) | — | (169 | ) | (169 | ) | ||||||||||||||
Net unrealized (losses) gains in accumulated other comprehensive income | (2 | ) | (4 | ) | (6 | ) | — | 6 | 6 | |||||||||||||||
Net realized (losses) gains in investment and other income | — | (15 | ) | (15 | ) | — | 109 | 109 | ||||||||||||||||
Balance at end of period | $ | 66 | $ | 301 | $ | 367 | $ | 66 | $ | 301 | $ | 367 | ||||||||||||
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, except ranges) | Fair Value | Valuation Technique | Unobservable Input | Low | High | |||||||
September 30, 2015 | ||||||||||||
Equity securities - available-for-sale: | ||||||||||||
Venture capital portfolios | $ | 322 | Market approach - comparable companies | Revenue multiple | 1.0 | 5.0 | ||||||
EBITDA multiple | 9.0 | 10.0 | ||||||||||
41 | Market approach - recent transactions | Inactive market transactions | N/A | N/A | ||||||||
Total equity securities available-for-sale | $ | 363 | ||||||||||
Also included in the Company’s assets measured at fair value on a recurring basis using Level 3 inputs were $93 million of available-for-sale debt securities as of September 30, 2015, which were not significant.
14
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 | |||||||||
September 30, 2015 | ||||||||||||
Cash and cash equivalents | $ | 292 | $ | — | $ | 292 | ||||||
Debt securities: | ||||||||||||
U.S. government and agency obligations | 444 | 142 | 586 | |||||||||
State and municipal obligations | — | 105 | 105 | |||||||||
Corporate obligations | — | 1,292 | 1,292 | |||||||||
U.S. agency mortgage-backed securities | — | 391 | 391 | |||||||||
Non-U.S. agency mortgage-backed securities | — | 199 | 199 | |||||||||
Total debt securities | 444 | 2,129 | 2,573 | |||||||||
Other investments | — | 83 | 83 | |||||||||
Total assets at fair value | $ | 736 | $ | 2,212 | $ | 2,948 | ||||||
Other liabilities | $ | 7 | $ | 6 | $ | 13 | ||||||
December 31, 2014 | ||||||||||||
Cash and cash equivalents | $ | 415 | $ | — | $ | 415 | ||||||
Debt securities: | ||||||||||||
U.S. government and agency obligations | 409 | |||||||||||