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, 2016
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 31, 2016, there were 951,816,220 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, 2016 | December 31, 2015 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 12,796 | $ | 10,923 | ||||
Short-term investments | 2,871 | 1,988 | ||||||
Accounts receivable, net | 7,347 | 6,523 | ||||||
Other current receivables, net | 7,502 | 6,801 | ||||||
Assets under management | 2,952 | 2,998 | ||||||
Prepaid expenses and other current assets | 2,300 | 2,406 | ||||||
Total current assets | 35,768 | 31,639 | ||||||
Long-term investments | 23,324 | 18,792 | ||||||
Property, equipment and capitalized software, net | 5,524 | 4,861 | ||||||
Goodwill | 47,183 | 44,453 | ||||||
Other intangible assets, net | 8,719 | 8,391 | ||||||
Other assets | 3,124 | 3,118 | ||||||
Total assets | $ | 123,642 | $ | 111,254 | ||||
Liabilities, redeemable noncontrolling interests and equity | ||||||||
Current liabilities: | ||||||||
Medical costs payable | $ | 16,500 | $ | 14,330 | ||||
Accounts payable and accrued liabilities | 12,994 | 11,994 | ||||||
Other policy liabilities | 8,670 | 7,798 | ||||||
Commercial paper and current maturities of long-term debt | 7,202 | 6,634 | ||||||
Unearned revenues | 5,730 | 2,142 | ||||||
Total current liabilities | 51,096 | 42,898 | ||||||
Long-term debt, less current maturities | 26,022 | 25,331 | ||||||
Future policy benefits | 2,509 | 2,496 | ||||||
Deferred income taxes | 2,492 | 3,587 | ||||||
Other liabilities | 2,032 | 1,481 | ||||||
Total liabilities | 84,151 | 75,793 | ||||||
Commitments and contingencies (Note 9) | ||||||||
Redeemable noncontrolling interests | 1,937 | 1,736 | ||||||
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 953 issued and outstanding | 10 | 10 | ||||||
Additional paid-in capital | — | 29 | ||||||
Retained earnings | 39,945 | 37,125 | ||||||
Accumulated other comprehensive loss | (2,303 | ) | (3,334 | ) | ||||
Nonredeemable noncontrolling interest | (98 | ) | (105 | ) | ||||
Total equity | 37,554 | 33,725 | ||||||
Total liabilities, redeemable noncontrolling interests and equity | $ | 123,642 | $ | 111,254 | ||||
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) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Revenues: | ||||||||||||||||
Premiums | $ | 36,142 | $ | 31,801 | $ | 107,366 | $ | 95,436 | ||||||||
Products | 6,696 | 6,482 | 19,699 | 8,935 | ||||||||||||
Services | 3,264 | 3,036 | 9,673 | 8,607 | ||||||||||||
Investment and other income | 191 | 170 | 567 | 530 | ||||||||||||
Total revenues | 46,293 | 41,489 | 137,305 | 113,508 | ||||||||||||
Operating costs: | ||||||||||||||||
Medical costs | 29,040 | 25,729 | 87,342 | 77,646 | ||||||||||||
Operating costs | 7,033 | 6,178 | 20,584 | 17,750 | ||||||||||||
Cost of products sold | 6,125 | 6,112 | 18,108 | 8,350 | ||||||||||||
Depreciation and amortization | 515 | 452 | 1,528 | 1,209 | ||||||||||||
Total operating costs | 42,713 | 38,471 | 127,562 | 104,955 | ||||||||||||
Earnings from operations | 3,580 | 3,018 | 9,743 | 8,553 | ||||||||||||
Interest expense | (269 | ) | (229 | ) | (799 | ) | (530 | ) | ||||||||
Earnings before income taxes | 3,311 | 2,789 | 8,944 | 8,023 | ||||||||||||
Provision for income taxes | (1,333 | ) | (1,171 | ) | (3,579 | ) | (3,407 | ) | ||||||||
Net earnings | 1,978 | 1,618 | 5,365 | 4,616 | ||||||||||||
Earnings attributable to noncontrolling interests | (10 | ) | (21 | ) | (32 | ) | (21 | ) | ||||||||
Net earnings attributable to UnitedHealth Group common shareholders | $ | 1,968 | $ | 1,597 | $ | 5,333 | $ | 4,595 | ||||||||
Earnings per share attributable to UnitedHealth Group common shareholders: | ||||||||||||||||
Basic | $ | 2.07 | $ | 1.68 | $ | 5.60 | $ | 4.82 | ||||||||
Diluted | $ | 2.03 | $ | 1.65 | $ | 5.51 | $ | 4.75 | ||||||||
Basic weighted-average number of common shares outstanding | 952 | 953 | 952 | 953 | ||||||||||||
Dilutive effect of common share equivalents | 17 | 14 | 16 | 14 | ||||||||||||
Diluted weighted-average number of common shares outstanding | 969 | 967 | 968 | 967 | ||||||||||||
Anti-dilutive shares excluded from the calculation of dilutive effect of common share equivalents | 1 | 8 | 3 | 8 | ||||||||||||
Cash dividends declared per common share | $ | 0.625 | $ | 0.500 | $ | 1.750 | $ | 1.375 | ||||||||
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) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Net earnings | $ | 1,978 | $ | 1,618 | $ | 5,365 | $ | 4,616 | ||||||||
Other comprehensive (loss) income: | ||||||||||||||||
Gross unrealized (losses) gains on investment securities during the period | (21 | ) | 66 | 473 | (51 | ) | ||||||||||
Income tax effect | 7 | (26 | ) | (173 | ) | 17 | ||||||||||
Total unrealized (losses) gains, net of tax | (14 | ) | 40 | 300 | (34 | ) | ||||||||||
Gross reclassification adjustment for net realized gains included in net earnings | (26 | ) | (28 | ) | (97 | ) | (99 | ) | ||||||||
Income tax effect | 9 | 11 | 35 | 37 | ||||||||||||
Total reclassification adjustment, net of tax | (17 | ) | (17 | ) | (62 | ) | (62 | ) | ||||||||
Total foreign currency translation (losses) gains | (69 | ) | (1,063 | ) | 793 | (1,859 | ) | |||||||||
Other comprehensive (loss) income | (100 | ) | (1,040 | ) | 1,031 | (1,955 | ) | |||||||||
Comprehensive income | 1,878 | 578 | 6,396 | 2,661 | ||||||||||||
Comprehensive income attributable to noncontrolling interests | (10 | ) | (21 | ) | (32 | ) | (21 | ) | ||||||||
Comprehensive income attributable to UnitedHealth Group common shareholders | $ | 1,868 | $ | 557 | $ | 6,364 | $ | 2,640 | ||||||||
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 Income (Loss) | Nonredeemable Noncontrolling Interest | Total Equity | ||||||||||||||||||||||||||
(in millions) | Shares | Amount | Net Unrealized Gains (Losses) on Investments | Foreign Currency Translation (Losses) Gains | |||||||||||||||||||||||||||
Balance at January 1, 2016 | 953 | $ | 10 | $ | 29 | $ | 37,125 | $ | 56 | $ | (3,390 | ) | $ | (105 | ) | $ | 33,725 | ||||||||||||||
Adjustment to adopt ASU 2016-09 | 28 | 28 | |||||||||||||||||||||||||||||
Net earnings | 5,333 | 31 | 5,364 | ||||||||||||||||||||||||||||
Other comprehensive income | 238 | 793 | 1,031 | ||||||||||||||||||||||||||||
Issuances of common stock, and related tax effects | 8 | — | 187 | 187 | |||||||||||||||||||||||||||
Share-based compensation | 350 | 350 | |||||||||||||||||||||||||||||
Common share repurchases | (9 | ) | — | (242 | ) | (875 | ) | (1,117 | ) | ||||||||||||||||||||||
Cash dividends paid on common shares | (1,666 | ) | (1,666 | ) | |||||||||||||||||||||||||||
Acquisition of redeemable noncontrolling interest shares | (143 | ) | (143 | ) | |||||||||||||||||||||||||||
Redeemable noncontrolling interests fair value and other adjustments | (181 | ) | (181 | ) | |||||||||||||||||||||||||||
Distribution to nonredeemable noncontrolling interest | (24 | ) | (24 | ) | |||||||||||||||||||||||||||
Balance at September 30, 2016 | 952 | $ | 10 | $ | — | $ | 39,945 | $ | 294 | $ | (2,597 | ) | $ | (98 | ) | $ | 37,554 | ||||||||||||||
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 stock, 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 interests | 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 | |||||||||||||||
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) | 2016 | 2015 | ||||||
Operating activities | ||||||||
Net earnings | $ | 5,365 | $ | 4,616 | ||||
Noncash items: | ||||||||
Depreciation and amortization | 1,528 | 1,209 | ||||||
Deferred income taxes | (405 | ) | (49 | ) | ||||
Share-based compensation | 369 | 306 | ||||||
Other, net | (68 | ) | (208 | ) | ||||
Net change in other operating items, net of effects from acquisitions and changes in AARP balances: | ||||||||
Accounts receivable | (580 | ) | (907 | ) | ||||
Other assets | (1,835 | ) | (1,686 | ) | ||||
Medical costs payable | 1,984 | 2,137 | ||||||
Accounts payable and other liabilities | 1,004 | 616 | ||||||
Other policy liabilities | 276 | 374 | ||||||
Unearned revenues | 3,566 | (179 | ) | |||||
Cash flows from operating activities | 11,204 | 6,229 | ||||||
Investing activities | ||||||||
Purchases of investments | (12,231 | ) | (6,712 | ) | ||||
Sales of investments | 4,422 | 4,041 | ||||||
Maturities of investments | 3,040 | 2,557 | ||||||
Cash paid for acquisitions, net of cash assumed | (2,727 | ) | (16,183 | ) | ||||
Purchases of property, equipment and capitalized software | (1,220 | ) | (1,072 | ) | ||||
Other, net | (25 | ) | (51 | ) | ||||
Cash flows used for investing activities | (8,741 | ) | (17,420 | ) | ||||
Financing activities | ||||||||
Common share repurchases | (1,117 | ) | (1,130 | ) | ||||
Acquisition of redeemable noncontrolling interest shares | (257 | ) | (113 | ) | ||||
Cash dividends paid | (1,666 | ) | (1,310 | ) | ||||
Proceeds from common stock issuances | 387 | 366 | ||||||
Proceeds from issuance of long-term debt | 2,485 | 11,982 | ||||||
Repayments of long-term debt | (2,101 | ) | (416 | ) | ||||
Proceeds from commercial paper, net | 693 | 2,665 | ||||||
Customer funds administered | 1,249 | 119 | ||||||
Other, net | (333 | ) | (333 | ) | ||||
Cash flows (used for) from financing activities | (660 | ) | 11,830 | |||||
Effect of exchange rate changes on cash and cash equivalents | 70 | (151 | ) | |||||
Increase in cash and cash equivalents | 1,873 | 488 | ||||||
Cash and cash equivalents, beginning of period | 10,923 | 7,495 | ||||||
Cash and cash equivalents, end of period | $ | 12,796 | $ | 7,983 | ||||
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, 2015 as filed with the SEC (2015 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 and valuations of certain investments. 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 2015 10-K remain unchanged.
Reclassification
During the fourth quarter of 2015, the Company aligned its accounting policy to conform the presentation of certain pharmacy fulfillment costs related to an acquired OptumRx business. These costs are now included in medical costs and cost of products sold, whereas they were previously included in operating costs. Prior periods have been reclassified to conform to the current period presentation. The reclassification increased medical expenses by $111 million and $313 million, decreased operating costs by $123 million and $352 million and increased cost of products sold by $12 million and $39 million for the three and nine months ended September 30, 2015, respectively. The reclassification had no impact on total operating costs, earnings from operations, net earnings, earnings per share or total equity.
Recently Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2016-02, “Leases (Topic 842)” (ASU 2016-02). Under ASU 2016-02, an entity will be required to recognize assets and liabilities for the rights and obligations created by leases on the entity’s balance sheet for both finance and operating leases. For leases with a term of 12 months or less, an entity can elect to not recognize lease assets and lease liabilities and expense the lease over a straight-line basis for the term of the lease. ASU 2016-02 will require new disclosures that depict the amount, timing, and uncertainty of cash flows pertaining to an entity’s leases. Companies are required to adopt the new standard using a modified retrospective approach for annual and interim periods beginning after December 15, 2018. Early adoption of ASU 2016-02 is permitted. The Company is currently evaluating the effect of the new leasing guidance.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU 2016-01). The new guidance changes the current accounting related to (i) the classification and measurement of certain equity investments, (ii) the presentation of changes in the fair value of financial liabilities measured under the fair value option that are due to instrument-specific credit risk, and (iii) certain disclosures associated with the fair value of financial instruments. Most notably, ASU 2016-01 requires that equity investments, with certain exemptions, be measured at fair value with changes in fair value recognized in net income as opposed to other
6
comprehensive income. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company is currently evaluating the effect of the new financial instruments guidance.
In May 2014, the FASB issued 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 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” and ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” 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 may adopt the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. The Company will early adopt the new standard effective January 1, 2017, as allowed by the standard, using the modified retrospective approach. The adoption of ASU 2014-09 will not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows.
Recently Adopted Accounting Standards
In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (ASU 2016-09). ASU 2016-09 modifies several aspects of the accounting for share-based payment awards, including income tax consequences, and classification on the statement of cash flows. The Company early adopted ASU 2016-09 in the first quarter of 2016. The provisions of ASU 2016-09 related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements and forfeitures were adopted using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of January 1, 2016. The provisions of ASU 2016-09 related to the recognition of excess tax benefits in the income statement and classification in the statement of cash flows were adopted prospectively and the prior periods were not retrospectively adjusted. The adoption of ASU 2016-09 did not materially impact the Company’s consolidated financial position, results of operations, equity or cash flows.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (ASU 2015-17). ASU 2015-17 requires entities to present deferred tax assets and deferred tax liabilities as noncurrent on the balance sheet. Prior to the issuance of ASU 2015-17, deferred taxes were required to be presented as a net current asset or liability and a net noncurrent asset or liability. The Company adopted ASU 2015-17 on a prospective basis in the first quarter of 2016 and the prior period was not retrospectively adjusted. The adoption of ASU 2015-17 did not impact the Company’s consolidated financial position, results of operations, equity or cash flows.
In April 2015, the FASB issued ASU No. 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (ASU 2015-03). ASU 2015-03 requires debt issuance costs to be presented as a reduction of the carrying amount of the related debt liability. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented as an asset in the balance sheet. The Company adopted ASU 2015-03 on a retrospective basis, as required, in the first quarter of 2016. The Company reclassified $129 million in debt issuance costs that were recorded in other assets on the Consolidated Balance Sheet as of December 31, 2015 to long-term debt, less current maturities.
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.
7
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 | ||||||||||||
September 30, 2016 | ||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | $ | 2,301 | $ | 12 | $ | (2 | ) | $ | 2,311 | |||||||
State and municipal obligations | 7,207 | 213 | (3 | ) | 7,417 | |||||||||||
Corporate obligations | 10,292 | 176 | (6 | ) | 10,462 | |||||||||||
U.S. agency mortgage-backed securities | 2,571 | 42 | (1 | ) | 2,612 | |||||||||||
Non-U.S. agency mortgage-backed securities | 931 | 24 | (3 | ) | 952 | |||||||||||
Total debt securities - available-for-sale | 23,302 | 467 | (15 | ) | 23,754 | |||||||||||
Equity securities - available-for-sale | 1,919 | 58 | (41 | ) | 1,936 | |||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||
U.S. government and agency obligations | 174 | 2 | — | 176 | ||||||||||||
State and municipal obligations | 8 | — | — | 8 | ||||||||||||
Corporate obligations | 323 | — | — | 323 | ||||||||||||
Total debt securities - held-to-maturity | 505 | 2 | — | 507 | ||||||||||||
Total investments | $ | 25,726 | $ | 527 | $ | (56 | ) | $ | 26,197 | |||||||
December 31, 2015 | ||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | $ | 1,982 | $ | 1 | $ | (6 | ) | $ | 1,977 | |||||||
State and municipal obligations | 6,022 | 149 | (3 | ) | 6,168 | |||||||||||
Corporate obligations | 7,446 | 41 | (81 | ) | 7,406 | |||||||||||
U.S. agency mortgage-backed securities | 2,127 | 13 | (16 | ) | 2,124 | |||||||||||
Non-U.S. agency mortgage-backed securities | 962 | 5 | (11 | ) | 956 | |||||||||||
Total debt securities - available-for-sale | 18,539 | 209 | (117 | ) | 18,631 | |||||||||||
Equity securities - available-for-sale | 1,638 | 58 | (57 | ) | 1,639 | |||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||
U.S. government and agency obligations | 163 | 1 | — | 164 | ||||||||||||
State and municipal obligations | 8 | — | — | 8 | ||||||||||||
Corporate obligations | 339 | — | — | 339 | ||||||||||||
Total debt securities - held-to-maturity | 510 | 1 | — | 511 | ||||||||||||
Total investments | $ | 20,687 | $ | 268 | $ | (174 | ) | $ | 20,781 | |||||||
The amortized cost and fair value of debt securities as of September 30, 2016, by contractual maturity, were as follows:
Available-for-Sale | Held-to-Maturity | |||||||||||||||
(in millions) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||
Due in one year or less | $ | 2,971 | $ | 2,975 | $ | 141 | $ | 141 | ||||||||
Due after one year through five years | 9,024 | 9,132 | 168 | 169 | ||||||||||||
Due after five years through ten years | 5,543 | 5,735 | 103 | 103 | ||||||||||||
Due after ten years | 2,262 | 2,348 | 93 | 94 | ||||||||||||
U.S. agency mortgage-backed securities | 2,571 | 2,612 | — | — | ||||||||||||
Non-U.S. agency mortgage-backed securities | 931 | 952 | — | — | ||||||||||||
Total debt securities | $ | 23,302 | $ | 23,754 | $ | 505 | $ | 507 | ||||||||
8
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, 2016 | ||||||||||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||||||||||
U.S. government and agency obligations | $ | 705 | $ | (2 | ) | $ | — | $ | — | $ | 705 | $ | (2 | ) | ||||||||||
State and municipal obligations | 1,007 | (3 | ) | — | — | 1,007 | (3 | ) | ||||||||||||||||
Corporate obligations | 1,285 | (3 | ) | 271 | (3 | ) | 1,556 | (6 | ) | |||||||||||||||
U.S. agency mortgage-backed securities | — | — | 86 | (1 | ) | 86 | (1 | ) | ||||||||||||||||
Non-U.S. agency mortgage-backed securities | — | — | 114 | (3 | ) | 114 | (3 | ) | ||||||||||||||||
Total debt securities - available-for-sale | $ | 2,997 | $ | (8 | ) | $ | 471 | $ | (7 | ) | $ | 3,468 | $ | (15 | ) | |||||||||
Equity securities - available-for-sale | $ | 83 | $ | (4 | ) | $ | 109 | $ | (37 | ) | $ | 192 | $ | (41 | ) | |||||||||
December 31, 2015 | ||||||||||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||||||||||
U.S. government and agency obligations | $ | 1,473 | $ | (6 | ) | $ | — | $ | — | $ | 1,473 | $ | (6 | ) | ||||||||||
State and municipal obligations | 650 | (3 | ) | — | — | 650 | (3 | ) | ||||||||||||||||
Corporate obligations | 4,629 | (63 | ) | 339 | (18 | ) | 4,968 | (81 | ) | |||||||||||||||
U.S. agency mortgage-backed securities | 1,304 | (12 | ) | 116 | (4 | ) | 1,420 | (16 | ) | |||||||||||||||
Non-U.S. agency mortgage-backed securities | 593 | (7 | ) | 127 | (4 | ) | 720 | (11 | ) | |||||||||||||||
Total debt securities - available-for-sale | $ | 8,649 | $ | (91 | ) | $ | 582 | $ | (26 | ) | $ | 9,231 | $ | (117 | ) | |||||||||
Equity securities - available-for-sale | $ | 112 | $ | (11 | ) | $ | 89 | $ | (46 | ) | $ | 201 | $ | (57 | ) | |||||||||
The Company’s unrealized losses from all securities as of September 30, 2016 were generated from approximately 4,000 positions out of a total of 28,000 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. As of September 30, 2016, 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.
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) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Total other than temporary impairments recognized in earnings | $ | (21 | ) | $ | (4 | ) | $ | (43 | ) | $ | (8 | ) | ||||
Gross realized losses from sales | (3 | ) | (9 | ) | (38 | ) | (20 | ) | ||||||||
Gross realized gains from sales | 50 | 41 | 178 | 127 | ||||||||||||
Net realized gains (included in investment and other income on the Condensed Consolidated Statements of Operations) | 26 | 28 | 97 | 99 | ||||||||||||
Income tax effect (included in provision for income taxes on the Condensed Consolidated Statements of Operations) | (9 | ) | (11 | ) | (35 | ) | (37 | ) | ||||||||
Realized gains, net of taxes | $ | 17 | $ | 17 | $ | 62 | $ | 62 | ||||||||
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.
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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 5 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2015 10-K.
The Company elected to measure the entirety of the Supplemental Health Insurance Program (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 2015 10-K for further detail on the AARP Program.
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 the AARP Program:
(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, 2016 | ||||||||||||||||
Cash and cash equivalents | $ | 12,744 | $ | 52 | $ | — | $ | 12,796 | ||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | 2,054 | 257 | — | 2,311 | ||||||||||||
State and municipal obligations | — | 7,417 | — | 7,417 | ||||||||||||
Corporate obligations | 36 | 10,319 | 107 | 10,462 | ||||||||||||
U.S. agency mortgage-backed securities | — | 2,612 | — | 2,612 | ||||||||||||
Non-U.S. agency mortgage-backed securities | — | 952 | — | 952 | ||||||||||||
Total debt securities - available-for-sale | 2,090 | 21,557 | 107 | 23,754 | ||||||||||||
Equity securities - available-for-sale | 1,488 | 12 | 436 | 1,936 | ||||||||||||
Interest rate swap assets | — | 242 | — | 242 | ||||||||||||
Total assets at fair value | $ | 16,322 | $ | 21,863 | $ | 543 | $ | 38,728 | ||||||||
Percentage of total assets at fair value | 42 | % | 57 | % | 1 | % | 100 | % | ||||||||
December 31, 2015 | ||||||||||||||||
Cash and cash equivalents | $ | 10,906 | $ | 17 | $ | — | $ | 10,923 | ||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | 1,779 | 198 | — | 1,977 | ||||||||||||
State and municipal obligations | — | 6,168 | — | 6,168 | ||||||||||||
Corporate obligations | 5 | 7,308 | 93 | 7,406 | ||||||||||||
U.S. agency mortgage-backed securities | — | 2,124 | — | 2,124 | ||||||||||||
Non-U.S. agency mortgage-backed securities | — | 951 | 5 | 956 | ||||||||||||
Total debt securities - available-for-sale | 1,784 | 16,749 | 98 | 18,631 | ||||||||||||
Equity securities - available-for-sale | 1,223 | 14 | 402 | 1,639 | ||||||||||||
Interest rate swap assets | — | 93 | — | 93 | ||||||||||||
Total assets at fair value | $ | 13,913 | $ | 16,873 | $ | 500 | $ | 31,286 | ||||||||
Percentage of total assets at fair value | 44 | % | 54 | % | 2 | % | 100 | % | ||||||||
Interest rate swap liabilities | $ | — | $ | 11 | $ | — | $ | 11 | ||||||||
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, 2016 or 2015.
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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 | |||||||||||||||
September 30, 2016 | ||||||||||||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||||||
U.S. government and agency obligations | $ | 176 | $ | — | $ | — | $ | 176 | $ | 174 | ||||||||||
State and municipal obligations | — | — | 8 | 8 | 8 | |||||||||||||||
Corporate obligations | 94 | 9 | 220 | 323 | 323 | |||||||||||||||
Total debt securities - held-to-maturity | $ | 270 | $ | 9 | $ | 228 | $ | 507 | $ | 505 | ||||||||||
Other assets | $ | — | $ | 481 | $ | — | $ | 481 | $ | 477 | ||||||||||
Long-term debt and other financing obligations | $ | — | $ | 31,654 | $ | — | $ | 31,654 | $ | 28,544 | ||||||||||
December 31, 2015 | ||||||||||||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||||||
U.S. government and agency obligations | $ | 164 | $ | — | $ | — | $ | 164 | $ | 163 | ||||||||||
State and municipal obligations | — | — | 8 | 8 | 8 | |||||||||||||||
Corporate obligations | 91 | 10 | 238 | 339 | 339 | |||||||||||||||
Total debt securities - held-to-maturity | $ | 255 | $ | 10 | $ | 246 | $ | 511 | $ | 510 | ||||||||||
Other assets | $ | — | $ | 493 | $ | — | $ | 493 | $ | 500 | ||||||||||
Long-term debt and other financing obligations | $ | — | $ | 29,455 | $ | — | $ | 29,455 | $ | 27,978 | ||||||||||
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, 2016 or 2015.
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, 2016 | ||||||||||||||||||||||||
Balance at beginning of period | $ | 101 | $ | 388 | $ | 489 | $ | 98 | $ | 402 | $ | 500 | ||||||||||||
Purchases | 6 | 71 | 77 | 10 | 91 | 101 | ||||||||||||||||||
Sales | — | (15 | ) | (15 | ) | (7 | ) | (19 | ) | (26 | ) | |||||||||||||
Net unrealized gains (losses) in accumulated other comprehensive income | — | 1 | 1 | 6 | (13 | ) | (7 | ) | ||||||||||||||||
Net realized losses in investment and other income | — | (9 | ) | (9 | ) | — | (25 | ) | (25 | ) | ||||||||||||||
Balance at end of period | $ | 107 | $ | 436 | $ | 543 | $ | 107 | $ | 436 | $ | 543 | ||||||||||||
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 | ||||||||||||
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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:
September 30, 2016 | December 31, 2015 | |||||||||||||||||||||||
(in millions) | Subsidies | Drug Discount | Risk-Share | Subsidies | Drug Discount | Risk-Share | ||||||||||||||||||
Other current receivables | $ | 986 | $ | 708 | $ | — | $ | 1,703 | $ | 423 | $ | — | ||||||||||||
Other policy liabilities | — | 345 | 714 | — | 58 | 496 | ||||||||||||||||||
See Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2015 10-K for further detail on Medicare Part D.
5. Other Current Receivables
The Company’s pharmacy care services businesses contract with pharmaceutical manufacturers, some of which provide rebates based on use of the manufacturers’ products by the Company’s clients. As of September 30, 2016 and December 31, 2015, total pharmaceutical manufacturer rebates receivable included in other receivables in the Condensed Consolidated Balance Sheets amounted to $3.5 billion and $2.6 billion, respectively. See Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2015 10-K for more information on the Company’s pharmaceutical manufacturer rebates.
6. Medical Costs Reserve Development
The following table provides details of the Company’s medical cost reserve development:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in millions) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Related to prior years | $ | (110 | ) | $ | 100 | $ | 190 | $ | 230 | |||||||
Related to current year | 230 | 50 | N/A | N/A | ||||||||||||
For the three and nine months ended September 30, 2016 and September 30, 2015, the medical cost reserve development included a number of individual items, none of which were material.
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7. Commercial Paper and Long-Term Debt
Commercial paper, term loan and senior unsecured long-term debt consisted of the following:
September 30, 2016 | December 31, 2015 | |||||||||||||||||||||||
(in millions, except percentages) | Par Value | Carrying Value | Fair Value | Par Value | Carrying Value (a) | Fair Value | ||||||||||||||||||
Commercial paper | $ | 4,680 | $ | 4,680 | $ | 4,680 | $ | 3,987 | $ | 3,987 | $ | 3,987 | ||||||||||||
Floating rate term loan due July 2016 | — | — | — | 1,500 | 1,500 | 1,500 | ||||||||||||||||||
5.375% notes due March 2016 | — | — | — | 601 | 605 | 606 | ||||||||||||||||||
1.875% notes due November 2016 | 400 | 400 | 400 | 400 | 400 | 403 | ||||||||||||||||||
5.360% notes due November 2016 | 95 | 95 | 95 | 95 | 95 | 98 | ||||||||||||||||||
Floating rate notes due January 2017 | 750 | 750 | 751 | 750 | 749 | 751 | ||||||||||||||||||
6.000% notes due June 2017 | 441 | 449 | 455 | 441 | 458 | 469 | ||||||||||||||||||
1.450% notes due July 2017 | 750 | 749 | 752 | 750 | 749 | 750 | ||||||||||||||||||
1.400% notes due October 2017 | 625 | 624 | 626 | 625 | 624 | 624 | ||||||||||||||||||
6.000% notes due November 2017 | 156 | 160 | 164 | 156 | 162 | 168 | ||||||||||||||||||
1.400% notes due December 2017 | 750 | 751 | 752 | 750 | 751 | 748 | ||||||||||||||||||
6.000% notes due February 2018 | 1,100 | 1,109 | 1,169 | 1,100 | 1,114 | 1,196 | ||||||||||||||||||
1.900% notes due July 2018 | 1,500 | 1,496 | 1,516 | 1,500 | 1,494 | 1,505 | ||||||||||||||||||
1.700% notes due February 2019 | 750 | 748 | 755 | — | — | — | ||||||||||||||||||
1.625% notes due March 2019 | 500 | 502 | 503 | 500 | 502 | 494 | ||||||||||||||||||
2.300% notes due December 2019 | 500 | 507 | 514 | 500 | 499 | 502 | ||||||||||||||||||
2.700% notes due July 2020 | 1,500 | 1,494 | 1,559 | 1,500 | 1,493 | 1,516 | ||||||||||||||||||
3.875% notes due October 2020 | 450 | 462 | 488 | 450 | 452 | |||||||||||||||||||