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, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer | [X] | Accelerated filer | [ ] | Non-accelerated filer | [ ] | Smaller reporting company | [ ] | Emerging growth company | [ ] | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
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 July 31, 2017, there were 966,859,926 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) | June 30, 2017 | December 31, 2016 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 14,582 | $ | 10,430 | ||||
Short-term investments | 3,388 | 2,845 | ||||||
Accounts receivable, net | 10,538 | 8,152 | ||||||
Other current receivables, net | 7,232 | 7,499 | ||||||
Assets under management | 2,977 | 3,105 | ||||||
Prepaid expenses and other current assets | 2,522 | 1,848 | ||||||
Total current assets | 41,239 | 33,879 | ||||||
Long-term investments | 26,397 | 23,868 | ||||||
Property, equipment and capitalized software, net | 6,324 | 5,901 | ||||||
Goodwill | 52,498 | 47,584 | ||||||
Other intangible assets, net | 8,338 | 8,541 | ||||||
Other assets | 3,301 | 3,037 | ||||||
Total assets | $ | 138,097 | $ | 122,810 | ||||
Liabilities, redeemable noncontrolling interests and equity | ||||||||
Current liabilities: | ||||||||
Medical costs payable | $ | 17,710 | $ | 16,391 | ||||
Accounts payable and accrued liabilities | 14,514 | 13,361 | ||||||
Commercial paper and current maturities of long-term debt | 5,739 | 7,193 | ||||||
Unearned revenues | 6,115 | 1,968 | ||||||
Other current liabilities | 13,043 | 10,339 | ||||||
Total current liabilities | 57,121 | 49,252 | ||||||
Long-term debt, less current maturities | 26,197 | 25,777 | ||||||
Future policy benefits | 2,521 | 2,524 | ||||||
Deferred income taxes | 2,844 | 2,761 | ||||||
Other liabilities | 2,421 | 2,307 | ||||||
Total liabilities | 91,104 | 82,621 | ||||||
Commitments and contingencies (Note 8) | ||||||||
Redeemable noncontrolling interests | 1,657 | 2,012 | ||||||
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; 965 and 952 issued and outstanding | 10 | 10 | ||||||
Additional paid-in capital | 1,661 | — | ||||||
Retained earnings | 44,081 | 40,945 | ||||||
Accumulated other comprehensive loss | (2,591 | ) | (2,681 | ) | ||||
Nonredeemable noncontrolling interest | 2,175 | (97 | ) | |||||
Total equity | 45,336 | 38,177 | ||||||
Total liabilities, redeemable noncontrolling interests and equity | $ | 138,097 | $ | 122,810 | ||||
1
UnitedHealth Group
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in millions, except per share data) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenues: | ||||||||||||||||
Premiums | $ | 39,585 | $ | 36,413 | $ | 78,523 | $ | 71,224 | ||||||||
Products | 6,415 | 6,610 | 12,544 | 13,003 | ||||||||||||
Services | 3,797 | 3,269 | 7,231 | 6,409 | ||||||||||||
Investment and other income | 256 | 193 | 478 | 376 | ||||||||||||
Total revenues | 50,053 | 46,485 | 98,776 | 91,012 | ||||||||||||
Operating costs: | ||||||||||||||||
Medical costs | 32,549 | 29,872 | 64,628 | 58,302 | ||||||||||||
Operating costs | 7,328 | 6,793 | 14,350 | 13,551 | ||||||||||||
Cost of products sold | 5,889 | 6,106 | 11,565 | 11,983 | ||||||||||||
Depreciation and amortization | 556 | 511 | 1,089 | 1,013 | ||||||||||||
Total operating costs | 46,322 | 43,282 | 91,632 | 84,849 | ||||||||||||
Earnings from operations | 3,731 | 3,203 | 7,144 | 6,163 | ||||||||||||
Interest expense | (301 | ) | (271 | ) | (584 | ) | (530 | ) | ||||||||
Earnings before income taxes | 3,430 | 2,932 | 6,560 | 5,633 | ||||||||||||
Provision for income taxes | (1,080 | ) | (1,172 | ) | (2,019 | ) | (2,246 | ) | ||||||||
Net earnings | 2,350 | 1,760 | 4,541 | 3,387 | ||||||||||||
Earnings attributable to noncontrolling interests | (66 | ) | (6 | ) | (85 | ) | (22 | ) | ||||||||
Net earnings attributable to UnitedHealth Group common shareholders | $ | 2,284 | $ | 1,754 | $ | 4,456 | $ | 3,365 | ||||||||
Earnings per share attributable to UnitedHealth Group common shareholders: | ||||||||||||||||
Basic | $ | 2.37 | $ | 1.84 | $ | 4.65 | $ | 3.53 | ||||||||
Diluted | $ | 2.32 | $ | 1.81 | $ | 4.55 | $ | 3.48 | ||||||||
Basic weighted-average number of common shares outstanding | 964 | 951 | 959 | 952 | ||||||||||||
Dilutive effect of common share equivalents | 21 | 16 | 21 | 15 | ||||||||||||
Diluted weighted-average number of common shares outstanding | 985 | 967 | 980 | 967 | ||||||||||||
Anti-dilutive shares excluded from the calculation of dilutive effect of common share equivalents | 8 | 1 | 9 | 4 | ||||||||||||
Cash dividends declared per common share | $ | 0.750 | $ | 0.625 | $ | 1.375 | $ | 1.125 | ||||||||
2
UnitedHealth Group
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Net earnings | $ | 2,350 | $ | 1,760 | $ | 4,541 | $ | 3,387 | ||||||||
Other comprehensive (loss) income: | ||||||||||||||||
Gross unrealized gains on investment securities during the period | 170 | 234 | 269 | 494 | ||||||||||||
Income tax effect | (62 | ) | (84 | ) | (94 | ) | (180 | ) | ||||||||
Total unrealized gains, net of tax | 108 | 150 | 175 | 314 | ||||||||||||
Gross reclassification adjustment for net realized gains included in net earnings | (20 | ) | (36 | ) | (41 | ) | (71 | ) | ||||||||
Income tax effect | 7 | 13 | 15 | 26 | ||||||||||||
Total reclassification adjustment, net of tax | (13 | ) | (23 | ) | (26 | ) | (45 | ) | ||||||||
Total foreign currency translation (losses) gains | (239 | ) | 474 | (59 | ) | 862 | ||||||||||
Other comprehensive (loss) income | (144 | ) | 601 | 90 | 1,131 | |||||||||||
Comprehensive income | 2,206 | 2,361 | 4,631 | 4,518 | ||||||||||||
Comprehensive income attributable to noncontrolling interests | (66 | ) | (6 | ) | (85 | ) | (22 | ) | ||||||||
Comprehensive income attributable to UnitedHealth Group common shareholders | $ | 2,140 | $ | 2,355 | $ | 4,546 | $ | 4,496 | ||||||||
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 (Losses) Gains on Investments | Foreign Currency Translation (Losses) Gains | |||||||||||||||||||||||||||
Balance at January 1, 2017 | 952 | $ | 10 | $ | — | $ | 40,945 | $ | (97 | ) | $ | (2,584 | ) | $ | (97 | ) | $ | 38,177 | |||||||||||||
Net earnings | 4,456 | 63 | 4,519 | ||||||||||||||||||||||||||||
Other comprehensive income (loss) | 149 | (59 | ) | 90 | |||||||||||||||||||||||||||
Issuances of common stock, and related tax effects | 19 | — | 1,969 | 1,969 | |||||||||||||||||||||||||||
Share-based compensation | 326 | 326 | |||||||||||||||||||||||||||||
Common share repurchases | (6 | ) | — | (1,045 | ) | (1,045 | ) | ||||||||||||||||||||||||
Cash dividends paid on common shares | (1,320 | ) | (1,320 | ) | |||||||||||||||||||||||||||
Redeemable noncontrolling interests fair value and other adjustments | 411 | 411 | |||||||||||||||||||||||||||||
Acquisition of nonredeemable noncontrolling interest | 2,265 | 2,265 | |||||||||||||||||||||||||||||
Distribution to nonredeemable noncontrolling interest | (56 | ) | (56 | ) | |||||||||||||||||||||||||||
Balance at June 30, 2017 | 965 | $ | 10 | $ | 1,661 | $ | 44,081 | $ | 52 | $ | (2,643 | ) | $ | 2,175 | $ | 45,336 | |||||||||||||||
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 | 3,365 | 22 | 3,387 | ||||||||||||||||||||||||||||
Other comprehensive income | 269 | 862 | 1,131 | ||||||||||||||||||||||||||||
Issuances of common stock, and related tax effects | 6 | — | 76 | 76 | |||||||||||||||||||||||||||
Share-based compensation | 249 | 249 | |||||||||||||||||||||||||||||
Common share repurchases | (8 | ) | — | (112 | ) | (868 | ) | (980 | ) | ||||||||||||||||||||||
Cash dividends paid on common shares | (1,071 | ) | (1,071 | ) | |||||||||||||||||||||||||||
Acquisition of redeemable noncontrolling interest shares | (139 | ) | (139 | ) | |||||||||||||||||||||||||||
Redeemable noncontrolling interests fair value and other adjustments | (103 | ) | (103 | ) | |||||||||||||||||||||||||||
Distribution to nonredeemable noncontrolling interest | (16 | ) | (16 | ) | |||||||||||||||||||||||||||
Balance at June 30, 2016 | 951 | $ | 10 | $ | — | $ | 38,579 | $ | 325 | $ | (2,528 | ) | $ | (99 | ) | $ | 36,287 | ||||||||||||||
4
UnitedHealth Group
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, | ||||||||
(in millions) | 2017 | 2016 | ||||||
Operating activities | ||||||||
Net earnings | $ | 4,541 | $ | 3,387 | ||||
Noncash items: | ||||||||
Depreciation and amortization | 1,089 | 1,013 | ||||||
Deferred income taxes | (200 | ) | (141 | ) | ||||
Share-based compensation | 332 | 262 | ||||||
Other, net | 111 | (20 | ) | |||||
Net change in other operating items, net of effects from acquisitions and changes in AARP balances: | ||||||||
Accounts receivable | (2,185 | ) | (2,638 | ) | ||||
Other assets | (1,520 | ) | (2,052 | ) | ||||
Medical costs payable | 1,095 | 2,099 | ||||||
Accounts payable and other liabilities | 1,221 | 2,686 | ||||||
Unearned revenues | 4,143 | (595 | ) | |||||
Cash flows from operating activities | 8,627 | 4,001 | ||||||
Investing activities | ||||||||
Purchases of investments | (6,944 | ) | (8,975 | ) | ||||
Sales of investments | 2,086 | 3,421 | ||||||
Maturities of investments | 2,776 | 1,973 | ||||||
Cash paid for acquisitions, net of cash assumed | (704 | ) | (2,035 | ) | ||||
Purchases of property, equipment and capitalized software | (925 | ) | (813 | ) | ||||
Other, net | 55 | 16 | ||||||
Cash flows used for investing activities | (3,656 | ) | (6,413 | ) | ||||
Financing activities | ||||||||
Common share repurchases | (1,045 | ) | (980 | ) | ||||
Cash dividends paid | (1,320 | ) | (1,071 | ) | ||||
Proceeds from common stock issuances | 391 | 254 | ||||||
Proceeds from issuance of long-term debt | 1,342 | 2,485 | ||||||
Repayments of long-term debt | (2,117 | ) | (1,601 | ) | ||||
(Repayments of) proceeds from commercial paper, net | (1,396 | ) | 124 | |||||
Customer funds administered | 3,899 | 1,039 | ||||||
Other, net | (566 | ) | (609 | ) | ||||
Cash flows used for financing activities | (812 | ) | (359 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | (7 | ) | 65 | |||||
Increase (decrease) in cash and cash equivalents | 4,152 | (2,706 | ) | |||||
Cash and cash equivalents, beginning of period | 10,430 | 10,923 | ||||||
Cash and cash equivalents, end of period | $ | 14,582 | $ | 8,217 | ||||
Supplemental Schedule of Noncash Investing Activities | ||||||||
Common stock issued for acquisition | $ | 1,867 | $ | — | ||||
5
UnitedHealth Group
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
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 helping to make 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. These core competencies are deployed within the Company’s two distinct, but strategically aligned, business platforms: health benefits operating under UnitedHealthcare and health services operating under Optum.
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” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the SEC (2016 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.
Revenues
The Company’s revenues include premium, product, and service revenues. Service revenues include net patient service revenues that are recorded based upon established billing rates, less allowances for contractual adjustments, and are recognized as services are provided. For more information about the Company’s revenues, see Notes 2 and 13 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2016 10-K. See Note 9 for disaggregation of revenue by segment and type.
As of June 30, 2017, accounts receivables related to products and services were $3.4 billion. For the three and six months ended June 30, 2017, the Company had no material bad-debt expense and there were no material contract assets, contract liabilities or deferred contract costs recorded on the Condensed Consolidated Balance Sheet as of June 30, 2017.
For the three and six months ended June 30, 2017, revenue recognized from performance obligations related to prior periods (for example, due to changes in transaction price), was not material.
Revenue expected to be recognized in any future year related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, contracts where revenue is recognized as invoiced and contracts with variable consideration related to undelivered performance obligations, is not material.
Health Insurance Industry Tax
The Patient Protection and Affordable Care Act (ACA) included an annual, nondeductible insurance industry tax (Health Insurance Industry Tax) to be levied proportionally across the insurance industry for risk-based health insurance products. A provision in the 2016 Federal Budget imposed a one year moratorium for 2017 on the collection of the Health Insurance Industry Tax. The Company has experienced a lower effective income tax rate in 2017 as compared to 2016 primarily due to the moratorium.
The remainder of the accounting policies disclosed in Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2016 10-K remain unchanged.
6
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. When adopted, the Company does not expect ASU 2016-02 to have a material impact on its results of operations, equity or cash flows. The impact of ASU 2016-02 on the Company’s consolidated financial position will be based on leases outstanding at the time of adoption.
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 comprehensive income. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2017. As of June 30, 2017, based on equity securities held, the Company does not expect ASU 2016-01 to have a material impact on its consolidated financial position, results of operations, equity or cash flows. The Company will continue to evaluate any changes in its mix of investments or market conditions and the related impact of ASU 2016-01.
Recently Adopted Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20 (collectively ASU 2014-09). ASU 2014-09 superseded 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. The Company early adopted the new standard effective January 1, 2017, as allowed, using the modified retrospective approach. A significant majority of the Company’s revenues are not subject to the new guidance. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows as of the adoption date or for the six months ended June 30, 2017. The Company has included the disclosures required by ASU 2014-09 above.
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 | ||||||||||||
June 30, 2017 | ||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | $ | 2,557 | $ | 3 | $ | (23 | ) | $ | 2,537 | |||||||
State and municipal obligations | 6,771 | 106 | (27 | ) | 6,850 | |||||||||||
Corporate obligations | 12,402 | 75 | (30 | ) | 12,447 | |||||||||||
U.S. agency mortgage-backed securities | 3,629 | 10 | (34 | ) | 3,605 | |||||||||||
Non-U.S. agency mortgage-backed securities | 995 | 5 | (5 | ) | 995 | |||||||||||
Total debt securities - available-for-sale | 26,354 | 199 | (119 | ) | 26,434 | |||||||||||
Equity securities | 2,165 | 42 | (40 | ) | 2,167 | |||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||
U.S. government and agency obligations | 256 | 1 | — | 257 | ||||||||||||
State and municipal obligations | 5 | — | — | 5 | ||||||||||||
Corporate obligations | 295 | — | — | 295 | ||||||||||||
Total debt securities - held-to-maturity | 556 | 1 | — | 557 | ||||||||||||
Total investments | $ | 29,075 | $ | 242 | $ | (159 | ) | $ | 29,158 | |||||||
December 31, 2016 | ||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | $ | 2,294 | $ | 1 | $ | (31 | ) | $ | 2,264 | |||||||
State and municipal obligations | 7,120 | 40 | (101 | ) | 7,059 | |||||||||||
Corporate obligations | 10,944 | 41 | (58 | ) | 10,927 | |||||||||||
U.S. agency mortgage-backed securities | 2,963 | 7 | (43 | ) | 2,927 | |||||||||||
Non-U.S. agency mortgage-backed securities | 1,009 | 3 | (10 | ) | 1,002 | |||||||||||
Total debt securities - available-for-sale | 24,330 | 92 | (243 | ) | 24,179 | |||||||||||
Equity securities | 2,036 | 52 | (47 | ) | 2,041 | |||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||
U.S. government and agency obligations | 250 | 1 | — | 251 | ||||||||||||
State and municipal obligations | 5 | — | — | 5 | ||||||||||||
Corporate obligations | 238 | — | — | 238 | ||||||||||||
Total debt securities - held-to-maturity | 493 | 1 | — | 494 | ||||||||||||
Total investments | $ | 26,859 | $ | 145 | $ | (290 | ) | $ | 26,714 | |||||||
The amortized cost and fair value of debt securities as of June 30, 2017, 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 | $ | 3,500 | $ | 3,500 | $ | 167 | $ | 168 | ||||||||
Due after one year through five years | 9,979 | 10,007 | 126 | 126 | ||||||||||||
Due after five years through ten years | 6,199 | 6,251 | 116 | 116 | ||||||||||||
Due after ten years | 2,052 | 2,076 | 147 | 147 | ||||||||||||
U.S. agency mortgage-backed securities | 3,629 | 3,605 | — | — | ||||||||||||
Non-U.S. agency mortgage-backed securities | 995 | 995 | — | — | ||||||||||||
Total debt securities | $ | 26,354 | $ | 26,434 | $ | 556 | $ | 557 | ||||||||
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 | ||||||||||||||||||
June 30, 2017 | ||||||||||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||||||||||
U.S. government and agency obligations | $ | 2,079 | $ | (23 | ) | $ | — | $ | — | $ | 2,079 | $ | (23 | ) | ||||||||||
State and municipal obligations | 2,441 | (27 | ) | — | — | 2,441 | (27 | ) | ||||||||||||||||
Corporate obligations | 4,294 | (28 | ) | 43 | (2 | ) | 4,337 | (30 | ) | |||||||||||||||
U.S. agency mortgage-backed securities | 2,159 | (32 | ) | 72 | (2 | ) | 2,231 | (34 | ) | |||||||||||||||
Non-U.S. agency mortgage-backed securities | 428 | (4 | ) | 13 | (1 | ) | 441 | (5 | ) | |||||||||||||||
Total debt securities - available-for-sale | $ | 11,401 | $ | (114 | ) | $ | 128 | $ | (5 | ) | $ | 11,529 | $ | (119 | ) | |||||||||
Equity securities | $ | 73 | $ | (4 | ) | $ | 100 | $ | (36 | ) | $ | 173 | $ | (40 | ) | |||||||||
December 31, 2016 | ||||||||||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||||||||||
U.S. government and agency obligations | $ | 1,794 | $ | (31 | ) | $ | — | $ | — | $ | 1,794 | $ | (31 | ) | ||||||||||
State and municipal obligations | 4,376 | (101 | ) | — | — | 4,376 | (101 | ) | ||||||||||||||||
Corporate obligations | 5,128 | (56 | ) | 137 | (2 | ) | 5,265 | (58 | ) | |||||||||||||||
U.S. agency mortgage-backed securities | 2,247 | (40 | ) | 79 | (3 | ) | 2,326 | (43 | ) | |||||||||||||||
Non-U.S. agency mortgage-backed securities | 544 | (7 | ) | 97 | (3 | ) | 641 | (10 | ) | |||||||||||||||
Total debt securities - available-for-sale | $ | 14,089 | $ | (235 | ) | $ | 313 | $ | (8 | ) | $ | 14,402 | $ | (243 | ) | |||||||||
Equity securities | $ | 93 | $ | (5 | ) | $ | 91 | $ | (42 | ) | $ | 184 | $ | (47 | ) | |||||||||
The Company’s unrealized losses from all securities as of June 30, 2017 were generated from 10,000 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. 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 no significant deterioration since purchase. As of June 30, 2017, 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. Additionally, as of June 30, 2017, the Company’s investments included $628 million in equity method investments.
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 2016 10-K.
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The following table presents a summary of fair value measurements by level and carrying values for items measured at fair value on a recurring basis in the Condensed Consolidated Balance Sheets:
(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, 2017 | ||||||||||||||||
Cash and cash equivalents | $ | 14,533 | $ | 49 | $ | — | $ | 14,582 | ||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | 2,274 | 263 | — | 2,537 | ||||||||||||
State and municipal obligations | — | 6,850 | — | 6,850 | ||||||||||||
Corporate obligations | 55 | 12,273 | 119 | 12,447 | ||||||||||||
U.S. agency mortgage-backed securities | — | 3,605 | — | 3,605 | ||||||||||||
Non-U.S. agency mortgage-backed securities | — | 995 | — | 995 | ||||||||||||
Total debt securities - available-for-sale | 2,329 | 23,986 | 119 | 26,434 | ||||||||||||
Equity securities | 1,707 | 13 | 447 | 2,167 | ||||||||||||
Assets under management | 968 | 2,009 | — | 2,977 | ||||||||||||
Interest rate swap assets | — | 60 | — | 60 | ||||||||||||
Total assets at fair value | $ | 19,537 | $ | 26,117 | $ | 566 | $ | 46,220 | ||||||||
Percentage of total assets at fair value | 42 | % | 57 | % | 1 | % | 100 | % | ||||||||
Interest rate swap liabilities | $ | — | $ | 11 | $ | — | $ | 11 | ||||||||
December 31, 2016 | ||||||||||||||||
Cash and cash equivalents | $ | 10,386 | $ | 44 | $ | — | $ | 10,430 | ||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | 2,017 | 247 | — | 2,264 | ||||||||||||
State and municipal obligations | — | 7,059 | — | 7,059 | ||||||||||||
Corporate obligations | 21 | 10,804 | 102 | 10,927 | ||||||||||||
U.S. agency mortgage-backed securities | — | 2,927 | — | 2,927 | ||||||||||||
Non-U.S. agency mortgage-backed securities | — | 1,002 | — | 1,002 | ||||||||||||
Total debt securities - available-for-sale | 2,038 | 22,039 | 102 | 24,179 | ||||||||||||
Equity securities | 1,591 | 13 | 437 | 2,041 | ||||||||||||
Assets under management | 1,064 | 2,041 | — | 3,105 | ||||||||||||
Interest rate swap assets | — | 55 | — | 55 | ||||||||||||
Total assets at fair value | $ | 15,079 | $ | 24,192 | $ | 539 | $ | 39,810 | ||||||||
Percentage of total assets at fair value | 38 | % | 61 | % | 1 | % | 100 | % | ||||||||
Interest rate swap liabilities | $ | — | $ | 14 | $ | — | $ | 14 | ||||||||
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, 2017 or 2016.
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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 | |||||||||||||||
June 30, 2017 | ||||||||||||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||||||
U.S. government and agency obligations | $ | 254 | $ | 3 | $ | — | $ | 257 | $ | 256 | ||||||||||
State and municipal obligations | — | — | 5 | 5 | 5 | |||||||||||||||
Corporate obligations | 16 | 2 | 277 | 295 | 295 | |||||||||||||||
Total debt securities - held-to-maturity | $ | 270 | $ | 5 | $ | 282 | $ | 557 | $ | 556 | ||||||||||
Other assets | $ | — | $ | 474 | $ | — | $ | 474 | $ | 472 | ||||||||||
Long-term debt and other financing obligations | $ | — | $ | 32,289 | $ | — | $ | 32,289 | $ | 29,682 | ||||||||||
December 31, 2016 | ||||||||||||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||||||
U.S. government and agency obligations | $ | 251 | $ | — | $ | — | $ | 251 | $ | 250 | ||||||||||
State and municipal obligations | — | — | 5 | 5 | 5 | |||||||||||||||
Corporate obligations | 20 | 8 | 210 | 238 | 238 | |||||||||||||||
Total debt securities - held-to-maturity | $ | 271 | $ | 8 | $ | 215 | $ | 494 | $ | 493 | ||||||||||
Other assets | $ | — | $ | 476 | $ | — | $ | 476 | $ | 471 | ||||||||||
Long-term debt and other financing obligations | $ | — | $ | 31,295 | $ | — | $ | 31,295 | $ | 29,337 | ||||||||||
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, 2017 or 2016.
4. 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 June 30, 2017 and December 31, 2016, total pharmaceutical manufacturer rebates receivable included in other receivables in the Condensed Consolidated Balance Sheets amounted to $4.2 billion and $3.3 billion, respectively. See Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2016 10-K for more information on the Company’s pharmaceutical manufacturer rebates.
5. Medical Costs Payable
The following table shows the components of the change in medical costs payable for the six months ended June 30:
(in millions) | 2017 | 2016 | ||||||
Medical costs payable, beginning of period | $ | 16,391 | $ | 14,330 | ||||
Acquisitions | 76 | — | ||||||
Reported medical costs: | ||||||||
Current year | 65,208 | 58,602 | ||||||
Prior years | (580 | ) | (300 | ) | ||||
Total reported medical costs | 64,628 | 58,302 | ||||||
Medical payments: | ||||||||
Payments for current year | (49,673 | ) | (43,476 | ) | ||||
Payments for prior years | (13,712 | ) | (12,524 | ) | ||||
Total medical payments | (63,385 | ) | (56,000 | ) | ||||
Medical costs payable, end of period | $ | 17,710 | $ | 16,632 | ||||
For the six months ended June 30, 2017 and 2016 the medical cost reserve development included no individual factors that were material. Medical costs payable included reserves for claims incurred by insured customers but not yet reported to the Company of $12.6 billion and $11.6 billion at June 30, 2017 and December 31, 2016, respectively.
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6. Commercial Paper and Long-Term Debt
Commercial paper and senior unsecured long-term debt consisted of the following:
June 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
(in millions, except percentages) | Par Value | Carrying Value | Fair Value | Par Value | Carrying Value | Fair Value | ||||||||||||||||||
Commercial paper | $ | 2,254 | $ | 2,254 | $ | 2,254 | $ | 3,633 | $ | 3,633 | $ | 3,633 | ||||||||||||
Floating rate notes due January 2017 | — | — | — | 750 | 750 | 750 | ||||||||||||||||||
6.000% notes due June 2017 | — | — | — | 441 | 446 | 450 | ||||||||||||||||||
1.450% notes due July 2017 | 750 | 750 | 750 | 750 | 750 | 751 | ||||||||||||||||||
1.400% notes due October 2017 | 625 | 625 | 625 | 625 | 624 | 626 | ||||||||||||||||||
6.000% notes due November 2017 | 156 | 158 | 159 | 156 | 159 | 163 | ||||||||||||||||||
1.400% notes due December 2017 | 750 | 750 | 750 | 750 | 751 | 750 | ||||||||||||||||||
6.000% notes due February 2018 | 1,100 | 1,104 | 1,129 | 1,100 | 1,107 | 1,153 | ||||||||||||||||||
1.900% notes due July 2018 | 1,500 | 1,498 | 1,506 | 1,500 | 1,496 | 1,507 | ||||||||||||||||||
1.700% notes due February 2019 | 750 | 748 | 749 | 750 | 748 | 748 | ||||||||||||||||||
1.625% notes due March 2019 | 500 | 501 | 497 | 500 | 501 | 498 | ||||||||||||||||||
2.300% notes due December 2019 | 500 | 498 | 505 | 500 | 498 | 504 | ||||||||||||||||||
2.700% notes due July 2020 | 1,500 | 1,495 | 1,532 | 1,500 | 1,495 | 1,523 | ||||||||||||||||||
3.875% notes due October 2020 | 450 | 450 | 474 | 450 | 450 | 474 | ||||||||||||||||||
4.700% notes due February 2021 | 400 | 409 | 432 | 400 | 409 | 433 | ||||||||||||||||||
2.125% notes due March 2021 | 750 | 746 | 748 | 750 | 745 | 741 | ||||||||||||||||||
3.375% notes due November 2021 | 500 | 498 | 521 | 500 | 497 | 519 | ||||||||||||||||||
2.875% notes due December 2021 | 750 | 750 | 767 | 750 | 748 | 760 | ||||||||||||||||||
2.875% notes due March 2022 | 1,100 | 1,063 | 1,125 | 1,100 | 1,057 | 1,114 | ||||||||||||||||||
3.350% notes due July 2022 | 1,000 | 996 | 1,044 | 1,000 | 995 | 1,030 | ||||||||||||||||||
0.000% notes due November 2022 | 15 | 11 | 12 | 15 | 11 | 12 | ||||||||||||||||||
2.750% notes due February 2023 | 625 | 612 | 630 | 625 | 609 | 622 | ||||||||||||||||||
2.875% notes due March 2023 | 750 | 772 | 762 | 750 | 771 | 753 | ||||||||||||||||||
3.750% notes due July 2025 | 2,000 | 1,987 | 2,107 | 2,000 | 1,986 | 2,070 | ||||||||||||||||||
3.100% notes due March 2026 | 1,000 | 995 | 1,005 | 1,000 | 994 | 986 | ||||||||||||||||||
3.450% notes due January 2027 | 750 | 745 | 771 | 750 | 745 | 762 | ||||||||||||||||||
3.375% notes due April 2027 | 625 | 618 | 639 | — | — | — | ||||||||||||||||||
4.625% notes due July 2035 | 1,000 | 991 | 1,124 | 1,000 | 991 | 1,090 | ||||||||||||||||||
5.800% notes due March 2036 | 850 | 837 | 1,076 | 850 | 837 | 1,034 | ||||||||||||||||||
6.500% notes due June 2037 | 500 | 491 | 675 | 500 | 491 | 643 | ||||||||||||||||||
6.625% notes due November 2037 | 650 | 641 | 896 | 650 | 640 | 850 | ||||||||||||||||||
6.875% notes due February 2038 | 1,100 | 1,075 | 1,562 | 1,100 | 1,075 | 1,497 | ||||||||||||||||||
5.700% notes due October 2040 | 300 | 296 | 383 | 300 | 296 | 366 | ||||||||||||||||||
5.950% notes due February 2041 | 350 | 345 | 458 | 350 | 345 | 437 | ||||||||||||||||||
4.625% notes due November 2041 | 600 | 588 | 661 | 600 | 588 | 634 | ||||||||||||||||||
4.375% notes due March 2042 | 502 | 483 | 539 | 502 | 483 | 509 | ||||||||||||||||||
3.950% notes due October 2042 | 625 | 606 | 633 | 625 | 606 | 609 | ||||||||||||||||||
4.250% notes due March 2043 | 750 | 734 | 793 | 750 | 734 | 765 | ||||||||||||||||||
4.750% notes due July 2045 | 2,000 | 1,972 | 2,297 | 2,000 | 1,972 | 2,203 | ||||||||||||||||||
4.200% notes due January 2047 | 750 | 738 | 791 | 750 | 737 | 759 | ||||||||||||||||||
4.250% notes due April 2047 | 725 | 717 | 773 | |||||||||||||||||||||