Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2018
(In Millions, Except Per Share Data or As Otherwise Stated Herein)
References to the terms “we,” “our,” “us” or “Anthem” used throughout these Notes to Consolidated Financial Statements refer to Anthem, Inc., an Indiana corporation, and unless the context otherwise requires, its direct and indirect subsidiaries. References to the “states” include the District of Columbia, unless the context otherwise requires.
We are one of the largest health benefits companies in the United States in terms of medical membership, serving
39.6
medical members through our affiliated health plans as of
March 31, 2018
. We offer a broad spectrum of network-based managed care plans to Large Group, Small Group, Individual, Medicaid and Medicare markets. Our managed care plans include: Preferred Provider Organizations, or PPOs; health maintenance organizations, or HMOs; Point-of-Service, or POS, plans; traditional indemnity plans and other hybrid plans, including Consumer-Driven Health Plans, or CDHPs; and hospital only and limited benefit products. In addition, we provide a broad array of managed care services to self-funded customers, including claims processing, underwriting, stop loss insurance, actuarial services, provider network access, medical cost management, disease management, wellness programs and other administrative services. We provide an array of specialty and other insurance products and services such as dental, vision, life and disability insurance benefits, radiology benefit management and analytics-driven personal health care. We also provide services to the federal government in connection with the Federal Employee Program
®
.
We are an independent licensee of the Blue Cross and Blue Shield Association, or BCBSA, an association of independent health benefit plans.
We serve our members as the Blue Cross licensee for California and as the Blue Cross and Blue Shield, or BCBS, licensee for Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri (excluding
30
counties in the Kansas City area), Nevada, New Hampshire, New York (in varying counties as BCBS, Blue Cross or Empire BlueCross BlueShield HealthPlus), Ohio, Virginia (excluding the Northern Virginia suburbs of Washington, D.C.) and Wisconsin. In a majority of these service areas, we do business as Anthem Blue Cross, Anthem Blue Cross and Blue Shield, Blue Cross and Blue Shield of Georgia, and Empire Blue Cross Blue Shield or Empire Blue Cross (in our New York service areas). We also conduct business through arrangements with other BCBS licensees in Louisiana, South Carolina and western New York. Through our subsidiaries, we also serve customers in over
15
states across the country as America’s 1st Choice, Amerigroup, CareMore, Freedom Health, HealthLink, HealthSun, Optimum HealthCare, Simply Healthcare, and/or Unicare.
We are licensed to conduct insurance operations in all
50
states and the District of Columbia through our subsidiaries.
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2.
|
Basis of Presentation and Significant Accounting Policies
|
Basis of Presentation:
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. We have omitted certain footnote disclosures that would substantially duplicate the disclosures in our
2017
Annual Report on Form 10-K, unless the information contained in those disclosures materially changed or is required by GAAP. Certain prior year amounts have been reclassified to conform to the current year presentation. In the opinion of management, all adjustments, including normal recurring adjustments, necessary for a fair statement of the consolidated financial statements as of and for the
three
months ended
March 31, 2018
and
2017
have been recorded. The results of operations for the
three
months ended
March 31, 2018
are not necessarily indicative of the results that may be expected for the full year ending
December 31, 2018
. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended
December 31, 2017
included in our
2017
Annual Report on Form 10-K.
Cash and Cash Equivalents:
Certain of our subsidiaries operate outside of the United States and have functional currencies other than the U.S. dollar, or USD. We translate the assets and liabilities of those subsidiaries to USD using the exchange rate in effect at the end of the period. We translate the revenues and expenses of those subsidiaries to USD using the average exchange rates in effect during the period. The net effect of these translation adjustments is included in “Foreign currency translation adjustments” in our consolidated statements of comprehensive income. Additionally, we control a
number of bank accounts that are used exclusively to hold customer funds for the administration of customer benefits and have cash and cash equivalents on deposit to meet certain regulatory requirements. These amounts totaled
$230.5
and
$182.3
at
March 31, 2018
and
December 31, 2017
, respectively and are included in the cash and cash equivalents line on our consolidated balance sheets.
Revenue Recognition:
Premiums for fully-insured contracts are recognized as revenue over the period insurance coverage is provided, and, if applicable, net of amounts recognized for the minimum medical loss ratio rebates, risk adjustment, reinsurance, risk corridor or contractual or government-mandated premium stabilization programs. Administrative fees include revenue from certain group contracts that provide for the group to be at risk for all, or with supplemental insurance arrangements, a portion of their claims experience. We charge these self-funded groups an administrative fee, which is based on the number of members in a group or the group’s claim experience. Under our self-funded arrangements, revenue is recognized as administrative services are performed, and benefit payments under these programs are excluded from benefit expense. For additional information about our revenues, see Note 2, "Basis of Presentation and Significant Accounting Policies" and Note 19, "Segment Information," to our audited consolidated financial statements as of and for the year ended
December 31, 2017
included in our
2017
Annual Report on Form 10-K. In addition, see Note 15, "Segment Information," herein, for the disaggregation of revenues by segments and products.
Premium and self-funded receivables include the uncollected amounts from fully-insured and self-funded groups, individuals and government programs. At
March 31, 2018
, premium and self-funded receivables were
$3,797.4
and
$2,458.5
, respectively. At
December 31, 2017
, premium and self-funded receivables were
$3,605.2
and
$2,579.7
, respectively. Premium and self-funded receivables are reported net of an allowance for doubtful accounts of
$369.8
and
$455.3
at
March 31, 2018
and
December 31, 2017
, respectively.
For our non-fully-insured contracts, we had no material contract assets, contract liabilities or deferred contract costs recorded on our consolidated balance sheet at
March 31, 2018
. For the
three months ended March 31, 2018
, revenue recognized from performance obligations related to prior periods, such as due to changes in transaction price, was not material. For contracts that have an original expected duration of greater than one year, revenue expected to be recognized in future periods related to unfulfilled contractual performance obligations and contracts with variable consideration related to undelivered performance obligations is not material.
Recently Adopted Accounting Guidance:
In February 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2018-02,
Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
, or ASU 2018-02. On December 22, 2017, the federal government enacted a tax bill, H.R.1,
An act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018
, or the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act contains significant changes to corporate taxation, including, but not limited to, reducing the U.S. federal corporate income tax rate from 35% to 21% and modifying or limiting many business deductions. Current FASB guidance requires adjustments of deferred taxes due to a change in the federal corporate income tax rate to be included in income from operations. As a result, the tax effects of items within accumulated other comprehensive loss did not reflect the appropriate tax rate. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive loss to retained earnings for stranded tax effects resulting from the change in the federal corporate income tax rate. We adopted the amendments in ASU 2018-02 for our interim and annual reporting periods beginning on January 1, 2018 and reclassified
$91.3
of stranded tax effects from accumulated other comprehensive loss to retained earnings on our consolidated balance sheets. The adoption of ASU 2018-02 did not have any impact on our results of operations or cash flows.
In May 2017, the FASB issued Accounting Standards Update No. 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
, or ASU 2017-09. This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. We adopted ASU 2017-09 on January 1, 2018. The guidance has been and will be applied prospectively to awards modified on or after the adoption date. The adoption of ASU 2017-09 did not have any impact on our consolidated financial position, results of operations or cash flows.
In March 2017, the FASB issued Accounting Standards Update No. 2017-07,
Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, or ASU 2017-07. This amendment requires entities to disaggregate the service cost component from the other components of the
benefit cost and present the service cost component in the same income statement line item as other employee compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. Certain of our defined benefit plans have previously been frozen, resulting in no annual service costs, and the remaining service costs for our non-frozen plan are not material. We adopted ASU 2017-07 on January 1, 2018 and it did not have a material impact on our results of operations, cash flows or consolidated financial position.
In December 2016, the FASB issued Accounting Standards Update No. 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
, or ASU 2016-20
.
In May 2016, the FASB issued Accounting Standards Update No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
, or ASU 2016-12. In April 2016, the FASB issued Accounting Standards Update No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
, or ASU 2016-10. In March 2016, the FASB issued Accounting Standards Update No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross verses Net)
, or ASU 2016-08. These updates provide additional clarification and implementation guidance on the previously issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, or ASU 2014-09. Collectively, these updates require a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. These updates supersede almost all existing revenue recognition guidance under GAAP, with certain exceptions, including an exception for our premium revenues, recorded on the Premiums line item on our consolidated statements of income, which will continue to be accounted for in accordance with the provisions of Accounting Standards Codification, or ASC, Topic 944,
Financial Services - Insurance
. Our administrative service and other contracts that are subject to these Accounting Standards Updates are recorded in the Administrative fees and Other revenue line items on our consolidated statements of income and represent approximately
6.0%
of our consolidated total operating revenue. We adopted these standards on January 1, 2018 using the modified retrospective approach. The adoption of these standards did not have a material impact on our beginning retained earnings, results of operations, cash flows or consolidated financial position.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash,
or ASU 2016-18. This update amends ASC Topic 230 to add and clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. We adopted ASU 2016-18 on January 1, 2018 using a retrospective approach. The adoption of ASU 2016-18 did not have a material impact on our consolidated statements of cash flows and did not impact our results of operations or consolidated financial position.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,
or ASU 2016-15. This update addresses the presentation and classification on the statement of cash flows for eight specific items, with the objective of reducing existing diversity in practice in how certain cash receipts and cash payments are presented and classified. We adopted ASU 2016-15 on January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on our consolidated statements of cash flows, results of operations or consolidated financial position.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
, or ASU 2016-01. The amendments in ASU 2016-01 change the accounting for non-consolidated equity investments that are not accounted for under the equity method of accounting by requiring changes in fair value to be recognized in income. Additionally, ASU 2016-01 simplifies the impairment assessment of equity investments without readily determinable fair values; requires entities to use the exit price when estimating the fair value of financial instruments; and modifies various presentation disclosure requirements for financial instruments. We adopted ASU 2016-01 on January 1, 2018 as a cumulative-effect adjustment and reclassified
$320.2
of unrealized gains on equity investments, net of tax, from accumulated other comprehensive loss to retained earnings on our consolidated balance sheet. Effective January 1, 2018, our results of operations include the changes in fair value of these financial instruments.
Recent Accounting Guidance Not Yet Adopted:
In February 2018, the FASB issued Accounting Standards Update No. 2018-03,
Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
, or ASU 2018-03. This amendment clarifies certain aspects of the
new guidance (ASU 2016-01) on recognizing and measuring financial instruments and presentation requirements for certain fair value option liabilities. ASU 2018-03 is effective for interim periods beginning after June 15, 2018 and will be effective for our 2018 annual reporting period. The standard requires entities to record a cumulative-effect adjustment to the statement of financial position at the beginning of the fiscal year in which the amendments are adopted. We are currently evaluating the effects the adoption of ASU 2018-03 will have on our consolidated financial position and related disclosures.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases (Topic 842)
, or ASU 2016-02. Upon the effective date, ASU 2016-02 will supersede the current lease guidance in Topic 840,
Leases
. Under the new guidance, lessees will be required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis. Concurrently, lessees will be required to recognize a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The guidance is required to be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements. We are currently evaluating the effects the adoption of ASU 2016-02 will have on our consolidated financial statements, results of operations and cash flows.
There were no other new accounting pronouncements that were issued or became effective since the issuance of our
2017
Annual Report on Form 10-K that had, or are expected to have, a material impact on our consolidated financial position, results of operations or cash flows.
Acquisition of America’s 1st Choice
On February 15, 2018, we completed our acquisition of Freedom Health, Inc., Optimum HealthCare, Inc., America’s 1st Choice of South Carolina, Inc. and related entities, or collectively, America’s 1st Choice, a Medicare Advantage organization that offers HMO
products, including Chronic Special Needs Plans and Dual-Eligible Special Needs Plans under its Freedom Health and Optimum HealthCare brands in Florida and its America’s 1st Choice of South Carolina brand in South Carolina. Through its Medicare Advantage plans, America’s 1st Choice currently serves approximately one hundred and thirty five thousand members in twenty-five Florida and three South Carolina counties. This acquisition aligns with our plans for continued growth in the Medicare Advantage and Special Needs populations.
In accordance with FASB accounting guidance for business combinations, the consideration transferred was allocated to the preliminary fair value of America's 1st Choice's assets acquired and liabilities assumed, including identifiable intangible assets. The excess of the consideration transferred over the preliminary fair value of net assets acquired resulted in preliminary goodwill of
$989.7
at March 31, 2018, all of which was allocated to our Government Business segment. Preliminary goodwill recognized from the acquisition of America's 1st Choice primarily relates to the future economic benefits arising from the assets acquired and is consistent with our stated intentions to strengthen our position and expand operations in the government sector to service Medicare Advantage and Special Needs populations. Any additional payments or receipts of cash resulting from contractual purchase price adjustments or any subsequent adjustments made to the assets acquired or liabilities assumed during the measurement period will be recorded as an adjustment to goodwill.
The preliminary fair value of the net assets acquired from America's 1st Choice includes
$722.0
of other intangible assets, which primarily consist of finite-lived customer relationships and provider networks with amortization periods ranging from
8
to
20
years. The results of operations of America's 1st Choice are included in our consolidated financial statements within our Government Business segment for the period following February 15, 2018. The pro forma effects of this acquisition for prior periods were not material to our consolidated results of operations.
Acquisition of HealthSun
On December 21, 2017, we completed our acquisition of HealthSun
,
which serves approximately forty thousand members in the state of Florida through its Medicare Advantage plans, which received a five-star rating from the Centers for Medicare & Medicaid Services. This acquisition aligns with our plans for continued growth in the Medicare Advantage and dual-eligible populations.
In accordance with FASB accounting guidance for business combinations, the consideration transferred was allocated to the preliminary fair value of HealthSun's assets acquired and liabilities assumed, including identifiable intangible assets. The excess of the consideration transferred over the preliminary fair value of net assets acquired resulted in preliminary goodwill of
$1,607.2
at March 31, 2018, all of which was allocated to our Government Business segment. Preliminary goodwill recognized from the acquisition of HealthSun primarily relates to the future economic benefits arising from the assets acquired and is consistent with our stated intentions to strengthen our position and expand operations in the government sector to service Medicare Advantage and dual-eligible enrollees. As of March 31, 2018, the initial accounting for the acquisition has not been finalized. Any subsequent adjustments made to the assets acquired or liabilities assumed during the measurement period will be recorded as an adjustment to goodwill. During the three months ended March 31, 2018, we reduced preliminary goodwill by
$36.2
due to adjustments made to acquired intangible assets.
The preliminary fair value of the net assets acquired from HealthSun includes
$637.0
of other intangible assets, which primarily consist of finite-lived customer relationships with amortization periods ranging from
7
to
20
years. The results of operations of HealthSun are included in our consolidated financial statements within our Government Business segment for the period following December 21, 2017. The pro forma effects of this acquisition for prior periods were not material to our consolidated results of operations.
Fixed Maturity Securities
We evaluate our available-for-sale fixed maturity securities for other-than-temporary declines based on qualitative and quantitative factors. Other-than-temporary impairment losses recognized in income totaled
$7.9
and
$8.1
for the
three months ended March 31, 2018
and
2017
, respectively. There were no individually significant other-than-temporary impairment losses on investments during the
three
months ended
March 31, 2018
and
2017
. We continue to review our investment portfolios under our impairment review policy. Given the inherent uncertainty of changes in market conditions and the significant judgments involved, there is a continuing risk that further declines in fair value may occur and additional material other-than-temporary impairment losses on investments may be recorded in future periods.
A summary of current and long-term fixed maturity securities, available-for-sale, at
March 31, 2018
and
December 31, 2017
is as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Credit
Component of
Other-Than-
Temporary
Impairments
Recognized in
Accumulated
Other
Comprehensive
Loss
|
|
Cost or
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross Unrealized Losses
|
|
Estimated
Fair Value
|
|
|
|
|
Less than
12 Months
|
|
12 Months
or Greater
|
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
United States Government securities
|
$
|
589.0
|
|
|
$
|
2.3
|
|
|
$
|
(6.9
|
)
|
|
$
|
(0.9
|
)
|
|
$
|
583.5
|
|
|
$
|
—
|
|
Government sponsored securities
|
105.6
|
|
|
0.2
|
|
|
(0.5
|
)
|
|
(0.5
|
)
|
|
104.8
|
|
|
—
|
|
States, municipalities and political subdivisions, tax-exempt
|
5,312.3
|
|
|
102.1
|
|
|
(23.3
|
)
|
|
(11.5
|
)
|
|
5,379.6
|
|
|
—
|
|
Corporate securities
|
7,651.6
|
|
|
85.9
|
|
|
(97.0
|
)
|
|
(18.2
|
)
|
|
7,622.3
|
|
|
—
|
|
Residential mortgage-backed securities
|
2,786.1
|
|
|
32.2
|
|
|
(32.7
|
)
|
|
(20.0
|
)
|
|
2,765.6
|
|
|
—
|
|
Commercial mortgage-backed securities
|
78.0
|
|
|
0.3
|
|
|
(0.4
|
)
|
|
(2.2
|
)
|
|
75.7
|
|
|
—
|
|
Other securities
|
1,051.7
|
|
|
16.1
|
|
|
(5.3
|
)
|
|
(1.0
|
)
|
|
1,061.5
|
|
|
—
|
|
Total fixed maturity securities
|
$
|
17,574.3
|
|
|
$
|
239.1
|
|
|
$
|
(166.1
|
)
|
|
$
|
(54.3
|
)
|
|
$
|
17,593.0
|
|
|
$
|
—
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
United States Government securities
|
$
|
649.0
|
|
|
$
|
2.2
|
|
|
$
|
(5.0
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
645.5
|
|
|
$
|
—
|
|
Government sponsored securities
|
90.3
|
|
|
0.3
|
|
|
(0.1
|
)
|
|
(0.4
|
)
|
|
90.1
|
|
|
—
|
|
States, municipalities and political subdivisions, tax-exempt
|
5,854.6
|
|
|
192.6
|
|
|
(5.0
|
)
|
|
(7.3
|
)
|
|
6,034.9
|
|
|
—
|
|
Corporate securities
|
7,362.8
|
|
|
165.8
|
|
|
(30.2
|
)
|
|
(12.6
|
)
|
|
7,485.8
|
|
|
(0.3
|
)
|
Residential mortgage-backed securities
|
2,520.0
|
|
|
38.5
|
|
|
(8.0
|
)
|
|
(11.6
|
)
|
|
2,538.9
|
|
|
—
|
|
Commercial mortgage-backed securities
|
80.1
|
|
|
0.7
|
|
|
(0.1
|
)
|
|
(2.0
|
)
|
|
78.7
|
|
|
—
|
|
Other securities
|
1,053.7
|
|
|
14.4
|
|
|
(2.4
|
)
|
|
(1.5
|
)
|
|
1,064.2
|
|
|
—
|
|
Total fixed maturity securities
|
$
|
17,610.5
|
|
|
$
|
414.5
|
|
|
$
|
(50.8
|
)
|
|
$
|
(36.1
|
)
|
|
$
|
17,938.1
|
|
|
$
|
(0.3
|
)
|
For fixed maturity securities in an unrealized loss position at
March 31, 2018
and
December 31, 2017
, the following table summarizes the aggregate fair values and gross unrealized losses by length of time those securities have continuously been in an unrealized loss position:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
12 Months or Greater
|
(Securities are whole amounts)
|
Number of
Securities
|
|
Estimated
Fair Value
|
|
Gross
Unrealized
Loss
|
|
Number of
Securities
|
|
Estimated
Fair Value
|
|
Gross
Unrealized
Loss
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
United States Government securities
|
36
|
|
|
$
|
291.9
|
|
|
$
|
(6.9
|
)
|
|
13
|
|
|
$
|
82.8
|
|
|
$
|
(0.9
|
)
|
Government sponsored securities
|
19
|
|
|
28.4
|
|
|
(0.5
|
)
|
|
16
|
|
|
14.0
|
|
|
(0.5
|
)
|
States, municipalities and political subdivisions, tax-exempt
|
848
|
|
|
1,638.9
|
|
|
(23.3
|
)
|
|
167
|
|
|
277.5
|
|
|
(11.5
|
)
|
Corporate securities
|
2,023
|
|
|
4,225.6
|
|
|
(97.0
|
)
|
|
262
|
|
|
304.5
|
|
|
(18.2
|
)
|
Residential mortgage-backed securities
|
712
|
|
|
1,572.8
|
|
|
(32.7
|
)
|
|
287
|
|
|
470.8
|
|
|
(20.0
|
)
|
Commercial mortgage-backed securities
|
15
|
|
|
26.2
|
|
|
(0.4
|
)
|
|
12
|
|
|
25.5
|
|
|
(2.2
|
)
|
Other securities
|
172
|
|
|
528.7
|
|
|
(5.3
|
)
|
|
17
|
|
|
23.4
|
|
|
(1.0
|
)
|
Total fixed maturity securities
|
3,825
|
|
|
$
|
8,312.5
|
|
|
$
|
(166.1
|
)
|
|
774
|
|
|
$
|
1,198.5
|
|
|
$
|
(54.3
|
)
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
United States Government securities
|
36
|
|
|
$
|
450.4
|
|
|
$
|
(5.0
|
)
|
|
11
|
|
|
$
|
56.1
|
|
|
$
|
(0.7
|
)
|
Government sponsored securities
|
12
|
|
|
16.3
|
|
|
(0.1
|
)
|
|
16
|
|
|
14.8
|
|
|
(0.4
|
)
|
States, municipalities and political subdivisions, tax-exempt
|
414
|
|
|
641.4
|
|
|
(5.0
|
)
|
|
189
|
|
|
355.5
|
|
|
(7.3
|
)
|
Corporate securities
|
1,081
|
|
|
2,200.1
|
|
|
(30.2
|
)
|
|
279
|
|
|
329.7
|
|
|
(12.6
|
)
|
Residential mortgage-backed securities
|
445
|
|
|
1,050.3
|
|
|
(8.0
|
)
|
|
287
|
|
|
478.0
|
|
|
(11.6
|
)
|
Commercial mortgage-backed securities
|
7
|
|
|
13.7
|
|
|
(0.1
|
)
|
|
12
|
|
|
27.2
|
|
|
(2.0
|
)
|
Other securities
|
132
|
|
|
406.1
|
|
|
(2.4
|
)
|
|
20
|
|
|
35.8
|
|
|
(1.5
|
)
|
Total fixed maturity securities
|
2,127
|
|
|
$
|
4,778.3
|
|
|
$
|
(50.8
|
)
|
|
814
|
|
|
$
|
1,297.1
|
|
|
$
|
(36.1
|
)
|
The amortized cost and fair value of fixed maturity securities at
March 31, 2018
, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations.
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Estimated
Fair Value
|
Due in one year or less
|
$
|
526.5
|
|
|
$
|
526.3
|
|
Due after one year through five years
|
4,969.7
|
|
|
4,973.8
|
|
Due after five years through ten years
|
5,322.5
|
|
|
5,313.4
|
|
Due after ten years
|
3,891.5
|
|
|
3,938.2
|
|
Mortgage-backed securities
|
2,864.1
|
|
|
2,841.3
|
|
Total fixed maturity securities
|
$
|
17,574.3
|
|
|
$
|
17,593.0
|
|
Proceeds from sales, maturities, calls or redemptions of fixed maturity securities and the related gross realized gains and gross realized losses for the
three
months ended
March 31, 2018
and
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
2018
|
|
2017
|
Proceeds
|
$
|
2,227.3
|
|
|
$
|
3,374.5
|
|
Gross realized gains
|
29.7
|
|
|
45.5
|
|
Gross realized losses
|
(36.4
|
)
|
|
(23.7
|
)
|
In the ordinary course of business, we may sell securities at a loss for a number of reasons, including, but not limited to: (i) changes in the investment environment; (ii) expectation that the fair value could deteriorate further; (iii) desire to reduce exposure to an issuer or an industry; (iv) changes in credit quality; or (v) changes in expected cash flow.
All securities sold resulting in investment gains and losses are recorded on the trade date. Realized gains and losses are determined on the basis of the cost or amortized cost of the specific securities sold.
Equity Securities
A summary of current and long-term equity securities, at
March 31, 2018
and
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Equity securities:
|
|
|
|
Exchange traded funds
|
$
|
510.6
|
|
|
$
|
1,300.3
|
|
Fixed maturity mutual funds
|
656.4
|
|
|
790.6
|
|
Common equity securities
|
904.4
|
|
|
1,253.7
|
|
Private equity securities
|
303.4
|
|
|
287.4
|
|
Total
|
$
|
2,374.8
|
|
|
$
|
3,632.0
|
|
The gross losses and gains related to equity securities for the three months ended
March 31, 2018
is as follows:
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
Gross realized gains recognized on securities sold during the period
|
$
|
172.9
|
|
Gross unrealized losses recognized on securities still held at March 31, 2018
|
(215.9
|
)
|
Net realized losses recognized
|
$
|
(43.0
|
)
|
The gross gains and losses recognized on sales of equity securities were
$14.2
and
$2.0
, respectively, for the three months ended March 31, 2017.
Securities Lending Programs
We participate in securities lending programs whereby marketable securities in our investment portfolio are transferred to independent brokers or dealers in exchange for cash and securities collateral. The fair value of the collateral received at the time of the transactions amounted to
$611.8
and
$454.4
at
March 31, 2018
and
December 31, 2017
, respectively. The value of the collateral represented
102%
and
104%
of the market value of the securities on loan at
March 31, 2018
and
December 31, 2017
, respectively. We recognize the collateral as an asset under the caption “Securities lending collateral” on our consolidated balance sheets and we recognize a corresponding liability for the obligation to return the collateral to the borrower under the caption “Securities lending payable.” The securities on loan are reported in the applicable investment category on our consolidated balance sheets.
The remaining contractual maturity of our securities lending agreements at
March 31, 2018
is as follows:
|
|
|
|
|
|
Overnight and Continuous
|
Securities lending transactions
|
|
United States Government securities
|
$
|
20.8
|
|
Corporate securities
|
447.2
|
|
Equity securities
|
143.8
|
|
Total
|
$
|
611.8
|
|
The market value of loaned securities and that of the collateral pledged can fluctuate in non-synchronized fashions. To the extent the loaned securities' value appreciates faster or depreciates slower than the value of the collateral pledged, we are exposed to the risk of the shortfall. As a primary mitigating mechanism, the loaned securities and collateral pledged are marked to market on a daily basis and the shortfall, if any, is collected accordingly. Secondarily, the collateral level is set at
102%
of the value of the loaned securities, which provides a cushion before any shortfall arises. The investment of the cash collateral is subject to market risk, which is managed by limiting the investments to higher quality and shorter duration instruments.
|
|
5.
|
Derivative Financial Instruments
|
We primarily invest in the following types of derivative financial instruments: interest rate swaps, futures, forward contracts, put and call options, swaptions, embedded derivatives and warrants. We also enter into master netting agreements which reduce credit risk by permitting net settlement of transactions. We had posted collateral of
$5.9
and
$11.5
related to our derivative financial instruments at
March 31, 2018
and
December 31, 2017
, respectively.
A summary of the aggregate contractual or notional amounts and estimated fair values related to derivative financial instruments at
March 31, 2018
and
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual/
Notional
Amount
|
|
Balance Sheet Location
|
|
Estimated Fair Value
|
|
Asset
|
|
(Liability)
|
March 31, 2018
|
|
|
|
|
|
|
|
Hedging instruments
|
|
|
|
|
|
|
|
Interest rate swaps - fixed to floating
|
$
|
1,000.0
|
|
|
Other assets/other liabilities
|
|
$
|
1.1
|
|
|
$
|
(11.7
|
)
|
Non-hedging instruments
|
|
|
|
|
|
|
|
Interest rate swaps
|
253.3
|
|
|
Equity securities
|
|
1.4
|
|
|
(7.8
|
)
|
Futures
|
264.2
|
|
|
Equity securities
|
|
1.0
|
|
|
(5.1
|
)
|
Subtotal non-hedging
|
517.5
|
|
|
Subtotal non-hedging
|
|
2.4
|
|
|
(12.9
|
)
|
Total derivatives
|
$
|
1,517.5
|
|
|
Total derivatives
|
|
3.5
|
|
|
(24.6
|
)
|
|
|
|
Amounts netted
|
|
(2.9
|
)
|
|
2.9
|
|
|
|
|
Net derivatives
|
|
$
|
0.6
|
|
|
$
|
(21.7
|
)
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
Hedging instruments
|
|
|
|
|
|
|
|
Interest rate swaps - fixed to floating
|
$
|
1,235.0
|
|
|
Other assets/other liabilities
|
|
$
|
2.0
|
|
|
$
|
(5.3
|
)
|
Interest rate swaps - forward starting pay fixed
|
425.0
|
|
|
Other assets/other liabilities
|
|
—
|
|
|
(8.9
|
)
|
Subtotal hedging
|
1,660.0
|
|
|
Subtotal hedging
|
|
2.0
|
|
|
(14.2
|
)
|
Non-hedging instruments
|
|
|
|
|
|
|
|
Interest rate swaps
|
171.3
|
|
|
Equity securities
|
|
1.0
|
|
|
(4.7
|
)
|
Options
|
100.0
|
|
|
Other assets/other liabilities
|
|
—
|
|
|
(0.1
|
)
|
Futures
|
116.8
|
|
|
Equity securities
|
|
0.1
|
|
|
(2.5
|
)
|
Subtotal non-hedging
|
388.1
|
|
|
Subtotal non-hedging
|
|
1.1
|
|
|
(7.3
|
)
|
Total derivatives
|
$
|
2,048.1
|
|
|
Total derivatives
|
|
3.1
|
|
|
(21.5
|
)
|
|
|
|
Amounts netted
|
|
(1.6
|
)
|
|
1.6
|
|
|
|
|
Net derivatives
|
|
$
|
1.5
|
|
|
$
|
(19.9
|
)
|
Fair Value Hedges
We have entered into various interest rate swap contracts to convert a portion of our interest rate exposure on our long-term debt from fixed rates to floating rates. The floating rates payable on all of our fair value hedges are benchmarked to LIBOR. A summary of our outstanding fair value hedges at
March 31, 2018
and
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Fair Value Hedges
|
|
Year
Entered
Into
|
|
Outstanding Notional Amount
|
|
Interest Rate
Received
|
|
Expiration Date
|
|
March 31, 2018
|
|
December 31, 2017
|
|
Interest rate swap
|
|
2018
|
|
$
|
300.0
|
|
|
$
|
—
|
|
|
3.300
|
%
|
|
January 15, 2023
|
Interest rate swap
|
|
2018
|
|
90.0
|
|
|
—
|
|
|
4.350
|
|
|
August 15, 2020
|
Interest rate swap
|
|
2017
|
|
50.0
|
|
|
50.0
|
|
|
4.350
|
|
|
August 15, 2020
|
Interest rate swap
|
|
2015
|
|
200.0
|
|
|
200.0
|
|
|
4.350
|
|
|
August 15, 2020
|
Interest rate swap
|
|
2014
|
|
150.0
|
|
|
150.0
|
|
|
4.350
|
|
|
August 15, 2020
|
Interest rate swap
|
|
2013
|
|
10.0
|
|
|
10.0
|
|
|
4.350
|
|
|
August 15, 2020
|
Interest rate swap
|
|
2012
|
|
200.0
|
|
|
200.0
|
|
|
4.350
|
|
|
August 15, 2020
|
Interest rate swap
|
|
2012
|
|
—
|
|
|
625.0
|
|
|
1.875
|
|
|
January 15, 2018
|
Total notional amount outstanding
|
|
|
|
$
|
1,000.0
|
|
|
$
|
1,235.0
|
|
|
|
|
|
|
The following amounts were recorded on our consolidated balance sheets related to cumulative basis adjustments for fair value hedges at
March 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification in Which Hedged Item is Included
|
|
Carrying Amount of Hedged Liability
|
|
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability
|
|
March 31, 2018
|
|
December 31, 2017
|
|
March 31, 2018
|
|
December 31, 2017
|
Current portion of long term-debt
|
|
$
|
650.8
|
|
|
$
|
1,274.6
|
|
|
$
|
1.1
|
|
|
$
|
2.0
|
|
Long-term debt
|
|
18,110.1
|
|
|
17,382.2
|
|
|
(11.7
|
)
|
|
(5.3
|
)
|
Cash Flow Hedges
We have entered into a series of forward starting pay fixed interest rate swaps with the objective of eliminating the variability of cash flows in the interest payments on anticipated future financings. We had
$425.0
in notional amounts outstanding under forward starting pay fixed interest rate swaps at
December 31, 2017
. During the three months ended March 31, 2018, swaps in the notional amount of
$425.0
were terminated. We received an aggregate of
$24.4
from the swap counter parties upon termination.
The unrecognized loss for all outstanding, expired and terminated cash flow hedges included in accumulated other comprehensive loss, net of tax, was
$254.4
and $
233.0
at
March 31, 2018
and
December 31, 2017
, respectively. As of
March 31, 2018
, the total amount of amortization over the next twelve months for all cash flow hedges is estimated to increase interest expense by approximately
$14.0
. No amounts were excluded from effectiveness testing.
A summary of the effect of cash flow hedges in accumulated other comprehensive loss for the
three
months ended
March 31, 2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge
Income
Recognized
in Other
Comprehensive
(Loss) Income
|
|
Income Statement Location of
Loss Reclassification from
Accumulated Other Comprehensive Loss
|
|
Hedge Loss
Reclassified from
Accumulated
Other
Comprehensive
Loss
|
Type of Cash Flow Hedge
|
|
|
|
Three months ended March 31, 2018
|
|
|
|
|
|
|
Forward starting pay fixed swaps
|
|
$
|
33.3
|
|
|
Interest expense
|
|
$
|
(3.2
|
)
|
Three months ended March 31, 2017
|
|
|
|
|
|
|
Forward starting pay fixed swaps
|
|
$
|
18.3
|
|
|
Interest expense
|
|
$
|
(1.5
|
)
|
Forward starting pay fixed swaps
|
|
|
|
Net realized (losses) gains on financial instruments
|
|
$
|
(12.0
|
)
|
Income Statement Relationship of Fair Value and Cash Flow Hedging
A summary of the relationship between the effects of fair value and cash flow hedges on the total amount of income and expense presented in our consolidated statements of income for the
three
months ended
March 31, 2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification and Amount of (Loss) Gain Recognized in Income on Fair Value and Cash Flow Hedging Relationships
|
|
Three Months Ended March 31, 2018
|
|
Three Months Ended March 31, 2017
|
|
Net Realized (Losses) Gains on Financial Instruments
|
|
Interest Expense
|
|
Net Realized (Losses) Gains on Financial Instruments
|
|
Interest Expense
|
Total amount of income or expense in the income statement in which the effects of fair value or cash flow hedges are recorded
|
$
|
(26.1
|
)
|
|
$
|
(184.2
|
)
|
|
$
|
7.3
|
|
|
$
|
(235.0
|
)
|
|
|
|
|
|
|
|
|
Loss (gain) on fair value hedging relationships:
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
|
|
|
|
|
Hedged items
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
(0.2
|
)
|
Derivatives designated as hedging instruments
|
—
|
|
|
0.4
|
|
|
—
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Loss on cash flow hedging relationships:
|
|
|
|
|
|
|
|
Forward starting pay fixed swaps
|
|
|
|
|
|
|
|
Amount of loss reclassified from accumulated other comprehensive loss into net income
|
—
|
|
|
(3.2
|
)
|
|
—
|
|
|
(1.5
|
)
|
Amount of loss reclassified from accumulated other comprehensive loss into net income due to ineffectiveness and missed forecasted transactions
|
—
|
|
|
—
|
|
|
(12.0
|
)
|
|
—
|
|
Non-Hedging Derivatives
A summary of the effect of non-hedging derivatives on our consolidated statements of income for the
three
months ended
March 31, 2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
Type of Non-hedging Derivatives
|
|
Income Statement Location of Loss Recognized
|
|
Derivative
Gain (Loss)
Recognized
|
Three months ended March 31, 2018
|
|
|
|
|
Interest rate swaps
|
|
Net realized (losses) gains on financial instruments
|
|
$
|
(2.4
|
)
|
Options
|
|
Net realized (losses) gains on financial instruments
|
|
(0.7
|
)
|
Futures
|
|
Net realized (losses) gains on financial instruments
|
|
3.0
|
|
Total
|
|
|
|
$
|
(0.1
|
)
|
Three months ended March 31, 2017
|
|
|
|
|
Interest rate swaps
|
|
Net realized (losses) gains on financial instruments
|
|
$
|
0.6
|
|
Options
|
|
Net realized (losses) gains on financial instruments
|
|
(10.5
|
)
|
Futures
|
|
Net realized (losses) gains on financial instruments
|
|
(0.4
|
)
|
Total
|
|
|
|
$
|
(10.3
|
)
|
Assets and liabilities recorded at fair value in our consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Level inputs, as defined by FASB guidance for fair value measurements and disclosures, are as follows:
|
|
|
|
Level Input
|
|
Input Definition
|
Level I
|
|
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
|
Level II
|
|
Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date.
|
Level III
|
|
Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
|
The following methods, assumptions and inputs were used to determine the fair value of each class of the following assets and liabilities recorded at fair value in our consolidated balance sheets:
Cash equivalents:
Cash equivalents primarily consist of highly rated money market funds with maturities of three months or less and are purchased daily at par value with specified yield rates. Due to the high ratings and short-term nature of the funds, we designate all cash equivalents as Level I.
Fixed maturity securities, available-for-sale:
Fair values of available-for-sale fixed maturity securities are based on quoted market prices, where available. These fair values are obtained primarily from third party pricing services, which generally use Level I or Level II inputs for the determination of fair value to facilitate fair value measurements and disclosures. Level II securities primarily include United States Government securities, corporate securities, securities from states, municipalities and political subdivisions, mortgage-backed securities and certain other asset-backed securities. For securities not actively traded, the pricing services may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. We have controls in place to review the pricing services’ qualifications and procedures used to determine fair values. In addition, we periodically review the pricing services’ pricing methodologies, data sources and pricing inputs to ensure the fair values obtained are reasonable. Inputs that are often used in the valuation methodologies include, but are not limited to, broker quotes, benchmark yields, credit spreads, default rates and prepayment speeds. We also have certain fixed maturity securities, primarily corporate debt securities, which are designated Level III securities. For these securities, the valuation methodologies may incorporate broker quotes or discounted cash flow analyses using assumptions for inputs such as
expected cash flows, benchmark yields, credit spreads, default rates and prepayment speeds that are not observable in the markets.
Equity securities:
Fair values of equity securities are generally designated as Level I and are based on quoted market prices. For certain equity securities, quoted market prices for the identical security are not always available and the fair value is estimated by reference to similar securities for which quoted prices are available. These securities are designated Level II. We also have certain equity securities, including private equity securities, for which the fair value is estimated based on each security’s current condition and future cash flow projections. Such securities are designated Level III. The fair values of these private equity securities are generally based on either broker quotes or discounted cash flow projections using assumptions for inputs such as the weighted-average cost of capital, long-term revenue growth rates and earnings before interest, taxes, depreciation and amortization, and/or revenue multiples that are not observable in the markets.
Other invested assets, current:
Other invested assets, current include securities held in rabbi trusts that are classified as trading. These securities are designated Level I securities, as fair values are based on quoted market prices.
Securities lending collateral:
Fair values of securities lending collateral are based on quoted market prices, where available. These fair values are obtained primarily from third party pricing services, which generally use Level I or Level II inputs for the determination of fair value, to facilitate fair value measurements and disclosures.
Derivatives:
Fair values are based on the quoted market prices by the financial institution that is the counterparty to the derivative transaction. We independently verify prices provided by the counterparties using valuation models that incorporate observable market inputs for similar derivative transactions. Derivatives are designated as Level II securities. Derivatives presented within the fair value hierarchy table below are presented on a gross basis and not on a master netting basis by counterparty.
A summary of fair value measurements by level for assets and liabilities measured at fair value on a recurring basis at
March 31, 2018
and
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
March 31, 2018
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
1,542.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,542.6
|
|
Fixed maturity securities, available-for-sale:
|
|
|
|
|
|
|
|
United States Government securities
|
—
|
|
|
583.5
|
|
|
—
|
|
|
583.5
|
|
Government sponsored securities
|
—
|
|
|
104.8
|
|
|
—
|
|
|
104.8
|
|
States, municipalities and political subdivisions, tax-exempt
|
—
|
|
|
5,379.6
|
|
|
—
|
|
|
5,379.6
|
|
Corporate securities
|
39.5
|
|
|
7,322.3
|
|
|
260.5
|
|
|
7,622.3
|
|
Residential mortgage-backed securities
|
—
|
|
|
2,760.9
|
|
|
4.7
|
|
|
2,765.6
|
|
Commercial mortgage-backed securities
|
—
|
|
|
75.7
|
|
|
—
|
|
|
75.7
|
|
Other securities
|
—
|
|
|
1,047.8
|
|
|
13.7
|
|
|
1,061.5
|
|
Total fixed maturity securities, available-for-sale
|
39.5
|
|
|
17,274.6
|
|
|
278.9
|
|
|
17,593.0
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Exchange traded funds
|
510.6
|
|
|
—
|
|
|
—
|
|
|
510.6
|
|
Fixed maturity mutual funds
|
—
|
|
|
656.4
|
|
|
—
|
|
|
656.4
|
|
Common equity securities
|
836.3
|
|
|
68.1
|
|
|
—
|
|
|
904.4
|
|
Private equity securities
|
—
|
|
|
—
|
|
|
303.4
|
|
|
303.4
|
|
Total equity securities
|
1,346.9
|
|
|
724.5
|
|
|
303.4
|
|
|
2,374.8
|
|
Other invested assets, current
|
24.3
|
|
|
—
|
|
|
—
|
|
|
24.3
|
|
Securities lending collateral
|
433.9
|
|
|
178.3
|
|
|
—
|
|
|
612.2
|
|
Derivatives
|
—
|
|
|
3.5
|
|
|
—
|
|
|
3.5
|
|
Total assets
|
$
|
3,387.2
|
|
|
$
|
18,180.9
|
|
|
$
|
582.3
|
|
|
$
|
22,150.4
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivatives
|
$
|
—
|
|
|
$
|
(24.6
|
)
|
|
$
|
—
|
|
|
$
|
(24.6
|
)
|
Total liabilities
|
$
|
—
|
|
|
$
|
(24.6
|
)
|
|
$
|
—
|
|
|
$
|
(24.6
|
)
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
1,956.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,956.4
|
|
Fixed maturity securities, available-for-sale:
|
|
|
|
|
|
|
|
United States Government securities
|
—
|
|
|
645.5
|
|
|
—
|
|
|
645.5
|
|
Government sponsored securities
|
—
|
|
|
90.1
|
|
|
—
|
|
|
90.1
|
|
States, municipalities and political subdivisions, tax-exempt
|
—
|
|
|
6,034.9
|
|
|
—
|
|
|
6,034.9
|
|
Corporate securities
|
24.8
|
|
|
7,231.8
|
|
|
229.2
|
|
|
7,485.8
|
|
Residential mortgage-backed securities
|
—
|
|
|
2,533.9
|
|
|
5.0
|
|
|
2,538.9
|
|
Commercial mortgage-backed securities
|
—
|
|
|
78.7
|
|
|
—
|
|
|
78.7
|
|
Other securities
|
75.2
|
|
|
973.1
|
|
|
15.9
|
|
|
1,064.2
|
|
Total fixed maturity securities, available-for-sale
|
100.0
|
|
|
17,588.0
|
|
|
250.1
|
|
|
17,938.1
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Exchange traded funds
|
1,300.3
|
|
|
—
|
|
|
—
|
|
|
1,300.3
|
|
Fixed maturity mutual funds
|
—
|
|
|
790.6
|
|
|
—
|
|
|
790.6
|
|
Common equity securities
|
1,146.6
|
|
|
107.1
|
|
|
—
|
|
|
1,253.7
|
|
Private equity securities
|
—
|
|
|
—
|
|
|
287.4
|
|
|
287.4
|
|
Total equity securities
|
2,446.9
|
|
|
897.7
|
|
|
287.4
|
|
|
3,632.0
|
|
Other invested assets, current
|
17.2
|
|
|
—
|
|
|
—
|
|
|
17.2
|
|
Securities lending collateral
|
214.1
|
|
|
241.0
|
|
|
—
|
|
|
455.1
|
|
Derivatives
|
—
|
|
|
3.1
|
|
|
—
|
|
|
3.1
|
|
Total assets
|
$
|
4,734.6
|
|
|
$
|
18,729.8
|
|
|
$
|
537.5
|
|
|
$
|
24,001.9
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivatives
|
$
|
—
|
|
|
$
|
(21.5
|
)
|
|
$
|
—
|
|
|
$
|
(21.5
|
)
|
Total liabilities
|
$
|
—
|
|
|
$
|
(21.5
|
)
|
|
$
|
—
|
|
|
$
|
(21.5
|
)
|
A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level III inputs for the
three months ended March 31, 2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
Securities
|
|
Residential
Mortgage-
backed
Securities
|
|
Other
Securities
|
|
Equity
Securities
|
|
Total
|
Three Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2018
|
$
|
229.2
|
|
|
$
|
5.0
|
|
|
$
|
15.9
|
|
|
$
|
287.4
|
|
|
$
|
537.5
|
|
Total (losses) gains:
|
|
|
|
|
|
|
|
|
|
Recognized in net income
|
(0.3
|
)
|
|
—
|
|
|
—
|
|
|
(238.7
|
)
|
|
(239.0
|
)
|
Recognized in accumulated other comprehensive loss
|
0.5
|
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
0.4
|
|
Purchases
|
19.9
|
|
|
0.1
|
|
|
—
|
|
|
255.6
|
|
|
275.6
|
|
Sales
|
(3.6
|
)
|
|
—
|
|
|
—
|
|
|
(0.9
|
)
|
|
(4.5
|
)
|
Settlements
|
(6.0
|
)
|
|
(0.4
|
)
|
|
(0.7
|
)
|
|
—
|
|
|
(7.1
|
)
|
Transfers into Level III
|
20.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20.8
|
|
Transfers out of Level III
|
—
|
|
|
—
|
|
|
(1.4
|
)
|
|
—
|
|
|
(1.4
|
)
|
Ending balance at March 31, 2018
|
$
|
260.5
|
|
|
$
|
4.7
|
|
|
$
|
13.7
|
|
|
$
|
303.4
|
|
|
$
|
582.3
|
|
Change in unrealized losses included in net income related to assets still held for the three months ended March 31, 2018
|
$
|
(0.5
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2017
|
$
|
238.8
|
|
|
$
|
12.0
|
|
|
$
|
42.8
|
|
|
$
|
187.8
|
|
|
$
|
481.4
|
|
Total (losses) gains:
|
|
|
|
|
|
|
|
|
|
Recognized in net income
|
(1.3
|
)
|
|
—
|
|
|
—
|
|
|
0.3
|
|
|
(1.0
|
)
|
Recognized in accumulated other comprehensive loss
|
3.6
|
|
|
—
|
|
|
0.1
|
|
|
(0.4
|
)
|
|
3.3
|
|
Purchases
|
34.8
|
|
|
1.5
|
|
|
9.5
|
|
|
36.0
|
|
|
81.8
|
|
Sales
|
(32.6
|
)
|
|
(1.5
|
)
|
|
—
|
|
|
(0.4
|
)
|
|
(34.5
|
)
|
Settlements
|
(19.6
|
)
|
|
(0.2
|
)
|
|
(0.4
|
)
|
|
—
|
|
|
(20.2
|
)
|
Transfers into Level III
|
8.3
|
|
|
—
|
|
|
1.2
|
|
|
—
|
|
|
9.5
|
|
Transfers out of Level III
|
(2.0
|
)
|
|
(4.6
|
)
|
|
(24.6
|
)
|
|
—
|
|
|
(31.2
|
)
|
Ending balance at March 31, 2017
|
$
|
230.0
|
|
|
$
|
7.2
|
|
|
$
|
28.6
|
|
|
$
|
223.3
|
|
|
$
|
489.1
|
|
Change in unrealized losses included in net income related to assets still held for the three months ended March 31, 2017
|
$
|
(1.7
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1.7
|
)
|
Transfers between levels, if any, are recorded as of the beginning of the reporting period. There were no material transfers between levels during the
three
months ended
March 31, 2018
or
2017
.
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. As disclosed in Note 3, “Business Acquisitions,” we completed our acquisition of America's 1st Choice on February 15, 2018. The preliminary values of net assets acquired in our acquisition of America's 1st Choice and resulting goodwill and other intangible assets were recorded at fair value primarily using Level III inputs. The majority of America's 1st Choice's assets acquired and liabilities assumed were recorded at their carrying values as of the respective date of acquisition, as their carrying values approximated their fair values due to their short-term nature. The preliminary fair values of goodwill and other intangible assets acquired in our acquisition of America's 1st Choice were internally estimated based on the income approach. The income approach estimates fair value based on the present value of the cash flows that the assets could be expected to generate in the future. We developed internal estimates for the expected cash flows and discount rate in the present value calculation. Other than the assets acquired and liabilities assumed in our acquisition of America's 1st
Choice described above, there were no material assets or liabilities measured at fair value on a nonrecurring basis during the
three
months ended
March 31, 2018
or
2017
.
Our valuation policy is determined by members of our treasury and accounting departments. Whenever possible, our policy is to obtain quoted market prices in active markets to estimate fair values for recognition and disclosure purposes. Where quoted market prices in active markets are not available, fair values are estimated using discounted cash flow analyses, broker quotes or other valuation techniques. These techniques are significantly affected by our assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs are not considered in estimating fair values. Our valuation policy is generally to obtain only one quoted price for each security from third party pricing services, which are derived through recently reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information. When broker quotes are used, we generally obtain only one broker quote per security. As we are responsible for the determination of fair value, we perform a monthly analysis on the prices received from the pricing services to determine whether the prices are reasonable estimates of fair value. This analysis is performed by our internal treasury personnel who are familiar with our investment portfolios, the pricing services engaged and the valuation techniques and inputs used. Our analysis includes a review of month-to-month price fluctuations. If unusual fluctuations are noted in this review, we may obtain additional information from other pricing services to validate the quoted price. There were no adjustments to quoted market prices obtained from the pricing services during the
three
months ended
March 31, 2018
or
2017
.
In addition to the preceding disclosures on assets recorded at fair value in the consolidated balance sheets, FASB guidance requires the disclosure of fair values for certain other financial instruments for which it is practicable to estimate fair value, whether or not such values are recognized in our consolidated balance sheets.
Non-financial instruments such as real estate, property and equipment, other current assets, deferred income taxes, intangible assets and certain financial instruments, such as policy liabilities, are excluded from the fair value disclosures. Therefore, the fair value amounts cannot be aggregated to determine our underlying economic value.
The carrying amounts reported in our consolidated balance sheets for cash, accrued investment income, premium and self-funded receivables, other receivables, income taxes receivable/payable, unearned income, accounts payable and accrued expenses, security trades pending payable, securities lending payable and certain other current liabilities approximate fair value because of the short term nature of these items. These assets and liabilities are not listed in the table below.
The following methods, assumptions and inputs were used to estimate the fair value of each class of financial instrument that is recorded at its carrying value in our consolidated balance sheets:
Other invested assets, long-term:
Other invested assets, long-term include primarily our investments in limited partnerships, joint ventures and other non-controlled corporations, as well as the cash surrender value of corporate-owned life insurance policies. Investments in limited partnerships, joint ventures and other non-controlled corporations are carried at our share in the entities’ undistributed earnings, which approximates fair value. The carrying value of corporate-owned life insurance policies represents the cash surrender value as reported by the respective insurer, which approximates fair value.
Short-term borrowings:
The fair value of our short-term borrowings is based on quoted market prices for the same or similar debt, or, if no quoted market prices were available, on the current market interest rates estimated to be available to us for debt of similar terms and remaining maturities.
Long-term debt – commercial paper:
The carrying amount for commercial paper approximates fair value as the underlying instruments have variable interest rates at market value.
Long-term debt – senior unsecured notes, remarketable subordinated notes and surplus notes:
The fair values of our notes are based on quoted market prices in active markets for the same or similar debt, or, if no quoted market prices are available, on the current observable market rates estimated to be available to us for debt of similar terms and remaining maturities.
Long-term debt – convertible debentures:
The fair value of our convertible debentures is based on the market price in the active private market in which the convertible debentures trade.
A summary of the estimated fair values by level of each class of financial instrument that is recorded at its carrying value on our consolidated balance sheets at
March 31, 2018
and
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Estimated Fair Value
|
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Other invested assets, long-term
|
$
|
3,460.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,460.8
|
|
|
$
|
3,460.8
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
1,125.0
|
|
|
—
|
|
|
1,125.0
|
|
|
—
|
|
|
1,125.0
|
|
Commercial paper
|
695.7
|
|
|
—
|
|
|
695.7
|
|
|
—
|
|
|
695.7
|
|
Notes
|
17,811.5
|
|
|
—
|
|
|
18,118.1
|
|
|
—
|
|
|
18,118.1
|
|
Convertible debentures
|
253.7
|
|
|
—
|
|
|
1,202.5
|
|
|
—
|
|
|
1,202.5
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Other invested assets, long-term
|
$
|
3,343.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,343.8
|
|
|
$
|
3,343.8
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
1,275.0
|
|
|
—
|
|
|
1,275.0
|
|
|
—
|
|
|
1,275.0
|
|
Commercial paper
|
803.6
|
|
|
—
|
|
|
803.6
|
|
|
—
|
|
|
803.6
|
|
Notes
|
17,592.7
|
|
|
—
|
|
|
18,815.1
|
|
|
—
|
|
|
18,815.1
|
|
Convertible debentures
|
260.5
|
|
|
—
|
|
|
1,215.7
|
|
|
—
|
|
|
1,215.7
|
|
During the
three months ended March 31, 2018
and
2017
, we recognized income tax expense of
$467.8
and
$505.1
, respectively, which represent effective tax rates of
26.3%
and
33.3%
, respectively. The
decrease
in income tax expense and effective tax rate was primarily due to the effect of the Tax Cuts and Jobs Act, which reduced the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. This decrease was partially offset by the reinstatement of the non-tax deductible Health Insurance Provider Fee for 2018, which resulted in additional income tax expense of
$83.4
. At March 31, 2018, we have not completed our accounting for all of the tax effects of the Tax Cuts and Jobs Act. We have made a reasonable estimate of the effects and will continue to make and refine our calculations as additional analysis is completed. Our estimates may also be affected as we gain a more thorough understanding of the Tax Cuts and Jobs Act.
The components of net periodic benefit credit included in our consolidated statements of income for the
three months ended March 31, 2018
and
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Three Months Ended
March 31
|
|
Three Months Ended
March 31
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
$
|
2.1
|
|
|
$
|
2.5
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
Interest cost
|
13.6
|
|
|
16.6
|
|
|
3.8
|
|
|
5.2
|
|
Expected return on assets
|
(36.8
|
)
|
|
(36.8
|
)
|
|
(6.1
|
)
|
|
(5.7
|
)
|
Recognized actuarial loss
|
6.0
|
|
|
5.4
|
|
|
0.9
|
|
|
2.9
|
|
Settlement loss
|
6.6
|
|
|
1.7
|
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
—
|
|
|
(0.1
|
)
|
|
(3.1
|
)
|
|
(3.4
|
)
|
Net periodic benefit credit
|
$
|
(8.5
|
)
|
|
$
|
(10.7
|
)
|
|
$
|
(4.2
|
)
|
|
$
|
(0.7
|
)
|
For the year ending
December 31, 2018
, no material contributions are expected to be necessary to meet the Employee Retirement Income Security Act, or ERISA, required funding levels; however, we may elect to make discretionary contributions up to the maximum amount deductible for income tax purposes. No contributions were made to our retirement benefit plans during the three months ended
March 31, 2018
and
2017
.
9 .
Medical Claims Payable
A reconciliation of the beginning and ending balances for medical claims payable, by segment (see Note 15, "Segment Information"), for the
three months ended March 31, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
& Specialty
Business
|
|
Government
Business
|
|
Total
|
Gross medical claims payable, beginning of period
|
$
|
3,406.6
|
|
|
$
|
4,584.9
|
|
|
$
|
7,991.5
|
|
Ceded medical claims payable, beginning of period
|
(78.0
|
)
|
|
(26.9
|
)
|
|
(104.9
|
)
|
Net medical claims payable, beginning of period
|
3,328.6
|
|
|
4,558.0
|
|
|
7,886.6
|
|
Business combinations and purchase adjustments
|
—
|
|
|
199.2
|
|
|
199.2
|
|
Net incurred medical claims:
|
|
|
|
|
|
Current period
|
5,825.2
|
|
|
11,445.9
|
|
|
17,271.1
|
|
Prior periods redundancies
|
(337.0
|
)
|
|
(308.2
|
)
|
|
(645.2
|
)
|
Total net incurred medical claims
|
5,488.2
|
|
|
11,137.7
|
|
|
16,625.9
|
|
Net payments attributable to:
|
|
|
|
|
|
Current period medical claims
|
3,796.1
|
|
|
7,682.7
|
|
|
11,478.8
|
|
Prior periods medical claims
|
2,221.7
|
|
|
3,405.4
|
|
|
5,627.1
|
|
Total net payments
|
6,017.8
|
|
|
11,088.1
|
|
|
17,105.9
|
|
Net medical claims payable, end of period
|
2,799.0
|
|
|
4,806.8
|
|
|
7,605.8
|
|
Ceded medical claims payable, end of period
|
2.1
|
|
|
32.4
|
|
|
34.5
|
|
Gross medical claims payable, end of period
|
$
|
2,801.1
|
|
|
$
|
4,839.2
|
|
|
$
|
7,640.3
|
|
At
March 31, 2018
, the total of net incurred but not reported liabilities plus expected development on reported claims for the Commercial & Specialty Business was
$85.2
,
$684.7
and
$2,029.1
for the claim years 2016 and prior, 2017 and 2018, respectively.
At
March 31, 2018
, the total of net incurred but not reported liabilities plus expected development on reported claims for the Government Business was
$43.0
,
$801.3
and
$3,962.5
for the claim years 2016 and prior, 2017 and 2018, respectively.
A reconciliation of the beginning and ending balances for medical claims payable, by segment (see Note 15, "Segment Information"), for the
three months ended March 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
& Specialty
Business
|
|
Government
Business
|
|
Total
|
Gross medical claims payable, beginning of period
|
$
|
3,267.0
|
|
|
$
|
4,625.6
|
|
|
$
|
7,892.6
|
|
Ceded medical claims payable, beginning of period
|
(521.3
|
)
|
|
(17.8
|
)
|
|
(539.1
|
)
|
Net medical claims payable, beginning of period
|
2,745.7
|
|
|
4,607.8
|
|
|
7,353.5
|
|
Net incurred medical claims:
|
|
|
|
|
|
Current period
|
7,084.1
|
|
|
10,884.4
|
|
|
17,968.5
|
|
Prior periods redundancies
|
(334.0
|
)
|
|
(460.6
|
)
|
|
(794.6
|
)
|
Total net incurred medical claims
|
6,750.1
|
|
|
10,423.8
|
|
|
17,173.9
|
|
Net payments attributable to:
|
|
|
|
|
|
Current period medical claims
|
4,560.2
|
|
|
7,212.0
|
|
|
11,772.2
|
|
Prior periods medical claims
|
2,062.5
|
|
|
3,226.4
|
|
|
5,288.9
|
|
Total net payments
|
6,622.7
|
|
|
10,438.4
|
|
|
17,061.1
|
|
Net medical claims payable, end of period
|
2,873.1
|
|
|
4,593.2
|
|
|
7,466.3
|
|
Ceded medical claims payable, end of period
|
439.6
|
|
|
14.7
|
|
|
454.3
|
|
Gross medical claims payable, end of period
|
$
|
3,312.7
|
|
|
$
|
4,607.9
|
|
|
$
|
7,920.6
|
|
The reconciliation of net incurred medical claims to benefit expense included in our consolidated statements of income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
|
2018
|
|
2017
|
Net incurred medical claims:
|
|
|
|
|
Commercial & Specialty Business
|
|
$
|
5,488.2
|
|
|
$
|
6,750.1
|
|
Government Business
|
|
11,137.7
|
|
|
10,423.8
|
|
Total net incurred medical claims
|
|
16,625.9
|
|
|
17,173.9
|
|
Quality improvement and other claims expense
|
|
420.0
|
|
|
368.9
|
|
Benefit expense
|
|
$
|
17,045.9
|
|
|
$
|
17,542.8
|
|
We generally issue senior unsecured notes for long-term borrowing purposes. At
March 31, 2018
and
December 31, 2017
, we had
$17,786.6
and
$16,329.1
, respectively, outstanding under these notes.
On May 12, 2015, we issued
25.0
Equity Units, pursuant to an underwriting agreement dated May 6, 2015, in an aggregate principal amount of
$1,250.0
. Each Equity Unit has a stated amount of
$50
(whole dollars) and consists of a purchase contract obligating the holder to purchase a certain number of shares of our common stock on May 1, 2018, subject to earlier termination or settlement, for a price in cash of $50 (whole dollars); and a
5%
undivided beneficial ownership interest in
$1,000
(whole dollars) principal amount of our
1.900%
remarketable subordinated notes, or RSNs, due 2028.
On May 1, 2018, if the applicable market value of our common stock is equal to or greater than $207.2968 per share, the settlement rate will be 0.2412 shares of our common stock. If the applicable market value of our common stock is less than $207.2968 per share but greater than $143.5544 per share, the settlement rate will be a number of shares of our common
stock equal to $50 (whole dollars) divided by the applicable market value of our common stock. If the applicable market value of common stock is less than or equal to $143.5544, the settlement rate will be 0.3483 shares of our common stock. Holders of the Equity Units may elect early settlement at a minimum settlement rate of 0.2412 shares of our common stock for each purchase contract being settled.
At
March 31, 2018
, the present value of the stock purchase contract liability was
$10.5
and is included in other current liabilities and other noncurrent liabilities with a corresponding offset to additional paid-in capital in our consolidated balance sheets. Contract adjustment payments commenced on August 1, 2015 at a rate of
3.350%
per annum on the stated amount per Equity Unit. Subject to certain specified terms and conditions, we have the right to defer payments on all or part of the contract adjustment payments but not beyond the purchase contract settlement date of May 1, 2018.
On March 2, 2018, we remarketed the RSNs
and used the proceeds to purchase U.S. Treasury securities that are pledged to secure the stock purchase obligations of the holders of the Equity Units. The purchasers of the RSNs transferred the RSNs to us in exchange for
$1,250.0
principal amount of our 4.101% senior notes due 2028, or the 2028 Notes, and a cash payment of
$4.4
. We cancelled the RSNs upon receipt and recognized a loss on extinguishment of debt of
$19.1
.
At the remarketing, we also issued
$850.0
aggregate principal amount of 4.550% notes due 2048, or the 2048 Notes, under our shelf registration statement.
We used the proceeds from the 2048 Notes for working capital and general corporate purposes. Interest on the 2028 Notes and the 2048 Notes is payable on March 1 and September 1 of each year, commencing on September 1, 2018. We may redeem the 2048 Notes in whole at any time, or in part from time to time, and on or after May 1, 2020, we may redeem the 2028 Notes in whole at any time, or in part from time to time, at the applicable redemption prices. The 2028 Notes and the 2048 Notes are unsecured and unsubordinated obligations.
At maturity on January 15, 2018, we repaid the
$625.0
outstanding balance of our 1.875% senior unsecured notes.
We have an unsecured surplus note with an outstanding principal balance of
$24.9
at
March 31, 2018
and
December 31, 2017
.
We have a senior revolving credit facility, or the Facility, with a group of lenders for general corporate purposes. The Facility provides credit up to
$3,500.0
and matures on
August 25, 2020
. There were no amounts outstanding under the Facility at any time during the
three months ended
March 31, 2018
or at
December 31, 2017
.
We have two separate 364-day lines of credit with separate lenders for general corporate purposes. The facilities provide combined credit up to
$450.0
. We had
$450.0
outstanding under these lines of credit at
March 31, 2018
and
December 31, 2017
.
We have an authorized commercial paper program of up to
$2,500.0
, the proceeds of which may be used for general corporate purposes. At
March 31, 2018
and
December 31, 2017
, we had
$695.7
and
$803.6
, respectively, outstanding under this program.
We have outstanding senior unsecured convertible debentures due 2042, or the Debentures, which are governed by an indenture between us and The Bank of New York Mellon Trust Company, N.A., as trustee. We have accounted for the Debentures in accordance with the cash conversion guidance in FASB guidance for debt with conversion and other options. As a result, the value of the embedded conversion option has been bifurcated from its debt host and recorded as a component of additional paid-in capital (net of deferred taxes and equity issuance costs) in our consolidated balance sheets. During the three months ended
March 31, 2018
,
$11.3
aggregate principal amount of the Debentures were surrendered for conversion by certain holders in accordance with the terms and provisions of the Indenture. We elected to settle the excess of the principal amount of the conversions with cash for total payments of
$37.7
. We did not recognize any gain or loss on the extinguishment of debt related to the Debentures, based on the fair values of the debt on the conversion settlement dates. The following table summarizes at
March 31, 2018
the related balances, conversion rate and conversion price of the Debentures:
|
|
|
|
|
Outstanding principal amount
|
$
|
384.8
|
|
Unamortized debt discount
|
$
|
127.0
|
|
Net debt carrying amount
|
$
|
253.7
|
|
Equity component carrying amount
|
$
|
139.5
|
|
Conversion rate (shares of common stock per $1,000 of principal amount)
|
13.7742
|
|
Effective conversion price (per $1,000 of principal amount)
|
$
|
72.5990
|
|
We had
$675.0
and
$825.0
in outstanding short-term borrowings from various Federal Home Loan Banks, or FHLBs, at
March 31, 2018
and
December 31, 2017
with fixed interest rates of
1.639%
and
1.386%
respectively.
All debt is a direct obligation of Anthem, Inc., except for the surplus note, the FHLB borrowings, and the lines of credit.
|
|
11.
|
Commitments and Contingencies
|
Litigation
In the ordinary course of business, we are defendants in, or parties to, a number of pending or threatened legal actions or proceedings. To the extent a plaintiff or plaintiffs in the following cases have specified in their complaint or in other court filings the amount of damages being sought, we have noted those alleged damages in the descriptions below. With respect to the cases described below, we contest liability and/or the amount of damages in each matter and believe we have meritorious defenses.
We are a defendant in multiple lawsuits that were initially filed in 2012 against the BCBSA as well as Blue Cross and/or Blue Shield licensees, or Blue plans, across the country. The cases were consolidated into a single multi-district lawsuit called
In re Blue Cross Blue Shield Antitrust Litigation
that is pending in the United States District Court for the Northern District of Alabama, or the Court. Generally, the suits allege that the BCBSA and the Blue plans have engaged in a conspiracy to horizontally allocate geographic markets through license agreements, best efforts rules (which limit the percentage of non-Blue revenue of each plan), restrictions on acquisitions, rules governing the BlueCard and National Accounts programs and other arrangements in violation of the Sherman Antitrust Act, or Sherman Act, and related state laws. The cases were brought by two putative nationwide classes of plaintiffs, health plan subscribers and providers. Subscriber and provider plaintiffs each filed consolidated amended complaints in July 2013. Consolidated amended subscriber complaints have been brought on behalf of putative state classes of health plan subscribers in Alabama, Arkansas, California, Florida, Hawaii, Illinois, Indiana, Kansas, Kansas City, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Carolina, North Dakota, Oklahoma, Pennsylvania, South Dakota, Rhode Island, South Carolina, Tennessee, Texas, Vermont, and Virginia, all of which have been consolidated into the multi-district lawsuit. Defendants filed motions to dismiss in September 2013. In June 2014, the Court denied the majority of the motions, ruling that plaintiffs had alleged sufficient facts at that stage of the litigation to avoid dismissal of their claims. Following the subsequent filing of amended complaints by each of the subscriber and provider plaintiffs in 2014, and again in November 2016 and April 2017 adding new named plaintiffs and new factual allegations, we filed our answers and asserted our affirmative defenses in December 2014 and May 2017, respectively. In February 2017, the Court granted in part defendants' motion for summary judgment based on the filed rate doctrine, finding that the damages claims of certain named Alabama subscribers are barred under federal law. Subscribers filed a motion to reconsider the Court's order, which was denied without prejudice to plaintiffs’ right to raise the issue at a
later date. In April 2017, the Court of Appeals for the Eleventh Circuit affirmed a lower court ruling in a related declaratory judgment action,
Musselman v. Blue Cross and Blue Shield of Alabama, et al
., that the antitrust conspiracy claims being asserted by a subset of putative provider class members were released a decade ago by class action settlements in
In re Managed Care Litigation
. In June 2017, the Court denied defendants’ motion to dismiss certain of the claims in provider plaintiffs’ latest consolidated complaint. Briefing on the relevant standard of review for the claims asserted under the Sherman Act, or standard of review, commenced in July 2017. In August 2017, provider plaintiffs moved for partial summary judgment against Anthem on the basis of collateral estoppel on several issues discussed in
United States v. Anthem, Inc
., 236 F. Supp. 3d 171 (D.D.C. 2017). That motion was heard in October 2017, and is pending. An order regarding the standard of review and the single entity defense was issued in April 2018. The order granted subscriber plaintiffs’ motion for partial summary judgment on the application of the per se rule as the standard of review. It granted in part and denied in part provider plaintiffs’ motion for partial summary judgment. It granted in part and denied in part defendants’ motion for summary judgment on plaintiffs’ standard of review and quick look claims and denied subscriber plaintiffs’ motion for partial summary judgment on defendants’ single entity defense. The Court found that defendants’ aggregation of geographic market allocations and output restrictions are due to be analyzed under a per se standard of review. The BlueCard program and other alleged Section 1 Sherman Act violations are due to be analyzed under the rule of reason standard of review. Finally, there remain genuine issues of material fact as to whether defendants operate as a single entity with regard to the enforcement of the Blue Cross Blue Shield trademarks. Also, in April 2018, the defendants filed a motion for certification under 28 U.S.C. § 1292(b), requesting the Court to amend its order to allow an appeal to the Eleventh Circuit Court of Appeals. No dates have been set for either the pretrial conference or trials in these actions. We intend to vigorously defend these suits; however, their ultimate outcome cannot be presently determined.
In July 2013, our California affiliate Blue Cross of California doing business as Anthem Blue Cross, or BCC, was named as a defendant, along with an unaffiliated entity, in a California taxpayer action filed in Los Angeles County Superior Court, captioned as
Michael D. Myers v. State Board of Equalization, et al.
This action was brought under a California statute that permits an individual taxpayer to sue a governmental agency when the taxpayer believes the agency has failed to enforce governing law. Plaintiff contends that BCC, a licensed Health Care Service Plan, or HCSP, is an “insurer” for purposes of taxation despite acknowledging it is not an “insurer” under regulatory law. At the time, under California law, “insurers” were required to pay a gross premiums tax, or GPT, calculated as
2.35%
on gross premiums. As a licensed HCSP, BCC has paid the California Corporate Franchise Tax, or CFT, the tax paid by California businesses generally. Plaintiff contends that BCC must pay the GPT rather than the CFT. Plaintiff seeks a writ of mandate directing the taxing agencies to collect the GPT, and seeks an order requiring BCC to pay GPT back taxes, interest, and penalties, for a period dating to eight years prior to the July 2013 filing of the complaint. In February 2014, the Superior Court sustained BCC’s demurrer to the complaint, without leave to amend, ruling that BCC is not an “insurer” for purposes of taxation. Plaintiff appealed. In September 2015, the Court of Appeal reversed the Superior Court’s ruling, and remanded. The Court of Appeal held that an HCSP could be an insurer for purposes of taxation if it wrote predominantly “indemnity” products. In October 2015, BCC filed a petition for rehearing in the Court of Appeal, which was denied. In November 2015, BCC filed a petition for review with the California Supreme Court, which was denied in December 2015. This lawsuit is being coordinated with similar lawsuits filed against other entities. BCC filed a motion for judgment on the pleadings based upon the 2016 Managed Care Organization tax bill, which became effective in 2016, arguing that the bill demonstrates the California legislature's clear intent that HCSPs such as BCC are not subject to the gross premium tax. BCC's motion was heard in January 2018 and taken under advisement. In March 2018, the Court denied BCC's motion, and similar motions brought by other entities. We intend to file a writ of mandate in the California Court of Appeal. Because GPT is constitutionally imposed in lieu of certain other taxes, BCC has filed protective tax refund claims with the city of Los Angeles, the California Department of Health Care Services and the Franchise Tax Board to protect its rights to recover certain taxes previously paid, should BCC eventually be determined to be subject to the GPT for the same tax periods. BCC intends to vigorously defend this suit; however, its ultimate outcome cannot be presently determined.
In March 2016, we filed a lawsuit against Express Scripts, Inc., or Express Scripts, our vendor for pharmacy benefit management, or PBM, services, captioned
Anthem, Inc. v. Express Scripts, Inc.
, in the U.S. District Court for the Southern District of New York. The lawsuit seeks to recover damages for pharmacy pricing that is higher than competitive benchmark pricing, damages related to operational breaches, as well as various declarations under the pharmacy benefit management agreement, or PBM Agreement, between the parties. Our suit asserts that Express Scripts' pricing exceeds the competitive benchmark pricing required by the PBM Agreement by approximately
$13,000.0
over the remaining term of the PBM Agreement, and by approximately
$1,800.0
through the post-termination transition period. In addition to the amounts
associated with competitive benchmark pricing, we are seeking over
$158.0
in damages associated with operational breaches incurred, together with a declaratory judgment that Express Scripts: (i) breached its obligation to negotiate in good faith and to agree in writing to new pricing terms; (ii) is required to provide competitive benchmark pricing to us through the term of the PBM Agreement; (iii) has breached the PBM Agreement, and that we can terminate the PBM Agreement either due to Express Scripts’ breaches or because we have determined that Express Scripts’ performance with respect to the delegated Medicare Part D prescription drug plans, or Medicare Part D, functions has been unsatisfactory; and (iv) is required under the PBM Agreement to provide post-termination services, at competitive benchmark pricing, for one year following any termination. In April 2016, Express Scripts filed an answer to the lawsuit disputing our contractual claims and alleging various defenses and counterclaims. Express Scripts contends that we breached the PBM Agreement by failing to negotiate proposed new pricing terms in good faith and that we breached the implied covenant of good faith and fair dealing by disregarding the terms of the transaction. In addition, Express Scripts is seeking declaratory judgments: (i) regarding the timing of the periodic pricing review under the PBM Agreement; (ii) that it has no obligation to ensure that we receive any specific level of pricing, that we have no contractual right to any change in pricing under the PBM Agreement and that its sole obligation is to negotiate proposed pricing terms in good faith; and (iii) that we do not have the right to terminate the PBM Agreement. In the alternative, Express Scripts claims that we have been unjustly enriched by its payment of
$4,675.0
at the time of the PBM Agreement. We believe that Express Scripts’ defenses and counterclaims are without merit. We filed a motion to dismiss Express Scripts' counterclaims. In March 2017, the court granted our motion to dismiss Express Scripts’ counterclaims for (i) breach of the implied covenant of good faith and fair dealing, and (ii) unjust enrichment with prejudice. We intend to vigorously pursue our claims and defend against any counterclaims; however, the ultimate outcome cannot be presently determined.
Anthem, Inc. and Express Scripts were named as defendants in a purported class action lawsuit filed in June 2016 in the Southern District of New York by three members of ERISA plans alleging ERISA violations captioned
Karen Burnett, Brendan Farrell, and Robert Shullich, individually and on behalf of all others similarly situated v. Express Scripts, Inc. and Anthem, Inc.
The lawsuit was then consolidated with a similar lawsuit that was previously filed against Express Scripts. A first amended consolidated complaint was filed in the consolidated lawsuit, which is captioned
In Re Express Scripts/Anthem ERISA Litigation
. The first amended consolidated complaint was filed by six individual plaintiffs against Anthem and Express Scripts on behalf of all persons who are participants in or beneficiaries of any ERISA or non-ERISA healthcare plan from December 1, 2009 to the present in which Anthem provided prescription drug benefits through the PBM Agreement with Express Scripts and who paid a percentage based co-insurance payment in the course of using that prescription drug benefit. As to the ERISA members, the plaintiffs allege that Anthem breached its duties under ERISA (i) by failing to adequately monitor Express Scripts’ pricing under the PBM Agreement and (ii) by placing its own pecuniary interest above the best interests of Anthem insureds by allegedly agreeing to higher pricing in the PBM Agreement in exchange for the $4,675.0 purchase price for our NextRx PBM business. As to the non-ERISA members, the plaintiffs assert that Anthem breached the implied covenant of good faith and fair dealing implied in the health plans under which the non-ERISA members are covered by (i) negotiating and entering into the PBM Agreement with Express Scripts that was detrimental to the interests of such non-ERISA members, (ii) failing to adequately monitor the activities of Express Scripts, including failing to timely monitor and correct the prices charged by Express Scripts for prescription medications, and (iii) acting in Anthem’s self-interests instead of the interests of the non-ERISA members when it accepted the $4,675.0 purchase price for NextRx. Plaintiffs seek to hold Anthem and Express Scripts jointly and severally liable and to recover all losses suffered by the proposed class, equitable relief, disgorgement of alleged ill-gotten gains, injunctive relief, attorney’s fees and costs and interest. In November 2016, we filed a motion to dismiss all of the claims brought against Anthem. In response, in March 2017, the plaintiffs filed a second amended consolidated complaint adding two self-insured accounts as plaintiffs and asserting an additional purported class of self-insured accounts. In April 2017, we filed a motion to dismiss the claims brought against Anthem. Our motion was granted without prejudice in January 2018. Plaintiffs have filed a notice of appeal with the United States Court of Appeals for the Second Circuit. We intend to vigorously defend this suit; however, its ultimate outcome cannot be presently determined.
In July 2015, we and Cigna Corporation, or Cigna, announced that we entered into the Agreement and Plan of Merger, or Cigna Merger Agreement, pursuant to which we would acquire all outstanding shares of Cigna. In July 2016, the U.S. Department of Justice, or DOJ, along with certain state attorneys general, filed a civil antitrust lawsuit in the U.S. District Court for the District of Columbia, or District Court, seeking to block the merger. In February 2017, Cigna purported to terminate the Cigna Merger Agreement and commenced litigation against us in the Delaware Court of Chancery, or Delaware Court, seeking damages, including the
$1,850.0
termination fee pursuant to the terms of the Cigna Merger Agreement, and a
declaratory judgment that its purported termination of the Cigna Merger Agreement was lawful, among other claims, which is captioned
Cigna Corp. v. Anthem Inc.
Also in February 2017, we initiated our own litigation against Cigna in the Delaware Court seeking a temporary restraining order to enjoin Cigna from terminating the Cigna Merger Agreement, specific performance compelling Cigna to comply with the Cigna Merger Agreement and damages, which is captioned
Anthem Inc. v. Cigna Corp
. In April 2017, the U.S. Circuit Court of Appeals for the District of Columbia affirmed the ruling of the District Court, which blocked the merger. In May 2017, after the Delaware Court denied our motion to enjoin Cigna from terminating the Cigna Merger Agreement, we delivered to Cigna a notice terminating the Cigna Merger Agreement. The litigation in Delaware is ongoing with trial scheduled to commence in February 2019. We believe Cigna’s allegations are without merit and we intend to vigorously pursue our claims and defend against Cigna's allegations; however, the ultimate outcome of our litigation with Cigna cannot be presently determined.
In December 2016 and March 2018, the DOJ issued civil investigative demands to Anthem, Inc. to discover information about our chart review and risk adjustment programs under Parts C and D of the Medicare Program. We understand the DOJ is investigating the programs of other Medicare Advantage health plans, along with providers and vendors. We continue to cooperate with the DOJ’s investigations, the ultimate outcome of the DOJ's investigation cannot presently be determined.
Where available information indicates that it is probable that a loss has been incurred as of the date of the consolidated financial statements and we can reasonably estimate the amount of that loss, we accrue the estimated loss by a charge to income. In many proceedings, however, it is difficult to determine whether any loss is probable or reasonably possible. In addition, even where loss is possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously identified loss contingency, it is not always possible to reasonably estimate the amount of the possible loss or range of loss.
With respect to many of the proceedings to which we are a party, we cannot provide an estimate of the possible losses, or the range of possible losses in excess of the amount, if any, accrued, for various reasons, including but not limited to some or all of the following: (i) there are novel or unsettled legal issues presented, (ii) the proceedings are in early stages, (iii) there is uncertainty as to the likelihood of a class being certified or decertified or the ultimate size and scope of the class, (iv) there is uncertainty as to the outcome of pending appeals or motions, (v) there are significant factual issues to be resolved, and/or (vi) in many cases, the plaintiffs have not specified damages in their complaint or in court filings. For those legal proceedings where a loss is probable, or reasonably possible, and for which it is possible to reasonably estimate the amount of the possible loss or range of losses, we currently believe that the range of possible losses, in excess of established reserves, for all of those proceedings is from
$0.0
to approximately
$250.0
at
March 31, 2018
. This estimated aggregate range of reasonably possible losses is based upon currently available information taking into account our best estimate of such losses for which such an estimate can be made.
Cyber Attack Incident
In February 2015, we reported that we were the target of a sophisticated external cyber attack. The attackers gained unauthorized access to certain of our information technology systems and obtained personal information related to many individuals and employees, such as names, birth dates, healthcare identification/social security numbers, street addresses, email addresses, phone numbers and employment information, including income data. To date, there is no evidence that credit card or medical information, such as claims, test results or diagnostic codes, were targeted, accessed or obtained, although no assurance can be given that we will not identify additional information that was accessed or obtained.
Upon discovery of the cyber attack, we took immediate action to remediate the security vulnerability and retained a cybersecurity firm to evaluate our systems and identify solutions based on the evolving landscape. We have provided credit monitoring and identity protection services to those who have been affected by this cyber attack. We have continued to implement security enhancements since this incident. We have incurred expenses subsequent to the cyber attack to investigate and remediate this matter and expect to continue to incur expenses of this nature in the foreseeable future. We recognize these expenses in the periods in which they are incurred.
Actions have been filed in various federal and state courts and other claims have been or may be asserted against us on behalf of current or former members, current or former employees, other individuals, shareholders or others seeking damages or other related relief, allegedly arising out of the cyber attack. Federal and state agencies, including state insurance regulators, state attorneys general, the Health and Human Services Office of Civil Rights and the Federal Bureau of Investigation, are investigating events related to the cyber attack, including how it occurred, its consequences and our
responses. In December 2016, the National Association of Insurance Commissioners, or NAIC, concluded its multistate targeted market conduct and financial exam. In connection with the resolution of the matter, the NAIC requested we provide, and we agreed to provide, a customized credit protection program, equivalent to a credit freeze, for our members who were under the age of eighteen on January 27, 2015. No fines or penalties were imposed on us. Although we are cooperating in these investigations, we may be subject to fines or other obligations, which may have an adverse effect on how we operate our business and an adverse effect on our results of operations and financial condition. With respect to the civil actions, a motion to transfer was filed with the Judicial Panel on Multidistrict Litigation, or the Panel, in February 2015 and was subsequently heard by the Panel in May 2015. In June 2015, the Panel entered its order transferring the consolidated matter to the U.S. District Court for the Northern District of California, or the U.S. District Court. The U.S. District Court entered its case management order in September 2015. We filed a motion to dismiss ten of the counts that were before the U.S. District Court. In February 2016, the U.S. District Court issued an order granting in part and denying in part our motion, dismissing three counts with prejudice, four counts without prejudice and allowing three counts to proceed. Plaintiffs filed a second amended complaint in March 2016, and we subsequently filed a second motion to dismiss. In May 2016, the U.S. District Court issued an order granting in part and denying in part our motion, dismissing one count with prejudice, dismissing certain counts asserted by specific named plaintiffs with or without prejudice depending on their individualized facts, and allowing the remaining counts to proceed. In July 2016, plaintiffs filed a third amended complaint, which we answered in August 2016. Fact discovery was completed in December 2016. Plaintiffs filed their motion for class certification and trial plan in March 2017. We filed our opposition to class certification, motions to strike the testimony of three of the plaintiffs' experts and trial plan in April 2017. Prior to those motions being heard, the parties agreed to settle plaintiffs' claims on a class-wide basis for a total settlement payment of
$115.0
and certain non-monetary relief. In June 2017, plaintiffs filed a motion for preliminary approval of the settlement and a motion to continue all case deadlines. In July 2017, the U.S. District Court granted the motion to continue all case deadlines. The U.S. District Court issued an order of preliminary approval in August 2017. The U.S. District Court held a hearing on plaintiffs' motion for final approval and class counsel's fee petition in February 2018. A special master was appointed to review class counsel's fee petition. The special master’s report and recommendation must be filed with the court by May 2018. No further dates have been set. Three state court cases related to the cyber attack are presently proceeding outside of this multidistrict litigation. There remain open regulatory investigations into the incident that are not directly impacted by the multidistrict litigation settlement.
We have contingency plans and insurance coverage for certain expenses and potential liabilities of this nature and will pursue coverage for all applicable losses; however, the ultimate outcome of our pursuit of insurance coverage cannot be presently determined. We intend to vigorously defend the remaining state court cases and regulatory actions related to the cyber attack; however, their ultimate outcome cannot be presently determined.
Other Contingencies
From time to time, we and certain of our subsidiaries are parties to various legal proceedings, many of which involve claims for coverage encountered in the ordinary course of business. We, like HMOs and health insurers generally, exclude certain healthcare and other services from coverage under our HMO, PPO and other plans. We are, in the ordinary course of business, subject to the claims of our enrollees arising out of decisions to restrict or deny reimbursement for uncovered services. The loss of even one such claim, if it results in a significant punitive damage award, could have a material adverse effect on us. In addition, the risk of potential liability under punitive damage theories may increase significantly the difficulty of obtaining reasonable settlements of coverage claims.
In addition to the lawsuits described above, we are also involved in other pending and threatened litigation of the character incidental to our business, and are from time to time involved as a party in various governmental investigations, audits, reviews and administrative proceedings. These investigations, audits, reviews and administrative proceedings include routine and special inquiries by state insurance departments, state attorneys general, the U.S. Attorney General and subcommittees of the U.S. Congress. Such investigations, audits, reviews and administrative proceedings could result in the imposition of civil or criminal fines, penalties, other sanctions and additional rules, regulations or other restrictions on our business operations. Any liability that may result from any one of these actions, or in the aggregate, could have a material adverse effect on our consolidated financial position or results of operations.
The National Organization of Life & Health Insurance Guaranty Associations, or NOLHGA, is a voluntary organization consisting of the state life and health insurance guaranty associations located throughout the U.S. Such associations, working together with NOLHGA, provide a safety net for their state’s policyholders, ensuring that they continue to receive coverage,
subject to state maximum limits, even if their insurer is declared insolvent. In March 2017, long term care insurance writers Penn Treaty Network America Insurance Company and its subsidiary, American Network Insurance Company (collectively, Penn Treaty), were ordered to be liquidated by the Pennsylvania state court, which had jurisdiction over the Penn Treaty rehabilitation proceeding. We and other insurers will be obligated to pay a portion of their policyholder claims through state guaranty association assessments in future periods. We estimated our portion of these net assessments for the insolvency of Penn Treaty to be approximately
$253.8
and recorded the estimate as a general and administrative expense during the three months ended March 31, 2017. Payment of the assessments will be largely recovered through premium billing surcharges and premium tax credits over future years.
Contractual Obligations and Commitments
Express Scripts, through our PBM Agreement, is the exclusive provider of certain PBM services to our plans, excluding our HealthSun and America's 1st Choice subsidiaries, our CareMore operations in the state of Arizona and certain self-insured members, who have exclusive agreements with different PBM service providers. The initial term of this PBM Agreement expires on December 31, 2019. Under the PBM Agreement, the Express Scripts PBM services include, but are not limited to, pharmacy network management, mail order and specialty drug fulfillment, claims processing, rebate management and specialty pharmaceutical management services. Accordingly, the PBM Agreement contains certain financial and operational requirements obligating both Express Scripts and us. Express Scripts’ primary obligations relate to the performance of such services in a compliant manner and meeting certain pricing guarantees and performance standards. Our primary responsibilities relate to formulary management, product and benefit design, provision of data, payment for services, certain minimum volume requirements and oversight. The failure by either party to meet the respective requirements could potentially serve as a basis for financial penalties or early termination of the PBM Agreement. In March 2016, we filed a lawsuit against Express Scripts seeking to recover damages for pharmacy pricing that is higher than competitive benchmark pricing, damages related to operational breaches, as well as various declarations under the PBM Agreement between the parties. For additional information regarding this lawsuit, refer to the
Litigation
section above. We believe we have appropriately recognized all rights and obligations under this PBM Agreement at
March 31, 2018
.
Vulnerability from Concentrations
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, investment securities, premium receivables and instruments held through hedging activities. All investment securities are managed by professional investment managers within policies authorized by our Board of Directors. Such policies limit the amounts that may be invested in any one issuer and prescribe certain investee company criteria. Concentrations of credit risk with respect to premium receivables are limited due to the large number of employer groups that constitute our customer base in the states in which we conduct business. As of
March 31, 2018
, there were no significant concentrations of financial instruments in a single investee, industry or geographic location.
Use of Capital – Dividends and Stock Repurchase Program
We regularly review the appropriate use of capital, including acquisitions, common stock and debt security repurchases and dividends to shareholders. The declaration and payment of any dividends or repurchases of our common stock or debt is at the discretion of our Board of Directors and depends upon our financial condition, results of operations, future liquidity needs, regulatory and capital requirements and other factors deemed relevant by our Board of Directors.
A summary of the cash dividend activity for the
three months ended March 31, 2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Cash
Dividend
per Share
|
|
Total
|
Three Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
January 30, 2018
|
|
March 9, 2018
|
|
March 23, 2018
|
|
$0.75
|
|
$191.9
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
|
|
|
|
|
February 22, 2017
|
|
March 10, 2017
|
|
March 24, 2017
|
|
$0.65
|
|
$172.2
|
On April 24, 2018, our Audit Committee declared a second quarter 2018 dividend to shareholders of
$0.75
per share, payable on
June 25, 2018
to shareholders of record at the close of business on
June 8, 2018
.
Under our Board of Directors’ authorization, we maintain a common stock repurchase program. On December 7, 2017, the Board of Directors authorized a
$5,000.0
increase to the common stock repurchase program. Repurchases may be made from time to time at prevailing market prices, subject to certain restrictions on volume, pricing and timing. The repurchases are effected from time to time in the open market, through negotiated transactions, including accelerated share repurchase agreements, and through plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. Our stock repurchase program is discretionary, as we are under no obligation to repurchase shares. We repurchase shares under the program when we believe it is a prudent use of capital. The excess cost of the repurchased shares over par value is charged on a pro rata basis to additional paid-in capital and retained earnings.
A summary of common stock repurchases from April 1, 2018 through April 12, 2018 (subsequent to March 31, 2018) and for the
three months ended March 31, 2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1, 2018
Through
April 12, 2018
|
|
Three Months Ended March 31
|
|
|
2018
|
|
2017
|
Shares repurchased
|
0.4
|
|
|
1.7
|
|
|
0.3
|
|
Average price per share
|
$
|
224.66
|
|
|
$
|
233.51
|
|
|
$
|
160.81
|
|
Aggregate cost
|
$
|
82.8
|
|
|
$
|
394.7
|
|
|
$
|
50.7
|
|
Authorization remaining at the end of the period
|
$
|
6,700.6
|
|
|
$
|
6,783.4
|
|
|
$
|
4,125.2
|
|
Equity Units
We have
25.0
Equity Units with an aggregate principal amount of
$1,250.0
. For additional information relating to the Equity Units, see Note 10, “Debt.”
Stock Incentive Plan
s
A summary of stock option activity for the
three months ended March 31, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average
Option Price
per Share
|
|
Weighted-
Average
Remaining
Contractual
Life (Years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding at January 1, 2018
|
4.3
|
|
|
$
|
124.31
|
|
|
|
|
|
Granted
|
0.8
|
|
|
232.03
|
|
|
|
|
|
Exercised
|
(0.5
|
)
|
|
99.33
|
|
|
|
|
|
Forfeited or expired
|
—
|
|
|
172.73
|
|
|
|
|
|
Outstanding at March 31, 2018
|
4.6
|
|
|
145.62
|
|
|
6.80
|
|
$
|
350.1
|
|
Exercisable at March 31, 2018
|
2.7
|
|
|
116.42
|
|
|
5.19
|
|
$
|
277.9
|
|
A summary of the status of nonvested restricted stock activity, including restricted stock units, for the
three months ended March 31, 2018
is as follows:
|
|
|
|
|
|
|
|
|
Restricted
Stock Shares
and Units
|
|
Weighted-
Average
Grant Date
Fair Value
per Share
|
Nonvested at January 1, 2018
|
2.0
|
|
|
$
|
152.20
|
|
Granted
|
0.8
|
|
|
232.15
|
|
Vested
|
(0.9
|
)
|
|
147.29
|
|
Forfeited
|
—
|
|
|
176.68
|
|
Nonvested at March 31, 2018
|
1.9
|
|
|
180.43
|
|
During the three months ended March 31, 2018, we granted approximately
0.3
restricted stock units that are contingent upon us achieving earnings targets over the three year period from 2018 to 2020. These grants have been included in the activity shown above, but will be subject to adjustment at the end of 2020, based on results in the three year period.
During the three months ended March 31, 2018, we granted an additional
0.2
restricted stock units, associated with our 2015 grants, that were earned as a result of satisfactory completion of performance measures between 2015 and 2017. These grants and vested shares have been included in the activity shown above.
Fair Value
We use a binomial lattice valuation model to estimate the fair value of all stock options granted. For a more detailed discussion of our stock incentive plan fair value methodology, see Note 14, “Capital Stock,” to our audited consolidated financial statements as of and for the year ended
December 31, 2017
included in our
2017
Annual Report on Form 10-K.
The following weighted-average assumptions were used to estimate the fair values of options granted during the
three months ended March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
2018
|
|
2017
|
Risk-free interest rate
|
2.90
|
%
|
|
2.31
|
%
|
Volatility factor
|
30.00
|
%
|
|
32.00
|
%
|
Quarterly dividend yield
|
0.323
|
%
|
|
0.397
|
%
|
Weighted-average expected life (years)
|
3.70
|
|
|
4.00
|
|
The following weighted-average fair values per option or share were determined for the
three months ended March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
2018
|
|
2017
|
Options granted during the period
|
$
|
55.31
|
|
|
$
|
40.73
|
|
Restricted stock awards granted during the period
|
232.15
|
|
|
166.94
|
|
|
|
13.
|
Accumulated Other Comprehensive Loss
|
A reconciliation of the components of accumulated other comprehensive loss at
March 31, 2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
March 31
|
|
2018
|
|
2017
|
Investments, excluding non-credit component of other-than-temporary impairments:
|
|
|
|
Gross unrealized gains
|
$
|
239.1
|
|
|
$
|
811.0
|
|
Gross unrealized losses
|
(220.4
|
)
|
|
(124.3
|
)
|
Net pre-tax unrealized gains
|
18.7
|
|
|
686.7
|
|
Deferred tax liability
|
(4.7
|
)
|
|
(245.3
|
)
|
Net unrealized gains on investments
|
14.0
|
|
|
441.4
|
|
Non-credit components of other-than-temporary impairments on investments:
|
|
|
|
Unrealized losses
|
—
|
|
|
(1.5
|
)
|
Deferred tax asset
|
—
|
|
|
0.5
|
|
Net unrealized non-credit component of other-than-temporary impairments on investments
|
—
|
|
|
(1.0
|
)
|
Cash flow hedges:
|
|
|
|
Gross unrealized losses
|
(322.0
|
)
|
|
(239.4
|
)
|
Deferred tax asset
|
67.6
|
|
|
88.0
|
|
Net unrealized losses on cash flow hedges
|
(254.4
|
)
|
|
(151.4
|
)
|
Defined benefit pension plans:
|
|
|
|
Deferred net actuarial loss
|
(612.1
|
)
|
|
(648.9
|
)
|
Deferred prior service credits
|
(1.0
|
)
|
|
(0.7
|
)
|
Deferred tax asset
|
158.8
|
|
|
254.8
|
|
Net unrecognized periodic benefit costs for defined benefit pension plans
|
(454.3
|
)
|
|
(394.8
|
)
|
Postretirement benefit plans:
|
|
|
|
Deferred net actuarial loss
|
(76.6
|
)
|
|
(143.7
|
)
|
Deferred prior service costs
|
42.9
|
|
|
56.3
|
|
Deferred tax asset
|
8.7
|
|
|
34.1
|
|
Net unrecognized periodic benefit costs for postretirement benefit plans
|
(25.0
|
)
|
|
(53.3
|
)
|
Foreign currency translation adjustments:
|
|
|
|
Gross unrealized losses
|
(1.4
|
)
|
|
(4.2
|
)
|
Deferred tax asset
|
0.5
|
|
|
1.5
|
|
Net unrealized losses on foreign currency translation adjustments
|
(0.9
|
)
|
|
(2.7
|
)
|
Accumulated other comprehensive loss
|
$
|
(720.6
|
)
|
|
$
|
(161.8
|
)
|
Other comprehensive income (loss) reclassification adjustments for the
three
months ended
March 31, 2018
and
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
2018
|
|
2017
|
Investments:
|
|
|
|
Net holding (loss) gain on investment securities arising during the period, net of tax benefit (expense) of 77.1 and ($46.3), respectively
|
$
|
(256.2
|
)
|
|
$
|
94.2
|
|
Reclassification adjustment for net realized loss (gain) on investment securities, net of tax (benefit) expense of ($3.1) and $7.5, respectively
|
11.5
|
|
|
(14.0
|
)
|
Total reclassification adjustment on investments
|
(244.7
|
)
|
|
80.2
|
|
Non-credit component of other-than-temporary impairments on investments:
|
|
|
|
Non-credit component of other-than-temporary impairments on investments, net of tax expense of ($0.1) and ($2.1), respectively
|
0.2
|
|
|
3.6
|
|
Cash flow hedges:
|
|
|
|
Holding gain, net of tax expense of ($7.8) and ($2.7), respectively
|
28.8
|
|
|
17.0
|
|
Other:
|
|
|
|
Net change in unrecognized periodic benefit costs for defined benefit pension and postretirement benefit plans, net of tax expense of ($2.6) and ($2.3), respectively
|
7.7
|
|
|
3.9
|
|
Foreign currency translation adjustment, net of tax expense of ($0.2) and ($0.7), respectively
|
0.4
|
|
|
1.4
|
|
Net (loss) gain recognized in other comprehensive income, net of tax benefit (expense) of $63.3 and ($46.6), respectively
|
$
|
(207.6
|
)
|
|
$
|
106.1
|
|
The denominator for basic and diluted earnings per share for the
three
months ended
March 31, 2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
2018
|
|
2017
|
Denominator for basic earnings per share – weighted-average shares
|
255.8
|
|
|
264.4
|
|
Effect of dilutive securities – employee stock options, nonvested restricted stock awards, convertible debentures and equity units
|
7.0
|
|
|
6.0
|
|
Denominator for diluted earnings per share
|
262.8
|
|
|
270.4
|
|
During the
three
months ended
March 31, 2018
and
2017
, weighted-average shares related to certain stock options of
0.3
and
0.4
, respectively, were excluded from the denominator for diluted earnings per share because the stock options were anti-dilutive.
During the
three months ended March 31, 2018
, we issued approximately
0.8
restricted stock units under our stock incentive plans,
0.3
of which vesting is contingent upon us meeting specified annual earnings targets for the three year period of
2018
through 2020. During the
three months ended
March 31, 2017
, we issued approximately
0.5
restricted stock units under our stock incentive plans,
0.1
of which vesting is contingent upon us meeting specified annual earnings targets for the three year period of 2017 through 2019. The contingent restricted stock units have been excluded from the denominator for diluted earnings per share and will be included only if and when the contingency is met.
The results of our operations are described through
three
reportable segments: Commercial & Specialty Business, Government Business and Other, as further described in Note 19, “Segment Information,” to our audited consolidated financial statements as of and for the year ended
December 31, 2017
included in our
2017
Annual Report on Form 10-K.
Financial data by reportable segment for the
three
months ended
March 31, 2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
& Specialty
Business
|
|
Government
Business
|
|
Other
|
|
Total
|
Three Months Ended March 31, 2018
|
|
|
|
|
|
|
|
Operating revenue
|
$
|
9,066.4
|
|
|
$
|
13,262.4
|
|
|
$
|
13.5
|
|
|
$
|
22,342.3
|
|
Operating gain (loss)
|
1,408.4
|
|
|
490.9
|
|
|
(31.4
|
)
|
|
1,867.9
|
|
Three Months Ended March 31, 2017
|
|
|
|
|
|
|
|
Operating revenue
|
$
|
10,289.6
|
|
|
$
|
12,025.7
|
|
|
$
|
4.2
|
|
|
$
|
22,319.5
|
|
Operating gain (loss)
|
1,302.4
|
|
|
318.6
|
|
|
(35.6
|
)
|
|
1,585.4
|
|
The major product revenues for each of the reportable segments for the
three
months ended
March 31, 2018
and
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
2018
|
|
2017
|
Commercial & Specialty Business
|
|
|
|
Managed care products
|
$
|
7,363.9
|
|
|
$
|
8,649.0
|
|
Managed care services
|
1,282.2
|
|
|
1,222.6
|
|
Dental/Vision products and services
|
304.5
|
|
|
306.4
|
|
Other
|
115.8
|
|
|
111.6
|
|
Total Commercial & Specialty Business
|
9,066.4
|
|
|
10,289.6
|
|
Government Business
|
|
|
|
Managed care products
|
13,152.2
|
|
|
11,918.2
|
|
Managed care services
|
110.2
|
|
|
107.5
|
|
Total Government Business
|
13,262.4
|
|
|
12,025.7
|
|
Other
|
|
|
|
Other
|
13.5
|
|
|
4.2
|
|
Total product revenues
|
$
|
22,342.3
|
|
|
$
|
22,319.5
|
|
The classification between managed care products and managed care services in the above table primarily distinguishes between the levels of risk assumed. Managed care products represent insurance products where we bear the insurance risk, whereas managed care services represent product offerings where we provide claims adjudication and other administrative services to the customer, but the customer principally bears the insurance risk.
A reconciliation of reportable segments’ operating revenues to the amounts of total revenues included in our consolidated statements of income for the
three
months ended
March 31, 2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
2018
|
|
2017
|
Reportable segments’ operating revenues
|
$
|
22,342.3
|
|
|
$
|
22,319.5
|
|
Net investment income
|
229.2
|
|
|
207.2
|
|
Net realized (losses) gains on financial instruments
|
(26.1
|
)
|
|
7.3
|
|
Other-than-temporary impairment losses recognized in income
|
(7.9
|
)
|
|
(8.1
|
)
|
Total revenues
|
$
|
22,537.5
|
|
|
$
|
22,525.9
|
|
A reconciliation of reportable segments’ operating gain to income before income tax expense included in our consolidated statements of income for the
three
months ended
March 31, 2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
2018
|
|
2017
|
Reportable segments’ operating gain
|
$
|
1,867.9
|
|
|
$
|
1,585.4
|
|
Net investment income
|
229.2
|
|
|
207.2
|
|
Net realized (losses) gains on financial instruments
|
(26.1
|
)
|
|
7.3
|
|
Other-than-temporary impairment losses recognized in income
|
(7.9
|
)
|
|
(8.1
|
)
|
Interest expense
|
(184.2
|
)
|
|
(235.0
|
)
|
Amortization of other intangible assets
|
(79.5
|
)
|
|
(41.8
|
)
|
Loss on extinguishment of debt
|
(19.1
|
)
|
|
—
|
|
Income before income tax expense
|
$
|
1,780.3
|
|
|
$
|
1,515.0
|
|