UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________
Form 10-Q
__________________________________________________________
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018
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 (check one)
Large accelerated filer | [X] | Accelerated filer | [ ] | Non-accelerated filer (Do not check if a smaller reporting company) | [ ] | ||
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 April 30, 2018, there were 960,981,242 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) | March 31, 2018 | December 31, 2017 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 18,243 | $ | 11,981 | ||||
Short-term investments | 3,798 | 3,509 | ||||||
Accounts receivable, net | 11,512 | 9,568 | ||||||
Other current receivables, net | 6,778 | 6,262 | ||||||
Assets under management | 2,922 | 3,101 | ||||||
Prepaid expenses and other current assets | 5,100 | 2,663 | ||||||
Total current assets | 48,353 | 37,084 | ||||||
Long-term investments | 29,441 | 28,341 | ||||||
Property, equipment and capitalized software, net | 8,144 | 7,013 | ||||||
Goodwill | 56,850 | 54,556 | ||||||
Other intangible assets, net | 9,033 | 8,489 | ||||||
Other assets | 3,748 | 3,575 | ||||||
Total assets | $ | 155,569 | $ | 139,058 | ||||
Liabilities, redeemable noncontrolling interests and equity | ||||||||
Current liabilities: | ||||||||
Medical costs payable | $ | 19,589 | $ | 17,871 | ||||
Accounts payable and accrued liabilities | 18,210 | 15,180 | ||||||
Commercial paper and current maturities of long-term debt | 7,379 | 2,857 | ||||||
Unearned revenues | 7,683 | 2,269 | ||||||
Other current liabilities | 14,806 | 12,286 | ||||||
Total current liabilities | 67,667 | 50,463 | ||||||
Long-term debt, less current maturities | 28,206 | 28,835 | ||||||
Deferred income taxes | 2,213 | 2,182 | ||||||
Other liabilities | 5,557 | 5,556 | ||||||
Total liabilities | 103,643 | 87,036 | ||||||
Commitments and contingencies (Note 6) | ||||||||
Redeemable noncontrolling interests | 1,890 | 2,189 | ||||||
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; 962 and 969 issued and outstanding | 10 | 10 | ||||||
Additional paid-in capital | — | 1,703 | ||||||
Retained earnings | 50,494 | 48,730 | ||||||
Accumulated other comprehensive loss | (2,951 | ) | (2,667 | ) | ||||
Nonredeemable noncontrolling interests | 2,483 | 2,057 | ||||||
Total equity | 50,036 | 49,833 | ||||||
Total liabilities, redeemable noncontrolling interests and equity | $ | 155,569 | $ | 139,058 | ||||
1
UnitedHealth Group
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31, | ||||||||
(in millions, except per share data) | 2018 | 2017 | ||||||
Revenues: | ||||||||
Premiums | $ | 44,084 | $ | 38,938 | ||||
Products | 6,702 | 6,129 | ||||||
Services | 4,104 | 3,434 | ||||||
Investment and other income | 298 | 222 | ||||||
Total revenues | 55,188 | 48,723 | ||||||
Operating costs: | ||||||||
Medical costs | 35,863 | 32,079 | ||||||
Operating costs | 8,506 | 7,022 | ||||||
Cost of products sold | 6,184 | 5,676 | ||||||
Depreciation and amortization | 582 | 533 | ||||||
Total operating costs | 51,135 | 45,310 | ||||||
Earnings from operations | 4,053 | 3,413 | ||||||
Interest expense | (329 | ) | (283 | ) | ||||
Earnings before income taxes | 3,724 | 3,130 | ||||||
Provision for income taxes | (800 | ) | (939 | ) | ||||
Net earnings | 2,924 | 2,191 | ||||||
Earnings attributable to noncontrolling interests | (88 | ) | (19 | ) | ||||
Net earnings attributable to UnitedHealth Group common shareholders | $ | 2,836 | $ | 2,172 | ||||
Earnings per share attributable to UnitedHealth Group common shareholders: | ||||||||
Basic | $ | 2.94 | $ | 2.28 | ||||
Diluted | $ | 2.87 | $ | 2.23 | ||||
Basic weighted-average number of common shares outstanding | 966 | 954 | ||||||
Dilutive effect of common share equivalents | 21 | 21 | ||||||
Diluted weighted-average number of common shares outstanding | 987 | 975 | ||||||
Anti-dilutive shares excluded from the calculation of dilutive effect of common share equivalents | 7 | 9 | ||||||
Cash dividends declared per common share | $ | 0.750 | $ | 0.625 | ||||
2
UnitedHealth Group
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended March 31, | ||||||||
(in millions) | 2018 | 2017 | ||||||
Net earnings | $ | 2,924 | $ | 2,191 | ||||
Other comprehensive (loss) income: | ||||||||
Gross unrealized (losses) gains on investment securities during the period | (378 | ) | 99 | |||||
Income tax effect | 86 | (32 | ) | |||||
Total unrealized (losses) gains, net of tax | (292 | ) | 67 | |||||
Gross reclassification adjustment for net realized gains included in net earnings | (19 | ) | (21 | ) | ||||
Income tax effect | 4 | 8 | ||||||
Total reclassification adjustment, net of tax | (15 | ) | (13 | ) | ||||
Total foreign currency translation (loss) gain | (1 | ) | 180 | |||||
Other comprehensive (loss) income | (308 | ) | 234 | |||||
Comprehensive income | 2,616 | 2,425 | ||||||
Comprehensive income attributable to noncontrolling interests | (88 | ) | (19 | ) | ||||
Comprehensive income attributable to UnitedHealth Group common shareholders | $ | 2,528 | $ | 2,406 | ||||
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 Interests | Total Equity | ||||||||||||||||||||||||||
(in millions) | Shares | Amount | Net Unrealized (Losses) Gains on Investments | Foreign Currency Translation (Losses) Gains | |||||||||||||||||||||||||||
Balance at January 1, 2018 | 969 | $ | 10 | $ | 1,703 | $ | 48,730 | $ | (13 | ) | $ | (2,654 | ) | $ | 2,057 | $ | 49,833 | ||||||||||||||
Adjustment to adopt ASU 2016-01 | (24 | ) | 24 | — | |||||||||||||||||||||||||||
Net earnings | 2,836 | 53 | 2,889 | ||||||||||||||||||||||||||||
Other comprehensive loss | (307 | ) | (1 | ) | (308 | ) | |||||||||||||||||||||||||
Issuances of common stock, and related tax effects | 5 | — | 415 | 415 | |||||||||||||||||||||||||||
Share-based compensation | 206 | 206 | |||||||||||||||||||||||||||||
Common share repurchases | (12 | ) | — | (2,324 | ) | (326 | ) | (2,650 | ) | ||||||||||||||||||||||
Cash dividends paid on common shares | (722 | ) | (722 | ) | |||||||||||||||||||||||||||
Acquisition of nonredeemable noncontrolling interests | 423 | 423 | |||||||||||||||||||||||||||||
Distribution to nonredeemable noncontrolling interests | (50 | ) | (50 | ) | |||||||||||||||||||||||||||
Balance at March 31, 2018 | 962 | $ | 10 | $ | — | $ | 50,494 | $ | (296 | ) | $ | (2,655 | ) | $ | 2,483 | $ | 50,036 | ||||||||||||||
Balance at January 1, 2017 | 952 | $ | 10 | $ | — | $ | 40,945 | $ | (97 | ) | $ | (2,584 | ) | $ | (97 | ) | $ | 38,177 | |||||||||||||
Net earnings | 2,172 | 9 | 2,181 | ||||||||||||||||||||||||||||
Other comprehensive income | 54 | 180 | 234 | ||||||||||||||||||||||||||||
Issuances of common stock, and related tax effects | 17 | — | 1,923 | 1,923 | |||||||||||||||||||||||||||
Share-based compensation | 189 | 189 | |||||||||||||||||||||||||||||
Common share repurchases | (4 | ) | — | (682 | ) | — | (682 | ) | |||||||||||||||||||||||
Cash dividends paid on common shares | (596 | ) | (596 | ) | |||||||||||||||||||||||||||
Redeemable noncontrolling interests fair value and other adjustments | 389 | 389 | |||||||||||||||||||||||||||||
Acquisition of nonredeemable noncontrolling interests | 2,191 | 2,191 | |||||||||||||||||||||||||||||
Distribution to nonredeemable noncontrolling interests | (11 | ) | (11 | ) | |||||||||||||||||||||||||||
Balance at March 31, 2017 | 965 | $ | 10 | $ | 1,819 | $ | 42,521 | $ | (43 | ) | $ | (2,404 | ) | $ | 2,092 | $ | 43,995 | ||||||||||||||
4
UnitedHealth Group
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, | ||||||||
(in millions) | 2018 | 2017 | ||||||
Operating activities | ||||||||
Net earnings | $ | 2,924 | $ | 2,191 | ||||
Noncash items: | ||||||||
Depreciation and amortization | 582 | 533 | ||||||
Deferred income taxes | (74 | ) | (89 | ) | ||||
Share-based compensation | 208 | 196 | ||||||
Other, net | 27 | 43 | ||||||
Net change in other operating items, net of effects from acquisitions and changes in AARP balances: | ||||||||
Accounts receivable | (1,579 | ) | (1,232 | ) | ||||
Other assets | (3,232 | ) | (998 | ) | ||||
Medical costs payable | 1,313 | 1,024 | ||||||
Accounts payable and other liabilities | 2,821 | 292 | ||||||
Unearned revenues | 5,379 | 4,496 | ||||||
Cash flows from operating activities | 8,369 | 6,456 | ||||||
Investing activities | ||||||||
Purchases of investments | (3,891 | ) | (3,683 | ) | ||||
Sales of investments | 1,002 | 1,018 | ||||||
Maturities of investments | 1,504 | 1,326 | ||||||
Cash paid for acquisitions, net of cash assumed | (2,583 | ) | (468 | ) | ||||
Purchases of property, equipment and capitalized software | (477 | ) | (507 | ) | ||||
Other, net | (72 | ) | 25 | |||||
Cash flows used for investing activities | (4,517 | ) | (2,289 | ) | ||||
Financing activities | ||||||||
Common share repurchases | (2,650 | ) | (682 | ) | ||||
Cash dividends paid | (722 | ) | (596 | ) | ||||
Proceeds from common stock issuances | 295 | 270 | ||||||
Repayments of long-term debt | (1,100 | ) | (1,392 | ) | ||||
Proceeds from (repayments of) commercial paper, net | 4,259 | (139 | ) | |||||
Proceeds from issuance of long-term debt | — | 1,342 | ||||||
Customer funds administered | 2,962 | 3,217 | ||||||
Other, net | (622 | ) | (495 | ) | ||||
Cash flows from financing activities | 2,422 | 1,525 | ||||||
Effect of exchange rate changes on cash and cash equivalents | (12 | ) | 20 | |||||
Increase in cash and cash equivalents | 6,262 | 5,712 | ||||||
Cash and cash equivalents, beginning of period | 11,981 | 10,430 | ||||||
Cash and cash equivalents, end of period | $ | 18,243 | $ | 16,142 | ||||
Supplemental schedule of noncash investing activities | ||||||||
Common stock issued for acquisition | $ | — | $ | 1,860 | ||||
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 care company dedicated to helping people live healthier lives and helping make the health system work better for everyone. Through its diversified family of businesses, the Company leverages core competencies in data and health information; advanced technology; and clinical expertise to help meet the demands of the health system. These core competencies are deployed within 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, 2017 as filed with the SEC (2017 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 medical costs payable, revenues, and goodwill and other intangible assets. 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.
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, ASU 2016-02 will not have a material impact on the Company’s balance sheet, results of operations, equity or cash flows.
Recently Adopted Accounting Standards
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). Most notably, the new guidance 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 Company adopted ASU 2016-01 on a prospective basis effective January 1, 2018, as required, and reclassified $24 million from accumulated other comprehensive income to retained earnings.
The Company has determined that there have been no other recently adopted or issued accounting standards that had, or will have, a material impact on its Condensed Consolidated Financial Statements.
6
2. Investments
A summary of debt securities by major security type is as follows:
(in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
March 31, 2018 | ||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | $ | 2,939 | $ | 1 | $ | (54 | ) | $ | 2,886 | |||||||
State and municipal obligations | 7,190 | 43 | (94 | ) | 7,139 | |||||||||||
Corporate obligations | 14,411 | 15 | (167 | ) | 14,259 | |||||||||||
U.S. agency mortgage-backed securities | 4,423 | 3 | (110 | ) | 4,316 | |||||||||||
Non-U.S. agency mortgage-backed securities | 1,162 | — | (20 | ) | 1,142 | |||||||||||
Total debt securities - available-for-sale | 30,125 | 62 | (445 | ) | 29,742 | |||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||
U.S. government and agency obligations | 249 | 1 | (2 | ) | 248 | |||||||||||
State and municipal obligations | 2 | — | — | 2 | ||||||||||||
Corporate obligations | 340 | — | — | 340 | ||||||||||||
Total debt securities - held-to-maturity | 591 | 1 | (2 | ) | 590 | |||||||||||
Total debt securities | $ | 30,716 | $ | 63 | $ | (447 | ) | $ | 30,332 | |||||||
December 31, 2017 | ||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | $ | 2,673 | $ | 1 | $ | (30 | ) | $ | 2,644 | |||||||
State and municipal obligations | 7,596 | 99 | (35 | ) | 7,660 | |||||||||||
Corporate obligations | 13,181 | 57 | (44 | ) | 13,194 | |||||||||||
U.S. agency mortgage-backed securities | 3,942 | 7 | (38 | ) | 3,911 | |||||||||||
Non-U.S. agency mortgage-backed securities | 1,018 | 3 | (6 | ) | 1,015 | |||||||||||
Total debt securities - available-for-sale | 28,410 | 167 | (153 | ) | 28,424 | |||||||||||
Debt securities - held-to-maturity: | ||||||||||||||||
U.S. government and agency obligations | 254 | 1 | (1 | ) | 254 | |||||||||||
State and municipal obligations | 2 | — | — | 2 | ||||||||||||
Corporate obligations | 280 | — | — | 280 | ||||||||||||
Total debt securities - held-to-maturity | 536 | 1 | (1 | ) | 536 | |||||||||||
Total debt securities | $ | 28,946 | $ | 168 | $ | (154 | ) | $ | 28,960 | |||||||
The Company held $1.9 billion and $2.0 billion of equity securities as of March 31, 2018 and December 31, 2017, respectively. The Company’s investments in equity securities primarily consist of investments in Brazilian real denominated fixed-income funds, employee savings plan related investments and dividend paying stocks, with readily determinable fair values.
Additionally, the Company’s investments included $959 million and $898 million of equity method investments in operating businesses in the health care sector as of March 31, 2018 and December 31, 2017, respectively.
7
The amortized cost and fair value of debt securities as of March 31, 2018, 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 | $ | 3,923 | $ | 3,915 | $ | 135 | $ | 135 | ||||||||
Due after one year through five years | 11,400 | 11,273 | 202 | 200 | ||||||||||||
Due after five years through ten years | 6,874 | 6,766 | 103 | 103 | ||||||||||||
Due after ten years | 2,343 | 2,330 | 151 | 152 | ||||||||||||
U.S. agency mortgage-backed securities | 4,423 | 4,316 | — | — | ||||||||||||
Non-U.S. agency mortgage-backed securities | 1,162 | 1,142 | — | — | ||||||||||||
Total debt securities | $ | 30,125 | $ | 29,742 | $ | 591 | $ | 590 | ||||||||
The fair value of available-for-sale debt securities with gross unrealized losses by security type and length of time that individual securities have been in a continuous unrealized loss position were as follows:
Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
(in millions) | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||
March 31, 2018 | ||||||||||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||||||||||
U.S. government and agency obligations | $ | 1,787 | $ | (25 | ) | $ | 945 | $ | (29 | ) | $ | 2,732 | $ | (54 | ) | |||||||||
State and municipal obligations | 3,958 | (66 | ) | 781 | (28 | ) | 4,739 | (94 | ) | |||||||||||||||
Corporate obligations | 9,998 | (129 | ) | 1,193 | (38 | ) | 11,191 | (167 | ) | |||||||||||||||
U.S. agency mortgage-backed securities | 2,775 | (61 | ) | 1,127 | (49 | ) | 3,902 | (110 | ) | |||||||||||||||
Non-U.S. agency mortgage-backed securities | 863 | (15 | ) | 136 | (5 | ) | 999 | (20 | ) | |||||||||||||||
Total debt securities - available-for-sale | $ | 19,381 | $ | (296 | ) | $ | 4,182 | $ | (149 | ) | $ | 23,563 | $ | (445 | ) | |||||||||
December 31, 2017 | ||||||||||||||||||||||||
Debt securities - available-for-sale: | ||||||||||||||||||||||||
U.S. government and agency obligations | $ | 1,249 | $ | (8 | ) | $ | 1,027 | $ | (22 | ) | $ | 2,276 | $ | (30 | ) | |||||||||
State and municipal obligations | 2,599 | (21 | ) | 866 | (14 | ) | 3,465 | (35 | ) | |||||||||||||||
Corporate obligations | 5,901 | (23 | ) | 1,242 | (21 | ) | 7,143 | (44 | ) | |||||||||||||||
U.S. agency mortgage-backed securities | 1,657 | (12 | ) | 1,162 | (26 | ) | 2,819 | (38 | ) | |||||||||||||||
Non-U.S. agency mortgage-backed securities | 411 | (3 | ) | 144 | (3 | ) | 555 | (6 | ) | |||||||||||||||
Total debt securities - available-for-sale | $ | 11,817 | $ | (67 | ) | $ | 4,441 | $ | (86 | ) | $ | 16,258 | $ | (153 | ) | |||||||||
The Company’s unrealized losses from debt securities as of March 31, 2018 were generated from 18,000 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 March 31, 2018, 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.
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.
8
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 2017 10-K.
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 | ||||||||||||
March 31, 2018 | ||||||||||||||||
Cash and cash equivalents | $ | 16,249 | $ | 1,994 | $ | — | $ | 18,243 | ||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | 2,631 | 255 | — | 2,886 | ||||||||||||
State and municipal obligations | — | 7,139 | — | 7,139 | ||||||||||||
Corporate obligations | 50 | 14,068 | 141 | 14,259 | ||||||||||||
U.S. agency mortgage-backed securities | — | 4,316 | — | 4,316 | ||||||||||||
Non-U.S. agency mortgage-backed securities | — | 1,142 | — | 1,142 | ||||||||||||
Total debt securities - available-for-sale | 2,681 | 26,920 | 141 | 29,742 | ||||||||||||
Equity securities | 1,791 | 13 | 143 | 1,947 | ||||||||||||
Assets under management | 950 | 1,972 | — | 2,922 | ||||||||||||
Total assets at fair value | $ | 21,671 | $ | 30,899 | $ | 284 | $ | 52,854 | ||||||||
Percentage of total assets at fair value | 41 | % | 58 | % | 1 | % | 100 | % | ||||||||
December 31, 2017 | ||||||||||||||||
Cash and cash equivalents | $ | 11,718 | $ | 263 | $ | — | $ | 11,981 | ||||||||
Debt securities - available-for-sale: | ||||||||||||||||
U.S. government and agency obligations | 2,428 | 216 | — | 2,644 | ||||||||||||
State and municipal obligations | — | 7,660 | — | 7,660 | ||||||||||||
Corporate obligations | 65 | 12,989 | 140 | 13,194 | ||||||||||||
U.S. agency mortgage-backed securities | — | 3,911 | — | 3,911 | ||||||||||||
Non-U.S. agency mortgage-backed securities | — | 1,015 | — | 1,015 | ||||||||||||
Total debt securities - available-for-sale | 2,493 | 25,791 | 140 | 28,424 | ||||||||||||
Equity securities | 1,784 | 14 | 194 | 1,992 | ||||||||||||
Assets under management | 1,117 | 1,984 | — | 3,101 | ||||||||||||
Total assets at fair value | $ | 17,112 | $ | 28,052 | $ | 334 | $ | 45,498 | ||||||||
Percentage of total assets at fair value | 38 | % | 61 | % | 1 | % | 100 | % | ||||||||
Transfers between levels, if any, are recorded as of the beginning of the reporting period in which the transfer occurs; there were no transfers between Levels 1, 2 or 3 of any financial assets or liabilities during the three months ended March 31, 2018 or 2017.
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The following table presents a summary of fair value measurements by level and carrying values for certain financial instruments not measured at fair value on a recurring basis in the Condensed Consolidated Balance Sheets:
(in millions) | Quoted Prices in Active Markets (Level 1) | Other Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | Total Fair Value | Total Carrying Value | |||||||||||||||
March 31, 2018 | ||||||||||||||||||||
Debt securities - held-to-maturity | $ | 260 | $ | 66 | $ | 264 | $ | 590 | $ | 591 | ||||||||||
Long-term debt and other financing obligations | $ | — | $ | 32,892 | $ | — | $ | 32,892 | $ | 31,162 | ||||||||||
December 31, 2017 | ||||||||||||||||||||
Debt securities - held-to-maturity | $ | 267 | $ | 4 | $ | 265 | $ | 536 | $ | 536 | ||||||||||
Long-term debt and other financing obligations | $ | — | $ | 34,504 | $ | — | $ | 34,504 | $ | 31,542 | ||||||||||
Nonfinancial assets and liabilities or financial assets and liabilities that are measured at fair value on a nonrecurring basis are subject to fair value adjustments only in certain circumstances, such as when the Company records an impairment. There were no significant fair value adjustments for these assets and liabilities recorded during the three months ended March 31, 2018 or 2017.
4. Medical Costs Payable
The following table shows the components of the change in medical costs payable for the three months ended March 31:
(in millions) | 2018 | 2017 | ||||||
Medical costs payable, beginning of period | $ | 17,871 | $ | 16,391 | ||||
Acquisitions | 211 | 76 | ||||||
Reported medical costs: | ||||||||
Current year | 36,153 | 32,529 | ||||||
Prior years | (290 | ) | (450 | ) | ||||
Total reported medical costs | 35,863 | 32,079 | ||||||
Medical payments: | ||||||||
Payments for current year | (21,237 | ) | (18,742 | ) | ||||
Payments for prior years | (13,119 | ) | (12,154 | ) | ||||
Total medical payments | (34,356 | ) | (30,896 | ) | ||||
Medical costs payable, end of period | $ | 19,589 | $ | 17,650 | ||||
For the three months ended March 31, 2018 and 2017, the medical cost reserve development included no individual factors that were significant. Medical costs payable included reserves for claims incurred by insured customers but not yet reported to the Company of $13.3 billion and $12.3 billion at March 31, 2018 and December 31, 2017, respectively.
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5. Commercial Paper and Long-Term Debt
Commercial paper and senior unsecured long-term debt consisted of the following:
March 31, 2018 | December 31, 2017 | |||||||||||||||||||||||
(in millions, except percentages) | Par Value | Carrying Value | Fair Value | Par Value | Carrying Value | Fair Value | ||||||||||||||||||
Commercial paper | $ | 4,427 | $ | 4,423 | $ | 4,423 | $ | 150 | $ | 150 | $ | 150 | ||||||||||||
6.000% notes due February 2018 | — | — | — | 1,100 | 1,101 | 1,106 | ||||||||||||||||||
1.900% notes due July 2018 | 1,500 | 1,499 | 1,498 | 1,500 | 1,499 | 1,501 | ||||||||||||||||||
1.700% notes due February 2019 | 750 | 749 | 744 | 750 | 749 | 747 | ||||||||||||||||||
1.625% notes due March 2019 | 500 | 501 | 495 | 500 | 501 | 497 | ||||||||||||||||||
2.300% notes due December 2019 | 500 | 491 | 495 | 500 | 495 | 501 | ||||||||||||||||||
2.700% notes due July 2020 | 1,500 | 1,497 | 1,493 | 1,500 | 1,496 | 1,517 | ||||||||||||||||||
Floating rate notes due October 2020 | 300 | 299 | 299 | 300 | 299 | 300 | ||||||||||||||||||
3.875% notes due October 2020 | 450 | 441 | 459 | 450 | 446 | 467 | ||||||||||||||||||
1.950% notes due October 2020 | 900 | 896 | 879 | 900 | 895 | 892 | ||||||||||||||||||
4.700% notes due February 2021 | 400 | 398 | 418 | 400 | 403 | 425 | ||||||||||||||||||
2.125% notes due March 2021 | 750 | 747 | 731 | 750 | 746 | 744 | ||||||||||||||||||
3.375% notes due November 2021 | 500 | 485 | 504 | 500 | 493 | 516 | ||||||||||||||||||
2.875% notes due December 2021 | 750 | 729 | 743 | 750 | 741 | 760 | ||||||||||||||||||
2.875% notes due March 2022 | 1,100 | 1,037 | 1,088 | 1,100 | 1,054 | 1,114 | ||||||||||||||||||
3.350% notes due July 2022 | 1,000 | 996 | 1,005 | 1,000 | 996 | 1,033 | ||||||||||||||||||
2.375% notes due October 2022 | 900 | 893 | 866 | 900 | 893 | 891 | ||||||||||||||||||
0.000% notes due November 2022 | 15 | 12 | 12 | 15 | 12 | 12 | ||||||||||||||||||
2.750% notes due February 2023 | 625 | 594 | 611 | 625 | 606 | 626 | ||||||||||||||||||
2.875% notes due March 2023 | 750 | 745 | 738 | 750 | 762 | 759 | ||||||||||||||||||
3.750% notes due July 2025 | 2,000 | 1,988 | 2,026 | 2,000 | 1,987 | 2,108 | ||||||||||||||||||
3.100% notes due March 2026 | 1,000 | 995 | 969 | 1,000 | 995 | 1,007 | ||||||||||||||||||
3.450% notes due January 2027 | 750 | 745 | 743 | 750 | 745 | 776 | ||||||||||||||||||
3.375% notes due April 2027 | 625 | 619 | 615 | 625 | 618 | 642 | ||||||||||||||||||
2.950% notes due October 2027 | 950 | 937 | 903 | 950 | 937 | 947 | ||||||||||||||||||
4.625% notes due July 2035 | 1,000 | 991 | 1,094 | 1,000 | 991 | 1,165 | ||||||||||||||||||
5.800% notes due March 2036 | 850 | 838 | 1,042 | 850 | 837 | 1,105 | ||||||||||||||||||
6.500% notes due June 2037 | 500 | 492 | 660 | 500 | 491 | 698 | ||||||||||||||||||
6.625% notes due November 2037 | 650 | 641 | 869 | 650 | 641 | 923 | ||||||||||||||||||
6.875% notes due February 2038 | 1,100 | 1,075 | 1,511 | 1,100 | 1,075 | 1,596 | ||||||||||||||||||
5.700% notes due October 2040 | 300 | 296 | 371 | 300 | 296 | 389 | ||||||||||||||||||
5.950% notes due February 2041 | 350 | 345 | 443 | 350 | 345 | 466 | ||||||||||||||||||
4.625% notes due November 2041 | 600 | 588 | 644 | 600 | 588 | 685 | ||||||||||||||||||
4.375% notes due March 2042 | 502 | 483 | 524 | 502 | 483 | 555 | ||||||||||||||||||
3.950% notes due October 2042 | 625 | 607 | 614 | 625 | 607 | 650 | ||||||||||||||||||
4.250% notes due March 2043 | 750 | 734 | 771 | 750 | 734 | 822 | ||||||||||||||||||
4.750% notes due July 2045 | 2,000 | 1,972 | 2,201 | 2,000 | 1,972 | 2,362 | ||||||||||||||||||
4.200% notes due January 2047 | 750 | 738 | 759 | 750 | 738 | 808 | ||||||||||||||||||
4.250% notes due April 2047 | 725 | 717 | 741 | 725 | 717 | 798 | ||||||||||||||||||
3.750% notes due October 2047 | 950 | 933 | 895 | 950 | 933 | 969 | ||||||||||||||||||
Total commercial paper and long-term debt | $ | 34,594 | $ | 34,166 | $ | 35,896 | $ | 31,417 | $ | 31,067 | $ | 34,029 | ||||||||||||
The Company’s long-term debt obligations included $1.4 billion and $625 million of other financing obligations, of which $207 million and $107 million were classified as current as of March 31, 2018 and December 31, 2017, respectively.
Commercial Paper and Bank Credit Facilities
Commercial paper consists of short-duration, senior unsecured debt privately placed on a discount basis through broker-dealers. As of March 31, 2018, the Company’s outstanding commercial paper had a weighted-average annual interest rate of 2.0%.
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The Company has $3.0 billion five-year, $3.0 billion three-year and $4.0 billion 364-day revolving bank credit facilities with 26 banks, which mature in December 2022, December 2020 and December 2018, respectively. These facilities provide liquidity support for the Company’s commercial paper program and are available for general corporate purposes. As of March 31, 2018, no amounts had been drawn on any of the bank credit facilities. The annual interest rates, which are variable based on term, are calculated based on the London Interbank Offered Rate (LIBOR) plus a credit spread based on the Company’s senior unsecured credit ratings. If amounts had been drawn on the bank credit facilities as of March 31, 2018, annual interest rates would have ranged from 2.7% to 3.3%.
Debt Covenants
The Company’s bank credit facilities contain various covenants, including covenants requiring the Company to maintain a defined debt to debt-plus-shareholders’ equity ratio of not more than 55%. The Company was in compliance with its debt covenants as of March 31, 2018.
6. Commitments and Contingencies
Legal Matters
Because of the nature of its businesses, the Company is frequently made party to a variety of legal actions and regulatory inquiries, including class actions and suits brought by members, care providers, consumer advocacy organizations, customers and regulators, relating to the Company’s businesses, including management and administration of health benefit plans and other services. These matters include medical malpractice, employment, intellectual property, antitrust, privacy and contract claims and claims related to health care benefits coverage and other business practices.
The Company records liabilities for its estimates of probable costs resulting from these matters where appropriate. Estimates of costs resulting from legal and regulatory matters involving the Company are inherently difficult to predict, particularly where the matters: involve indeterminate claims for monetary damages or may involve fines, penalties or punitive damages; present novel legal theories or represent a shift in regulatory policy; involve a large number of claimants or regulatory bodies; are in the early stages of the proceedings; or could result in a change in business practices. Accordingly, the Company is often unable to estimate the losses or ranges of losses for those matters where there is a reasonable possibility or it is probable that a loss may be incurred.
Government Investigations, Audits and Reviews
The Company has been involved or is currently involved in various governmental investigations, audits and reviews. These include routine, regular and special investigations, audits and reviews by the Centers for Medicare and Medicaid Services (CMS), state insurance and health and welfare departments, the Brazilian national regulatory agency for private health insurance and plans (the Agência Nacional de Saúde Suplementar), state attorneys general, the Office of the Inspector General, the Office of Personnel Management, the Office of Civil Rights, the Government Accountability Office, the Federal Trade Commission, U.S. Congressional committees, the U.S. Department of Justice, the SEC, the Internal Revenue Service, the U.S. Drug Enforcement Administration, the Brazilian federal revenue service (the Secretaria da Receita Federal), the U.S. Department of Labor, the Federal Deposit Insurance Corporation, the Defense Contract Audit Agency and other governmental authorities. Certain of the Company’s businesses have been reviewed or are currently under review, including for, among other matters, compliance with coding and other requirements under the Medicare risk-adjustment model. CMS has selected certain of the Company’s local plans for risk adjustment data validation (RADV) audits to validate the coding practices of and supporting documentation maintained by health care providers and such audits may result in retrospective adjustments to payments made to the Company’s health plans.
On February 14, 2017, the Department of Justice (DOJ) announced its decision to pursue certain claims within a lawsuit initially asserted against the Company and filed under seal by a whistleblower in 2011. The whistleblower’s complaint, which was unsealed on February 15, 2017, alleges that the Company made improper risk adjustment submissions and violated the False Claims Act. On February 12, 2018, the court granted in part and denied in part the Company’s motion to dismiss. The Company cannot reasonably estimate the outcome that may result from this matter given its procedural status.
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7. Segment Financial Information
The Company’s four reportable segments are UnitedHealthcare, OptumHealth, OptumInsight and OptumRx. For more information on the Company’s segments see Part I, Item I, “Business” and Note 13 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2017 10-K.
The following tables present reportable segment financial information:
Optum | ||||||||||||||||||||||||||||||||
(in millions) | UnitedHealthcare | OptumHealth | OptumInsight | OptumRx | Optum Eliminations | Optum | Corporate and Eliminations | Consolidated | ||||||||||||||||||||||||
Three Months Ended March 31, 2018 | ||||||||||||||||||||||||||||||||
Revenues - unaffiliated customers: | ||||||||||||||||||||||||||||||||
Premiums | $ | 43,237 | $ | 847 | $ | — | $ | — | $ | — | $ | 847 | $ | — | $ | 44,084 | ||||||||||||||||
Products | — | 12 | 23 | 6,667 | — | 6,702 | — | 6,702 | ||||||||||||||||||||||||
Services | 2,039 | 1,188 | 740 | 137 | — | 2,065 | — | 4,104 | ||||||||||||||||||||||||
Total revenues - unaffiliated customers | 45,276 | 2,047 | 763 | 6,804 | — | 9,614 | — | 54,890 | ||||||||||||||||||||||||
Total revenues - affiliated customers | — | 3,606 | 1,304 | 9,295 | (333 | ) | 13,872 | (13,872 | ) | — | ||||||||||||||||||||||
Investment and other income | 183 | 106 | 2 | 7 | — | 115 | — | 298 | ||||||||||||||||||||||||
Total revenues | $ | 45,459 | $ | 5,759 | $ | 2,069 | $ | 16,106 | $ | (333 | ) | $ | 23,601 | $ | (13,872 | ) | $ | 55,188 | ||||||||||||||
Earnings from operations | $ | 2,400 | $ | 488 | $ | 395 | $ | 770 | $ | — | $ | 1,653 | $ | — | $ | 4,053 | ||||||||||||||||
Interest expense | — | — | — | — | — | — | (329 | ) | (329 | ) | ||||||||||||||||||||||
Earnings before income taxes | $ | 2,400 | $ | 488 | $ | 395 | $ | 770 | $ | — | $ | 1,653 | $ | (329 | ) | $ | 3,724 | |||||||||||||||
Three Months Ended March 31, 2017 | ||||||||||||||||||||||||||||||||
Revenues - unaffiliated customers: | ||||||||||||||||||||||||||||||||
Premiums | $ | 38,053 | $ | 885 | $ | — | $ | — | $ | — | $ | 885 | $ | — | $ | 38,938 | ||||||||||||||||
Products | — | 12 | 21 | 6,096 | — | 6,129 | — | 6,129 | ||||||||||||||||||||||||
Services | 1,922 | 721 | 642 | 149 | — | 1,512 | — | 3,434 | ||||||||||||||||||||||||
Total revenues - unaffiliated customers | 39,975 | 1,618 | 663 | 6,245 | — | 8,526 | — | 48,501 | ||||||||||||||||||||||||
Total revenues - affiliated customers | — | 3,059 | 1,179 | 8,698 | (286 | ) | 12,650 | (12,650 | ) | — | ||||||||||||||||||||||
Investment and other income | 161 | 56 | 1 | 4 | — | 61 | — | 222 | ||||||||||||||||||||||||
Total revenues | $ | 40,136 | $ | 4,733 | $ | 1,843 | $ | 14,947 | $ | (286 | ) | $ | 21,237 | $ | (12,650 | ) | $ | 48,723 | ||||||||||||||
Earnings from operations | $ | 2,134 | ||||||||||||||||||||||||||||||