Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2017
(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.
We are one of the largest health benefits companies in the United States in terms of medical membership, serving
40.4
medical members through our affiliated health plans as of
June 30, 2017
. We offer a broad spectrum of network-based managed care plans to large and small employer, 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 (as BCBS in
10
New York City metropolitan and surrounding counties, and as Blue Cross or BCBS in selected upstate counties), 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 South Carolina and western New York. Through our AMERIGROUP Corporation subsidiary and other subsidiaries, we conduct business in Florida, Georgia, Iowa, Kansas, Louisiana, Maryland, Nevada, New Jersey, New Mexico, New York, Tennessee, Texas and Washington. In addition, we conduct business through our Simply Healthcare Holdings, Inc.
subsidiary in Florida. We also serve customers throughout the country as HealthLink, UniCare (including a non-risk arrangement with Massachusetts), and in certain Arizona, California, Nevada and Virginia markets through our CareMore Health Group, Inc., or CareMore, subsidiary. We are licensed to conduct insurance operations in all
50
states 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
2016
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 and six
months ended
June 30, 2017
and
2016
have been recorded. The results of operations for the
three and six
months ended
June 30, 2017
are not necessarily indicative of the results that may be expected for the full year ending
December 31, 2017
. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended
December 31, 2016
included in our
2016
Annual Report on Form 10-K.
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. At
June 30, 2017
and
December 31, 2016
, we held
$166.1
and
$157.0
, respectively, of customer funds with an offsetting liability in other current liabilities.
Recently Adopted Accounting Guidance:
In March 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, or ASU 2016-09. The amendments in this update simplify several aspects of accounting for and reporting on share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. We adopted the amendments in ASU 2016-09 on January 1, 2017. We prospectively recognized tax benefits of
$5.2
, or $
0.02
per diluted share, for the
three
months ended
June 30, 2017
and
$25.2
, or
$0.09
per diluted share, for the
six months ended
June 30, 2017
in our consolidated statement of income, which previously would have been recorded to additional paid-in capital. In addition, we prospectively recognized excess tax benefits as an operating activity within the cash flow statement for the
six months ended
June 30, 2017
. Finally, we retrospectively recognized taxes paid on the employees' behalf through the withholding of common stock as a financing activity within the cash flow statements for the
six months ended
June 30, 2017
and
2016
.
Recent Accounting Guidance Not Yet Adopted:
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 amendment 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. ASU 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The guidance is to be applied prospectively to an award modified on or after the adoption date. The adoption of ASU 2017-09 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
In March 2017, the FASB issued Accounting Standards Update No. 2017-08,
Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
, or ASU 2018-08. This amendment changes the amortization period for certain purchased callable debt securities held at a premium by shortening the amortization period for the premium to the earliest call date. Under current guidance, the premium is generally amortized over the contractual life of the instrument. ASU 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. Upon adoption, the amendments are to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of ASU 2017-08 is not expected to have a material 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. In addition, the amendment allows only the service cost component to be eligible for asset capitalization. Upon adoption, the guidance on the presentation of the components of net periodic benefit cost in the income statement is to be applied retrospectively and the guidance limiting the capitalization of net periodic benefit cost in assets to the service cost component is to be applied prospectively. ASU 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the effects the adoption of ASU 2017-07 will have upon our consolidated financial position, results of operations and cash flows.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, or ASU 2017-04. This amendment removes Step 2 of the goodwill impairment test under current guidance which requires a hypothetical purchase price allocation. The new guidance requires an impairment charge to be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. Upon adoption, the guidance is to be applied prospectively. ASU 2017-04 is effective for us on January 1, 2020, with early
adoption permitted. The adoption of ASU 2017-04 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
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. The amendments in ASU 2016-20 provide technical corrections to various implementation examples and clarifying guidance on the treatment of capitalized advertising costs, impairment testing of capitalized contract costs, performance obligation disclosures and scope exceptions. The amendments in ASU 2016-12 provide clarifying guidance on assessing collectability; noncash consideration; presentation of sales taxes; and transition. The amendments in ASU 2016-10 provide clarifying guidance on the materiality and evaluation of performance obligations; treatment of shipping and handling costs; and determining whether an entity's promise to grant a license provides a customer with either a right to use or a right to access an entity's intellectual property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. Collectively, these updates will 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. The adoption of ASU 2016-20, ASU 2016-12, ASU 2016-10 and ASU 2016-08 is to coincide with an entity's adoption of ASU 2014-09, which we intend to adopt for interim and annual reporting periods beginning after December 15, 2017. Upon the effective date, these updates will 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 will be 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. The new guidance permits adoption through either a full retrospective approach or a modified retrospective approach with a cumulative effect adjustment to retained earnings. We intend to use the modified retrospective approach upon adoption and are still in the process of evaluating the impact that these updates will have on our results of operations, cash flows, consolidated financial position and related disclosures.
There were no other new accounting pronouncements that were issued or became effective since the issuance of our
2016
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.
Termination of Agreement and Plan of Merger with Cigna Corporation
On July 24, 2015, we and Cigna Corporation, or Cigna, announced that we entered into an Agreement and Plan of Merger, or Merger Agreement, dated as of July 23, 2015, to acquire all outstanding shares of Cigna, or the Acquisition. On May 12, 2017, we delivered to Cigna a notice terminating the Merger Agreement. For additional information, see the “
Litigation
” section of Note 11, “Commitments and Contingencies.”
We evaluate our investment securities for other-than-temporary declines based on qualitative and quantitative factors. Other-than-temporary impairment losses recognized in income totaled
$7.2
and
$25.7
for the
three months ended June 30, 2017
and
2016
, respectively. Other-than-temporary impairment losses recognized in income totaled
$15.3
and
$92.6
for the
six months ended June 30, 2017
and
2016
, respectively. There were no individually significant other-than-temporary impairment losses on investments during the
three and six
months ended
June 30, 2017
and
2016
. 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 investments, available-for-sale, at
June 30, 2017
and
December 31, 2016
is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Credit
Component of
Other-Than-
Temporary
Impairments
Recognized in
AOCI
|
|
Cost or
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross Unrealized Losses
|
|
Estimated
Fair Value
|
|
|
|
|
Less than
12 Months
|
|
12 Months
or Greater
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
United States Government securities
|
$
|
379.5
|
|
|
$
|
2.2
|
|
|
$
|
(2.4
|
)
|
|
$
|
—
|
|
|
$
|
379.3
|
|
|
$
|
—
|
|
Government sponsored securities
|
47.4
|
|
|
0.4
|
|
|
(0.3
|
)
|
|
(0.1
|
)
|
|
47.4
|
|
|
—
|
|
States, municipalities and political subdivisions, tax-exempt
|
5,758.7
|
|
|
197.2
|
|
|
(15.0
|
)
|
|
(1.7
|
)
|
|
5,939.2
|
|
|
—
|
|
Corporate securities
|
9,678.6
|
|
|
221.8
|
|
|
(22.3
|
)
|
|
(13.1
|
)
|
|
9,865.0
|
|
|
(0.2
|
)
|
Residential mortgage-backed securities
|
2,218.5
|
|
|
37.0
|
|
|
(10.8
|
)
|
|
(3.3
|
)
|
|
2,241.4
|
|
|
—
|
|
Commercial mortgage-backed securities
|
99.2
|
|
|
1.0
|
|
|
(0.1
|
)
|
|
(2.3
|
)
|
|
97.8
|
|
|
—
|
|
Other securities
|
895.3
|
|
|
10.7
|
|
|
(0.7
|
)
|
|
(2.4
|
)
|
|
902.9
|
|
|
—
|
|
Total fixed maturity securities
|
19,077.2
|
|
|
470.3
|
|
|
(51.6
|
)
|
|
(22.9
|
)
|
|
19,473.0
|
|
|
$
|
(0.2
|
)
|
Equity securities
|
1,405.6
|
|
|
471.3
|
|
|
(20.8
|
)
|
|
—
|
|
|
1,856.1
|
|
|
|
Total investments, available-for-sale
|
$
|
20,482.8
|
|
|
$
|
941.6
|
|
|
$
|
(72.4
|
)
|
|
$
|
(22.9
|
)
|
|
$
|
21,329.1
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
United States Government securities
|
$
|
561.7
|
|
|
$
|
2.5
|
|
|
$
|
(5.7
|
)
|
|
$
|
—
|
|
|
$
|
558.5
|
|
|
$
|
—
|
|
Government sponsored securities
|
40.1
|
|
|
0.3
|
|
|
(0.3
|
)
|
|
(0.1
|
)
|
|
40.0
|
|
|
—
|
|
States, municipalities and political subdivisions, tax-exempt
|
6,024.6
|
|
|
139.1
|
|
|
(55.2
|
)
|
|
(3.2
|
)
|
|
6,105.3
|
|
|
(3.8
|
)
|
Corporate securities
|
8,011.7
|
|
|
159.5
|
|
|
(49.5
|
)
|
|
(27.1
|
)
|
|
8,094.6
|
|
|
(3.4
|
)
|
Residential mortgage-backed securities
|
1,916.9
|
|
|
32.3
|
|
|
(15.3
|
)
|
|
(4.6
|
)
|
|
1,929.3
|
|
|
—
|
|
Commercial mortgage-backed securities
|
216.8
|
|
|
1.2
|
|
|
(0.3
|
)
|
|
(3.4
|
)
|
|
214.3
|
|
|
—
|
|
Other securities
|
744.6
|
|
|
6.4
|
|
|
(1.5
|
)
|
|
(4.0
|
)
|
|
745.5
|
|
|
—
|
|
Total fixed maturity securities
|
17,516.4
|
|
|
341.3
|
|
|
(127.8
|
)
|
|
(42.4
|
)
|
|
17,687.5
|
|
|
$
|
(7.2
|
)
|
Equity securities
|
1,103.3
|
|
|
407.3
|
|
|
(10.7
|
)
|
|
—
|
|
|
1,499.9
|
|
|
|
Total investments, available-for-sale
|
$
|
18,619.7
|
|
|
$
|
748.6
|
|
|
$
|
(138.5
|
)
|
|
$
|
(42.4
|
)
|
|
$
|
19,187.4
|
|
|
|
For available-for-sale securities in an unrealized loss position at
June 30, 2017
and
December 31, 2016
, 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
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
United States Government securities
|
35
|
|
|
$
|
277.7
|
|
|
$
|
(2.4
|
)
|
|
1
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
Government sponsored securities
|
17
|
|
|
24.8
|
|
|
(0.3
|
)
|
|
3
|
|
|
2.1
|
|
|
(0.1
|
)
|
States, municipalities and political subdivisions, tax-exempt
|
510
|
|
|
949.9
|
|
|
(15.0
|
)
|
|
28
|
|
|
58.4
|
|
|
(1.7
|
)
|
Corporate securities
|
1,018
|
|
|
1,987.6
|
|
|
(22.3
|
)
|
|
103
|
|
|
255.0
|
|
|
(13.1
|
)
|
Residential mortgage-backed securities
|
441
|
|
|
981.8
|
|
|
(10.8
|
)
|
|
98
|
|
|
98.6
|
|
|
(3.3
|
)
|
Commercial mortgage-backed securities
|
11
|
|
|
20.1
|
|
|
(0.1
|
)
|
|
14
|
|
|
27.8
|
|
|
(2.3
|
)
|
Other securities
|
72
|
|
|
232.2
|
|
|
(0.7
|
)
|
|
25
|
|
|
42.4
|
|
|
(2.4
|
)
|
Total fixed maturity securities
|
2,104
|
|
|
4,474.1
|
|
|
(51.6
|
)
|
|
272
|
|
|
484.8
|
|
|
(22.9
|
)
|
Equity securities
|
522
|
|
|
205.9
|
|
|
(20.8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total investments, available-for-sale
|
2,626
|
|
|
$
|
4,680.0
|
|
|
$
|
(72.4
|
)
|
|
272
|
|
|
$
|
484.8
|
|
|
$
|
(22.9
|
)
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
United States Government securities
|
51
|
|
|
$
|
359.9
|
|
|
$
|
(5.7
|
)
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Government sponsored securities
|
18
|
|
|
26.4
|
|
|
(0.3
|
)
|
|
1
|
|
|
1.0
|
|
|
(0.1
|
)
|
States, municipalities and political subdivisions, tax-exempt
|
1,022
|
|
|
1,849.0
|
|
|
(55.2
|
)
|
|
28
|
|
|
60.7
|
|
|
(3.2
|
)
|
Corporate securities
|
1,272
|
|
|
2,640.6
|
|
|
(49.5
|
)
|
|
203
|
|
|
422.8
|
|
|
(27.1
|
)
|
Residential mortgage-backed securities
|
430
|
|
|
905.8
|
|
|
(15.3
|
)
|
|
114
|
|
|
136.9
|
|
|
(4.6
|
)
|
Commercial mortgage-backed securities
|
19
|
|
|
61.2
|
|
|
(0.3
|
)
|
|
24
|
|
|
60.8
|
|
|
(3.4
|
)
|
Other securities
|
66
|
|
|
144.3
|
|
|
(1.5
|
)
|
|
55
|
|
|
133.8
|
|
|
(4.0
|
)
|
Total fixed maturity securities
|
2,878
|
|
|
5,987.2
|
|
|
(127.8
|
)
|
|
425
|
|
|
816.0
|
|
|
(42.4
|
)
|
Equity securities
|
452
|
|
|
233.1
|
|
|
(10.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total investments, available-for-sale
|
3,330
|
|
|
$
|
6,220.3
|
|
|
$
|
(138.5
|
)
|
|
425
|
|
|
$
|
816.0
|
|
|
$
|
(42.4
|
)
|
The amortized cost and fair value of available-for-sale fixed maturity securities at
June 30, 2017
, 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
|
$
|
358.2
|
|
|
$
|
359.5
|
|
Due after one year through five years
|
4,576.8
|
|
|
4,663.4
|
|
Due after five years through ten years
|
5,576.3
|
|
|
5,726.2
|
|
Due after ten years
|
6,248.2
|
|
|
6,384.7
|
|
Mortgage-backed securities
|
2,317.7
|
|
|
2,339.2
|
|
Total available-for-sale fixed maturity securities
|
$
|
19,077.2
|
|
|
$
|
19,473.0
|
|
Proceeds from sales, maturities, calls or redemptions of fixed maturity securities, equity securities and other invested assets and the related gross realized gains and gross realized losses for the
three and six
months ended
June 30, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
Six Months Ended
June 30
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Proceeds
|
$
|
2,941.8
|
|
|
$
|
2,480.5
|
|
|
$
|
6,455.8
|
|
|
$
|
5,542.6
|
|
Gross realized gains
|
50.9
|
|
|
108.4
|
|
|
110.7
|
|
|
229.8
|
|
Gross realized losses
|
(20.1
|
)
|
|
(31.0
|
)
|
|
(50.3
|
)
|
|
(123.7
|
)
|
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.
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
$1,213.7
and
$1,078.9
at
June 30, 2017
and
December 31, 2016
, respectively. The value of the collateral represented
103%
of the market value of the securities on loan at
June 30, 2017
and
December 31, 2016
. 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. Unrealized gains or losses on securities lending collateral are included in accumulated other comprehensive loss within shareholders’ equity.
The remaining contractual maturity of our securities lending agreements at
June 30, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overnight and Continuous
|
|
Less than 30 days
|
|
30-90 days
|
|
Greater Than 90 days
|
|
Total
|
Securities lending transactions
|
|
|
|
|
|
|
|
|
|
United States Government securities
|
$
|
66.1
|
|
|
$
|
4.2
|
|
|
$
|
—
|
|
|
$
|
6.6
|
|
|
$
|
76.9
|
|
Government sponsored securities
|
6.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6.2
|
|
Corporate securities
|
782.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
782.4
|
|
Equity securities
|
348.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
348.2
|
|
Total
|
$
|
1,202.9
|
|
|
$
|
4.2
|
|
|
$
|
—
|
|
|
$
|
6.6
|
|
|
$
|
1,213.7
|
|
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. At
June 30, 2017
, we had posted collateral of
$139.6
and received collateral of
$84.8
related to our derivative financial instruments. In addition to collateral posted for derivative transactions, from time to time, we may have cash on deposit to meet certain regulatory requirements, which are included in cash and cash equivalents on the consolidated balance sheets. At
June 30, 2017
and
December 31, 2016
, we had cash on deposit of
$224.8
and
$405.3
, respectively.
A summary of the aggregate contractual or notional amounts and estimated fair values related to derivative financial instruments at
June 30, 2017
and
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual/
Notional
Amount
|
|
Balance Sheet Location
|
|
Estimated Fair Value
|
|
Asset
|
|
(Liability)
|
June 30, 2017
|
|
|
|
|
|
|
|
Hedging instruments
|
|
|
|
|
|
|
|
Interest rate swaps - fixed to floating
|
$
|
1,235.0
|
|
|
Other assets/other liabilities
|
|
$
|
2.9
|
|
|
$
|
(1.1
|
)
|
Interest rate swaps - forward starting pay fixed
|
4,625.0
|
|
|
Other assets/other liabilities
|
|
4.3
|
|
|
(69.2
|
)
|
Subtotal hedging
|
5,860.0
|
|
|
Subtotal hedging
|
|
7.2
|
|
|
(70.3
|
)
|
Non-hedging instruments
|
|
|
|
|
|
|
|
Interest rate swaps
|
325.1
|
|
|
Equity securities
|
|
4.1
|
|
|
(0.1
|
)
|
Options
|
11,147.0
|
|
|
Other assets/other liabilities
|
|
300.0
|
|
|
(310.8
|
)
|
Futures
|
169.2
|
|
|
Equity securities
|
|
0.4
|
|
|
(1.0
|
)
|
Subtotal non-hedging
|
11,641.3
|
|
|
Subtotal non-hedging
|
|
304.5
|
|
|
(311.9
|
)
|
Total derivatives
|
$
|
17,501.3
|
|
|
Total derivatives
|
|
311.7
|
|
|
(382.2
|
)
|
|
|
|
Amounts netted
|
|
(147.4
|
)
|
|
147.4
|
|
|
|
|
Net derivatives
|
|
$
|
164.3
|
|
|
$
|
(234.8
|
)
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Hedging instruments
|
|
|
|
|
|
|
|
Interest rate swaps - fixed to floating
|
$
|
1,385.0
|
|
|
Other assets/other liabilities
|
|
$
|
4.0
|
|
|
$
|
(0.7
|
)
|
Interest rate swaps - forward starting pay fixed
|
4,775.0
|
|
|
Other assets/other liabilities
|
|
528.8
|
|
|
(6.0
|
)
|
Subtotal hedging
|
6,160.0
|
|
|
Subtotal hedging
|
|
532.8
|
|
|
(6.7
|
)
|
Non-hedging instruments
|
|
|
|
|
|
|
|
Interest rate swaps
|
209.4
|
|
|
Equity securities
|
|
4.7
|
|
|
(0.2
|
)
|
Options
|
10,280.2
|
|
|
Other assets/other liabilities
|
|
220.7
|
|
|
(233.9
|
)
|
Futures
|
185.3
|
|
|
Equity securities
|
|
0.5
|
|
|
(1.1
|
)
|
Subtotal non-hedging
|
10,674.9
|
|
|
Subtotal non-hedging
|
|
225.9
|
|
|
(235.2
|
)
|
Total derivatives
|
$
|
16,834.9
|
|
|
Total derivatives
|
|
758.7
|
|
|
(241.9
|
)
|
|
|
|
Amounts netted
|
|
(92.8
|
)
|
|
92.8
|
|
|
|
|
Net derivatives
|
|
$
|
665.9
|
|
|
$
|
(149.1
|
)
|
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
June 30, 2017
and
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Fair Value Hedges
|
|
Year
Entered
Into
|
|
Outstanding Notional Amount
|
|
Interest Rate
Received
|
|
Expiration Date
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Interest rate swap
|
|
2017
|
|
$
|
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
|
|
|
625.0
|
|
|
1.875
|
|
|
January 15, 2018
|
Interest rate swap
|
|
2012
|
|
—
|
|
|
200.0
|
|
|
2.375
|
|
|
February 15, 2017
|
Total notional amount outstanding
|
|
|
|
$
|
1,235.0
|
|
|
$
|
1,385.0
|
|
|
|
|
|
|
A summary of the effect of fair value hedges on our income statement for the
three and six
months ended
June 30, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Fair Value Hedges
|
|
Income Statement
Location of Hedge
Gain (Loss)
|
|
Hedge
Gain (Loss)
Recognized
|
|
Hedged Item
|
|
Income Statement
Location of
Hedged Item
Gain (Loss)
|
|
Hedged
Item
Gain (Loss)
Recognized
|
Three months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Interest expense
|
|
$
|
0.1
|
|
|
Fixed rate debt
|
|
Interest expense
|
|
$
|
(0.1
|
)
|
Three months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Interest expense
|
|
$
|
2.2
|
|
|
Fixed rate debt
|
|
Interest expense
|
|
$
|
(2.2
|
)
|
Six months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Interest expense
|
|
$
|
(0.2
|
)
|
|
Fixed rate debt
|
|
Interest expense
|
|
$
|
0.2
|
|
Six months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Interest expense
|
|
$
|
4.6
|
|
|
Fixed rate debt
|
|
Interest expense
|
|
$
|
(4.6
|
)
|
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. During the six months ended
June 30, 2017
, swaps in the notional amount of
$5,525.0
were terminated. We received an aggregate of
$476.1
from the swap counterparties upon termination. Following the termination of these swaps, we entered into a new series of forward starting pay fixed interest rate swaps to replace the terminated swaps. We had
$4,625.0
and
$4,775.0
in notional amounts outstanding under forward starting pay fixed interest rate swaps at
June 30, 2017
and
December 31, 2016
, respectively.
For the six months ended
June 30, 2017
, following a final effectiveness test upon the terminated swaps, we recorded a net realized loss on financial instruments of
$12.0
related to ineffectiveness and missed forecasted transactions. The unrecognized loss for all outstanding, expired and terminated cash flow hedges included in accumulated other comprehensive loss, net of tax, was
$231.2
and $
168.4
at
June 30, 2017
and
December 31, 2016
, respectively. As of
June 30, 2017
, the total amount of amortization over the next twelve months for all cash flow hedges is estimated to increase interest expense by approximately
$12.3
.
A summary of the effect of cash flow hedges on our financial statements for the
three and six
months ended
June 30, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion
|
|
|
|
|
Pretax
Hedge Loss
Recognized
in Other
Comprehensive
Income (Loss)
|
|
Income Statement
Location of
Loss
Reclassification
from Accumulated
Other
Comprehensive
Loss
|
|
Hedge Loss
Reclassified from
Accumulated
Other
Comprehensive
Loss
|
|
Ineffective Portion
|
Type of Cash Flow Hedge
|
|
|
|
|
Income Statement Location of
Loss Recognized
|
|
Hedge Loss
Recognized
|
Three months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Forward starting pay fixed interest rate swaps
|
|
$
|
(118.0
|
)
|
|
Interest expense
|
|
$
|
(1.5
|
)
|
|
None
|
|
$
|
—
|
|
Three months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Forward starting pay fixed interest rate swaps
|
|
$
|
(293.8
|
)
|
|
Interest expense
|
|
$
|
(1.5
|
)
|
|
None
|
|
$
|
—
|
|
Six months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Forward starting pay fixed interest rate swaps
|
|
$
|
(99.7
|
)
|
|
Interest expense
|
|
$
|
(3.0
|
)
|
|
Net realized gains (losses) on financial instruments
|
|
$
|
(12.0
|
)
|
Six months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Forward starting pay fixed interest rate swaps
|
|
$
|
(703.6
|
)
|
|
Interest expense
|
|
$
|
(2.9
|
)
|
|
None
|
|
$
|
—
|
|
We test for cash flow hedge effectiveness at hedge inception and re-assess at the end of each reporting period. No amounts were excluded from the assessment of hedge effectiveness, and no ineffectiveness was recognized, except for the amounts described above related to the expired interest rate swaps.
Non-Hedging Derivatives
A summary of the effect of non-hedging derivatives on our income statement for the
three and six
months ended
June 30, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
Type of Non-hedging Derivatives
|
|
Income Statement Location of Loss Recognized
|
|
Derivative
Loss
Recognized
|
Three months ended June 30, 2017
|
|
|
|
|
Interest rate swaps
|
|
Net realized gains (losses) on financial instruments
|
|
$
|
(2.0
|
)
|
Options
|
|
Net realized gains (losses) on financial instruments
|
|
(10.6
|
)
|
Futures
|
|
Net realized gains (losses) on financial instruments
|
|
(2.0
|
)
|
Total
|
|
|
|
$
|
(14.6
|
)
|
Three months ended June 30, 2016
|
|
|
|
|
Interest rate swaps
|
|
Net realized gains (losses) on financial instruments
|
|
$
|
(9.4
|
)
|
Options
|
|
Net realized gains (losses) on financial instruments
|
|
(53.7
|
)
|
Futures
|
|
Net realized gains (losses) on financial instruments
|
|
(1.8
|
)
|
Total
|
|
|
|
$
|
(64.9
|
)
|
Six months ended June 30, 2017
|
|
|
|
|
Interest rate swaps
|
|
Net realized gains (losses) on financial instruments
|
|
$
|
(1.4
|
)
|
Options
|
|
Net realized gains (losses) on financial instruments
|
|
(21.1
|
)
|
Futures
|
|
Net realized gains (losses) on financial instruments
|
|
(2.4
|
)
|
Total
|
|
|
|
$
|
(24.9
|
)
|
Six months ended June 30, 2016
|
|
|
|
|
Interest rate swaps
|
|
Net realized gains (losses) on financial instruments
|
|
$
|
(26.3
|
)
|
Options
|
|
Net realized gains (losses) on financial instruments
|
|
(190.1
|
)
|
Futures
|
|
Net realized gains (losses) on financial instruments
|
|
(2.3
|
)
|
Total
|
|
|
|
$
|
(218.7
|
)
|
Assets and liabilities recorded at fair value in the 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 the 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. United States Government securities represent Level I securities, while Level II securities primarily include 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, that 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, available-for-sale:
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 market observable 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
June 30, 2017
and
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
June 30, 2017
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
2,625.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,625.2
|
|
Investments available-for-sale:
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
United States Government securities
|
379.3
|
|
|
—
|
|
|
—
|
|
|
379.3
|
|
Government sponsored securities
|
5.0
|
|
|
42.4
|
|
|
—
|
|
|
47.4
|
|
States, municipalities and political subdivisions, tax-exempt
|
—
|
|
|
5,939.2
|
|
|
—
|
|
|
5,939.2
|
|
Corporate securities
|
737.6
|
|
|
8,889.2
|
|
|
238.2
|
|
|
9,865.0
|
|
Residential mortgage-backed securities
|
3.1
|
|
|
2,235.4
|
|
|
2.9
|
|
|
2,241.4
|
|
Commercial mortgage-backed securities
|
—
|
|
|
97.8
|
|
|
—
|
|
|
97.8
|
|
Other securities
|
53.4
|
|
|
814.7
|
|
|
34.8
|
|
|
902.9
|
|
Total fixed maturity securities
|
1,178.4
|
|
|
18,018.7
|
|
|
275.9
|
|
|
19,473.0
|
|
Equity securities
|
1,509.4
|
|
|
102.2
|
|
|
244.5
|
|
|
1,856.1
|
|
Other invested assets, current
|
19.1
|
|
|
—
|
|
|
—
|
|
|
19.1
|
|
Securities lending collateral
|
857.0
|
|
|
357.5
|
|
|
—
|
|
|
1,214.5
|
|
Derivatives
|
—
|
|
|
311.7
|
|
|
—
|
|
|
311.7
|
|
Total assets
|
$
|
6,189.1
|
|
|
$
|
18,790.1
|
|
|
$
|
520.4
|
|
|
$
|
25,499.6
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivatives
|
$
|
—
|
|
|
$
|
(382.2
|
)
|
|
$
|
—
|
|
|
$
|
(382.2
|
)
|
Total liabilities
|
$
|
—
|
|
|
$
|
(382.2
|
)
|
|
$
|
—
|
|
|
$
|
(382.2
|
)
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
1,546.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,546.0
|
|
Investments available-for-sale:
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
United States Government securities
|
558.5
|
|
|
—
|
|
|
—
|
|
|
558.5
|
|
Government sponsored securities
|
—
|
|
|
40.0
|
|
|
—
|
|
|
40.0
|
|
States, municipalities and political subdivisions, tax-exempt
|
—
|
|
|
6,105.3
|
|
|
—
|
|
|
6,105.3
|
|
Corporate securities
|
79.9
|
|
|
7,775.9
|
|
|
238.8
|
|
|
8,094.6
|
|
Residential mortgage-backed securities
|
—
|
|
|
1,917.3
|
|
|
12.0
|
|
|
1,929.3
|
|
Commercial mortgage-backed securities
|
—
|
|
|
214.3
|
|
|
—
|
|
|
214.3
|
|
Other securities
|
53.4
|
|
|
649.3
|
|
|
42.8
|
|
|
745.5
|
|
Total fixed maturity securities
|
691.8
|
|
|
16,702.1
|
|
|
293.6
|
|
|
17,687.5
|
|
Equity securities
|
1,200.2
|
|
|
111.9
|
|
|
187.8
|
|
|
1,499.9
|
|
Other invested assets, current
|
15.8
|
|
|
—
|
|
|
—
|
|
|
15.8
|
|
Securities lending collateral
|
726.0
|
|
|
353.8
|
|
|
—
|
|
|
1,079.8
|
|
Derivatives
|
—
|
|
|
758.7
|
|
|
—
|
|
|
758.7
|
|
Total assets
|
$
|
4,179.8
|
|
|
$
|
17,926.5
|
|
|
$
|
481.4
|
|
|
$
|
22,587.7
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivatives
|
$
|
—
|
|
|
$
|
(241.9
|
)
|
|
$
|
—
|
|
|
$
|
(241.9
|
)
|
Total liabilities
|
$
|
—
|
|
|
$
|
(241.9
|
)
|
|
$
|
—
|
|
|
$
|
(241.9
|
)
|
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 June 30, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
Securities
|
|
Residential
Mortgage-
backed
Securities
|
|
Other Debt
Securities
|
|
Equity
Securities
|
|
Total
|
Three months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
Beginning balance at April 1, 2017
|
$
|
230.0
|
|
|
$
|
7.2
|
|
|
$
|
28.6
|
|
|
$
|
223.3
|
|
|
$
|
489.1
|
|
Total gains (losses):
|
|
|
|
|
|
|
|
|
|
Recognized in net income
|
0.9
|
|
|
—
|
|
|
—
|
|
|
(0.5
|
)
|
|
0.4
|
|
Recognized in accumulated other comprehensive loss
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
0.4
|
|
|
0.6
|
|
Purchases
|
25.4
|
|
|
—
|
|
|
21.3
|
|
|
21.3
|
|
|
68.0
|
|
Sales
|
(7.3
|
)
|
|
(3.9
|
)
|
|
(0.8
|
)
|
|
—
|
|
|
(12.0
|
)
|
Settlements
|
(16.0
|
)
|
|
(0.1
|
)
|
|
(0.7
|
)
|
|
—
|
|
|
(16.8
|
)
|
Transfers into Level III
|
5.1
|
|
|
1.2
|
|
|
—
|
|
|
—
|
|
|
6.3
|
|
Transfers out of Level III
|
—
|
|
|
(1.5
|
)
|
|
(13.7
|
)
|
|
—
|
|
|
(15.2
|
)
|
Ending balance at June 30, 2017
|
$
|
238.2
|
|
|
$
|
2.9
|
|
|
$
|
34.8
|
|
|
$
|
244.5
|
|
|
$
|
520.4
|
|
Change in unrealized losses included in net income related to assets still held for the three months ended June 30, 2017
|
$
|
(0.9
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
Beginning balance at April 1, 2016
|
$
|
232.2
|
|
|
$
|
—
|
|
|
$
|
34.8
|
|
|
$
|
144.5
|
|
|
$
|
411.5
|
|
Total (losses) gains:
|
|
|
|
|
|
|
|
|
|
Recognized in net income
|
(0.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.7
|
)
|
Recognized in accumulated other comprehensive loss
|
0.2
|
|
|
—
|
|
|
0.1
|
|
|
1.2
|
|
|
1.5
|
|
Purchases
|
33.9
|
|
|
—
|
|
|
—
|
|
|
28.1
|
|
|
62.0
|
|
Sales
|
(0.8
|
)
|
|
—
|
|
|
—
|
|
|
(8.1
|
)
|
|
(8.9
|
)
|
Settlements
|
(10.3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10.3
|
)
|
Transfers into Level III
|
0.6
|
|
|
1.6
|
|
|
7.6
|
|
|
—
|
|
|
9.8
|
|
Transfers out of Level III
|
(47.0
|
)
|
|
—
|
|
|
(10.2
|
)
|
|
—
|
|
|
(57.2
|
)
|
Ending balance at June 30, 2016
|
$
|
208.1
|
|
|
$
|
1.6
|
|
|
$
|
32.3
|
|
|
$
|
165.7
|
|
|
$
|
407.7
|
|
Change in unrealized losses included in net income related to assets still held for the three months ended June 30, 2016
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level III inputs for the
six months ended June 30, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
Securities
|
|
Residential
Mortgage-
backed
Securities
|
|
Commercial
Mortgage-
backed
Securities
|
|
Other
Securities
|
|
Equity
Securities
|
|
Total
|
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2017
|
$
|
238.8
|
|
|
$
|
12.0
|
|
|
$
|
—
|
|
|
$
|
42.8
|
|
|
$
|
187.8
|
|
|
$
|
481.4
|
|
Total (losses) gains:
|
|
|
|
|
|
|
|
|
|
|
|
Recognized in net income
|
(0.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
|
(0.6
|
)
|
Recognized in accumulated other comprehensive loss
|
3.7
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
3.9
|
|
Purchases
|
60.2
|
|
|
1.5
|
|
|
—
|
|
|
30.8
|
|
|
57.3
|
|
|
149.8
|
|
Sales
|
(39.9
|
)
|
|
(5.4
|
)
|
|
—
|
|
|
(0.8
|
)
|
|
(0.4
|
)
|
|
(46.5
|
)
|
Settlements
|
(35.6
|
)
|
|
(0.3
|
)
|
|
—
|
|
|
(1.1
|
)
|
|
—
|
|
|
(37.0
|
)
|
Transfers into Level III
|
13.4
|
|
|
1.2
|
|
|
—
|
|
|
1.2
|
|
|
—
|
|
|
15.8
|
|
Transfers out of Level III
|
(2.0
|
)
|
|
(6.1
|
)
|
|
—
|
|
|
(38.3
|
)
|
|
—
|
|
|
(46.4
|
)
|
Ending balance at June 30, 2017
|
$
|
238.2
|
|
|
$
|
2.9
|
|
|
$
|
—
|
|
|
$
|
34.8
|
|
|
$
|
244.5
|
|
|
$
|
520.4
|
|
Change in unrealized losses included in net income related to assets still held for the six months ended June 30, 2017
|
$
|
(2.6
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2016
|
$
|
186.2
|
|
|
$
|
—
|
|
|
$
|
1.9
|
|
|
$
|
25.6
|
|
|
$
|
102.1
|
|
|
$
|
315.8
|
|
Total (losses) gains:
|
|
|
|
|
|
|
|
|
|
|
|
Recognized in net income
|
(1.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.2
|
|
|
0.6
|
|
Recognized in accumulated other comprehensive loss
|
(1.3
|
)
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
|
(0.4
|
)
|
|
(2.0
|
)
|
Purchases
|
91.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
72.3
|
|
|
164.2
|
|
Sales
|
(1.8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10.5
|
)
|
|
(12.3
|
)
|
Settlements
|
(21.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(21.2
|
)
|
Transfers into Level III
|
2.9
|
|
|
1.6
|
|
|
—
|
|
|
17.2
|
|
|
—
|
|
|
21.7
|
|
Transfers out of Level III
|
(47.0
|
)
|
|
—
|
|
|
(1.9
|
)
|
|
(10.2
|
)
|
|
—
|
|
|
(59.1
|
)
|
Ending balance at June 30, 2016
|
$
|
208.1
|
|
|
$
|
1.6
|
|
|
$
|
—
|
|
|
$
|
32.3
|
|
|
$
|
165.7
|
|
|
$
|
407.7
|
|
Change in unrealized losses included in net income related to assets still held for the six months ended June 30, 2016
|
$
|
(1.8
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1.8
|
)
|
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 and six
months ended
June 30, 2017
or
2016
.
There were no material assets or liabilities measured at fair value on a nonrecurring basis during the
three and six
months ended
June 30, 2017
or
2016
.
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 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 and six
months ended
June 30, 2017
or
2016
.
In addition to the preceding disclosures on assets recorded at fair value in the consolidated balance sheets, FASB guidance also 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 the 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 the consolidated balance sheets for cash, accrued investment income, premium and self-funded receivables, other receivables, unearned income, accounts payable and accrued expenses, income taxes receivable/payable, 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 on the 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 market observable rates estimated to be available to us for debt of similar terms and remaining maturities.
Long-term debt – senior unsecured 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
June 30, 2017
and
December 31, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Estimated Fair Value
|
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Other invested assets, long-term
|
$
|
2,352.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,352.1
|
|
|
$
|
2,352.1
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
580.0
|
|
|
—
|
|
|
580.0
|
|
|
—
|
|
|
580.0
|
|
Commercial paper
|
1,976.8
|
|
|
—
|
|
|
1,976.8
|
|
|
—
|
|
|
1,976.8
|
|
Notes
|
13,400.3
|
|
|
—
|
|
|
14,563.2
|
|
|
—
|
|
|
14,563.2
|
|
Convertible debentures
|
335.3
|
|
|
—
|
|
|
1,320.4
|
|
|
—
|
|
|
1,320.4
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Other invested assets, long-term
|
$
|
2,240.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,240.5
|
|
|
$
|
2,240.5
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
440.0
|
|
|
—
|
|
|
440.0
|
|
|
—
|
|
|
440.0
|
|
Commercial paper
|
629.0
|
|
|
—
|
|
|
629.0
|
|
|
—
|
|
|
629.0
|
|
Notes
|
14,323.8
|
|
|
—
|
|
|
14,858.4
|
|
|
—
|
|
|
14,858.4
|
|
Convertible debentures
|
334.1
|
|
|
—
|
|
|
1,020.2
|
|
|
—
|
|
|
1,020.2
|
|
During the
three months ended June 30, 2017
and
2016
, we recognized income tax expense of
$350.4
and
$667.7
, respectively, which represent effective tax rates of
29.1%
and
46.1%
, respectively. The
decrease
in income tax expense was primarily due to the suspension of the non-tax deductible Health Insurance Provider Fee, or HIP Fee, for 2017 and lower income before income tax expense. For the
three months ended June 30, 2016
, we recognized additional income tax expense of
$104.1
related to the HIP Fee.
The decrease in income tax expense was further due to the favorable impact of our recognition of tax benefits during the three months ended June 30, 2017 for prior acquisition costs incurred related to the terminated Merger Agreement with Cigna.
Additionally, during the
three months ended June 30, 2016
,
we recognized additional California deferred state tax expense resulting from specific California legislation related to Managed Care Organizations that did not recur in 2017.
The decrease in the effective tax rate was primarily due to the suspension of the HIP Fee, the deduction of the Acquisition related costs and the additional California deferred state tax expense, discussed above.
During the
six months ended June 30, 2017
and
2016
, we recognized income tax expense of
$855.5
and
$1,276.7
, respectively, which represent effective tax rates of
31.4%
and
46.3%
, respectively. The
decrease
in income tax expense was
primarily due to the suspension of the non-tax deductible HIP Fee for 2017 and the favorable impact of our recognition of tax benefits for prior acquisition costs incurred related to the terminated Merger Agreement with Cigna.
For the
six months ended June 30, 2016
,
we recognized additional income tax expense of
$208.2
related to the HIP Fee. The decrease in income tax expense was further due to the recognition of excess tax benefits during the
six months ended June 30, 2017
from the adoption of ASU 2016-09, as discussed in Note 2, "Basis of Presentation and Significant Accounting Policies -
Recently Adopted Accounting Guidance.
"
Additionally, during the six months ended June 30, 2016, we recognized additional California deferred state tax expense resulting from specific California legislation related to Managed Care Organizations that did not recur in 2017.
The decrease in the effective tax rate was primarily due to the suspension of the HIP Fee, the deduction
of the Acquisition related costs, the excess tax benefits from the adoption of ASU 2016-09 and the additional California deferred state tax expense, discussed above.
The components of net periodic (benefit credit) benefit cost included in the consolidated statements of income for the
three months ended June 30, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Three Months Ended
June 30
|
|
Three Months Ended
June 30
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
$
|
2.5
|
|
|
$
|
2.9
|
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
Interest cost
|
16.7
|
|
|
17.3
|
|
|
5.2
|
|
|
5.6
|
|
Expected return on assets
|
(37.0
|
)
|
|
(36.7
|
)
|
|
(5.6
|
)
|
|
(5.6
|
)
|
Recognized actuarial loss
|
5.5
|
|
|
4.3
|
|
|
2.8
|
|
|
3.1
|
|
Settlement loss
|
2.1
|
|
|
3.2
|
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
(0.1
|
)
|
|
(0.1
|
)
|
|
(3.4
|
)
|
|
(3.4
|
)
|
Net periodic (benefit credit) benefit cost
|
$
|
(10.3
|
)
|
|
$
|
(9.1
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
0.1
|
|
The components of net periodic (benefit credit) benefit cost included in the consolidated statements of income for the
six months ended June 30, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Six Months Ended
June 30
|
|
Six Months Ended
June 30
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
$
|
5.0
|
|
|
$
|
5.7
|
|
|
$
|
0.7
|
|
|
$
|
0.8
|
|
Interest cost
|
33.3
|
|
|
34.6
|
|
|
10.4
|
|
|
11.2
|
|
Expected return on assets
|
(73.8
|
)
|
|
(73.4
|
)
|
|
(11.3
|
)
|
|
(11.2
|
)
|
Recognized actuarial loss
|
10.9
|
|
|
8.7
|
|
|
5.7
|
|
|
6.2
|
|
Settlement loss
|
3.8
|
|
|
5.6
|
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
(0.2
|
)
|
|
(0.2
|
)
|
|
(6.8
|
)
|
|
(6.9
|
)
|
Net periodic (benefit credit) benefit cost
|
$
|
(21.0
|
)
|
|
$
|
(19.0
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
0.1
|
|
For the year ending
December 31, 2017
, 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
six months ended June 30, 2017
and
2016
.
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
six months ended June 30, 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
|
14,423.4
|
|
|
21,263.1
|
|
|
35,686.5
|
|
Prior periods redundancies
|
(408.9
|
)
|
|
(542.1
|
)
|
|
(951.0
|
)
|
Total net incurred medical claims
|
14,014.5
|
|
|
20,721.0
|
|
|
34,735.5
|
|
Net payments attributable to:
|
|
|
|
|
|
Current period medical claims
|
11,495.2
|
|
|
17,045.2
|
|
|
28,540.4
|
|
Prior periods medical claims
|
2,371.1
|
|
|
3,699.8
|
|
|
6,070.9
|
|
Total net payments
|
13,866.3
|
|
|
20,745.0
|
|
|
34,611.3
|
|
Net medical claims payable, end of period
|
2,893.9
|
|
|
4,583.8
|
|
|
7,477.7
|
|
Ceded medical claims payable, end of period
|
469.5
|
|
|
22.3
|
|
|
491.8
|
|
Gross medical claims payable, end of period
|
$
|
3,363.4
|
|
|
$
|
4,606.1
|
|
|
$
|
7,969.5
|
|
At
June 30, 2017
, the total of net incurred but not reported liabilities plus expected development on reported claims for the Commercial & Specialty Business was
$70.5
,
$(104.9)
and
$2,928.3
for the claim years 2015 and prior, 2016 and 2017, respectively.
At
June 30, 2017
, the total of net incurred but not reported liabilities plus expected development on reported claims for the Government Business was
$34.4
,
$331.5
and
$4,217.9
for the claim years 2015 and prior, 2016 and 2017, respectively.
A reconciliation of the beginning and ending balances for medical claims payable, by segment (see Note 15, "Segment Information"), for the
six months ended June 30, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
& Specialty
Business
|
|
Government
Business
|
|
Total
|
Gross medical claims payable, beginning of period
|
$
|
3,396.1
|
|
|
$
|
4,173.7
|
|
|
$
|
7,569.8
|
|
Ceded medical claims payable, beginning of period
|
(635.7
|
)
|
|
(9.9
|
)
|
|
(645.6
|
)
|
Net medical claims payable, beginning of period
|
2,760.4
|
|
|
4,163.8
|
|
|
6,924.2
|
|
Net incurred medical claims:
|
|
|
|
|
|
Current period
|
13,396.2
|
|
|
19,056.0
|
|
|
32,452.2
|
|
Prior periods redundancies
|
(421.9
|
)
|
|
(304.4
|
)
|
|
(726.3
|
)
|
Total net incurred medical claims
|
12,974.3
|
|
|
18,751.6
|
|
|
31,725.9
|
|
Net payments attributable to:
|
|
|
|
|
|
Current period medical claims
|
11,217.9
|
|
|
14,979.2
|
|
|
26,197.1
|
|
Prior periods medical claims
|
2,003.3
|
|
|
3,538.1
|
|
|
5,541.4
|
|
Total net payments
|
13,221.2
|
|
|
18,517.3
|
|
|
31,738.5
|
|
Net medical claims payable, end of period
|
2,513.5
|
|
|
4,398.1
|
|
|
6,911.6
|
|
Ceded medical claims payable, end of period
|
571.2
|
|
|
15.8
|
|
|
587.0
|
|
Gross medical claims payable, end of period
|
$
|
3,084.7
|
|
|
$
|
4,413.9
|
|
|
$
|
7,498.6
|
|
The reconciliation of net incurred medical claims to benefit expense included in the consolidated statements of income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
Six Months Ended
June 30
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net incurred medical claims:
|
|
|
|
|
|
|
|
|
Commercial & Specialty Business
|
|
$
|
7,264.4
|
|
|
$
|
6,893.3
|
|
|
$
|
14,014.5
|
|
|
$
|
12,974.3
|
|
Government Business
|
|
10,297.2
|
|
|
9,607.4
|
|
|
20,721.0
|
|
|
18,751.6
|
|
Total net incurred medical claims
|
|
17,561.6
|
|
|
16,500.7
|
|
|
34,735.5
|
|
|
31,725.9
|
|
Quality improvement and other claims expense
|
|
355.6
|
|
|
304.5
|
|
|
724.5
|
|
|
618.1
|
|
Benefit expense
|
|
$
|
17,917.2
|
|
|
$
|
16,805.2
|
|
|
$
|
35,460.0
|
|
|
$
|
32,344.0
|
|
We generally issue senior unsecured notes for long-term borrowing purposes. At
June 30, 2017
and
December 31, 2016
, we had
$12,137.3
and
$13,061.3
, respectively, outstanding under these notes.
Upon maturity on June 15, 2017 and February 15, 2017, we repaid the
$528.8
outstanding balance of our
5.875%
senior unsecured notes and the
$400.0
outstanding balance of our
2.375%
senior unsecured notes, respectively.
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 $207.5898 per share, the settlement rate will be 0.2406 shares of our common stock. If the applicable market value of our common stock is less than $207.5898 per share but greater than $143.7160 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 $143.7160, the settlement rate will be 0.3480 shares of our common stock. Holders of the Equity Units may elect early settlement at a minimum settlement rate of 0.2406 shares of our common stock for each purchase contract being settled.
The RSNs are pledged as collateral to secure the purchase of common stock under the related stock purchase contracts. Quarterly interest payments on the RSNs commenced on August 1, 2015. The RSNs are scheduled to be remarketed during the five business day period ending on April 26, 2018 and may be remarketed earlier, at our election, during the period from January 30, 2018 through April 12, 2018. Following the re-marketing, the interest rate on the RSNs will be set to current market rates and interest will be payable semi-annually. At
June 30, 2017
, the present value of the stock purchase contract liability was
$41.5
and is included in other current liabilities and other noncurrent liabilities with a corresponding offset to additional paid-in capital in our consolidated balance sheet. 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, and we have the right to defer payment of interest on the RSNs but not beyond the purchase contract settlement date or maturity date. At
June 30, 2017
and
December 31, 2016
, the carrying amount of the RSNs was
$1,238.1
and
$1,237.6
, respectively.
We have an unsecured surplus note with an outstanding principal balance of
$24.9
at
June 30, 2017
and
December 31, 2016
.
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
six months ended
June 30, 2017
or at
December 31, 2016
.
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
June 30, 2017
and
December 31, 2016
, we had
$1,976.8
and
$629.0
, 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. The following table summarizes at
June 30, 2017
the related balances, conversion rate and conversion price of the Debentures:
|
|
|
|
|
Outstanding principal amount
|
$
|
512.6
|
|
Unamortized debt discount
|
$
|
171.7
|
|
Net debt carrying amount
|
$
|
335.3
|
|
Equity component carrying amount
|
$
|
185.8
|
|
Conversion rate (shares of common stock per $1,000 of principal amount)
|
13.6931
|
|
Effective conversion price (per $1,000 of principal amount)
|
$
|
73.0291
|
|
We have
$580.0
in outstanding short-term borrowings from various Federal Home Loan Banks, or FHLBs, at
June 30, 2017
with fixed interest rates of
1.151%
.
During the year ended December 31, 2015, we entered into a bridge facility commitment letter and a joinder agreement, and a term loan facility, to finance a portion of the now terminated Acquisition. We paid
$106.6
in fees in connection with the bridge facility which were capitalized in other current assets and amortized as interest expense. In January 2017, we reduced the size of the bridge facility from
$22,500.0
to
$19,500.0
and extended the termination date under the Merger Agreement, as well as the availability of commitments under the bridge facility and term loan facility, to April 30, 2017. In connection with the extension of the bridge facility, we paid
$97.5
in fees, which were amortized through April 30, 2017. We recorded
$32.3
and
$107.9
of interest expense related to the amortization of the bridge loan facility and other related fees during the
three and six
months ended
June 30, 2017
, respectively. We recorded
$31.5
and
$63.1
of interest expense related to the amortization of the bridge loan facility and other related fees during the three and six months ended June 30, 2016, respectively.
The commitment of the lenders to provide the bridge facility and term loan facility expired on April 30, 2017.
All debt is a direct obligation of Anthem, Inc., except for the surplus note and the FHLB borrowings.
|
|
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 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 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. The consolidated amended subscriber complaint was also brought on behalf of putative state classes of health plan subscribers in Alabama, Arkansas, California, Florida, Hawaii, Illinois, Louisiana, Michigan, Mississippi, Missouri, New Hampshire, North Carolina, Pennsylvania, Rhode Island, South Carolina, Tennessee, and Texas. 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 this 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, we filed our answer and asserted our affirmative defenses in December 2014. Since January 2016, subscribers have filed additional actions asserting damage claims in Indiana, Kansas, Kansas City, Minnesota, Montana, Nebraska, North Dakota, Oklahoma, South Dakota, Vermont, and Virginia, all of which have been consolidated into the multi-district lawsuit. In November 2016 and April 2017, subscriber plaintiffs and provider plaintiffs filed new consolidated amended complaints adding new named plaintiffs and new factual allegations. We filed answers to the amended complaints in May 2017. 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 the
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 Antitrust Act commenced in July 2017. No date has 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 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. The lawsuits were recently assigned to a new judge and an initial status conference occurred in June 2017. 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 and seeks 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. Further, we assert that Express Scripts’ excessive pricing has caused us to lose existing customers and prevented us from gaining new business. 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 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 health care plan from December 1, 2009 to the present in which Anthem provided prescription drug benefits through a 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. In January 2017, Express Scripts filed a motion to transfer the case to a federal court in Missouri, which we opposed. Following a hearing in March 2017, Express Scripts' motion to transfer was denied. We intend to vigorously defend this suit; however, its ultimate outcome cannot be presently determined.
In July 2015, we and Cigna announced that we entered into a 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 Acquisition. In February 2017, Cigna purported to terminate the 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 Merger Agreement, and a declaratory judgment that its purported termination of the 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 Merger Agreement, specific performance compelling Cigna to comply with the 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 Acquisition. In May 2017, after the Delaware Court denied our motion to enjoin Cigna from terminating the Merger Agreement, we delivered to Cigna a notice terminating the Merger Agreement. The litigation in Delaware continues. 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, the DOJ issued a civil investigative demand 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 investigation.
Where available information indicates that it is probable that a loss has been incurred as of the date of our 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
June 30, 2017
. 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, birthdays, health care 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 our results of operations. 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 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 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 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 court granted the motion to continue all case deadlines. A hearing on the motion for preliminary approval of the settlement is scheduled for August 2017. 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 health care 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 Penn Treaty insolvency to approximate
$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 CareMore subsidiary 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 and seeking 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
June 30, 2017
.
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
June 30, 2017
, 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
six months ended June 30, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Cash
Dividend
per Share
|
|
Total
|
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
February 22, 2017
|
|
March 10, 2017
|
|
March 24, 2017
|
|
$0.65
|
|
$172.2
|
April 27, 2017
|
|
June 9, 2017
|
|
June 23, 2017
|
|
$0.65
|
|
$171.8
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
February 18, 2016
|
|
March 10, 2016
|
|
March 25, 2016
|
|
$0.65
|
|
$170.7
|
April 26, 2016
|
|
June 10, 2016
|
|
June 24, 2016
|
|
$0.65
|
|
$170.9
|
On
July 25, 2017
, our Audit Committee of the Board of Directors declared a third quarter 2017 dividend to shareholders of
$0.70
per share, payable on
September 25, 2017
to shareholders of record at the close of business on
September 8, 2017
.
Under our Board of Directors’ authorization, we maintain a common stock repurchase program. On October 2, 2014, 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 July 1, 2017 through July 13, 2017 (subsequent to June 30, 2017) and for the
six months ended June 30, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
July 1, 2017
Through
July 13, 2017
|
|
Six Months Ended
June 30, 2017
|
Shares repurchased
|
0.6
|
|
|
2.8
|
|
Average price per share
|
$
|
189.24
|
|
|
$
|
180.37
|
|
Aggregate cost
|
$
|
117.3
|
|
|
$
|
509.0
|
|
Authorization remaining at the end of the period
|
$
|
3,549.6
|
|
|
$
|
3,666.9
|
|
There were no common stock repurchases during the
six months ended June 30, 2016
.
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
six months ended June 30, 2017
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, 2017
|
5.6
|
|
|
$
|
102.80
|
|
|
|
|
|
Granted
|
1.1
|
|
|
167.09
|
|
|
|
|
|
Exercised
|
(1.6
|
)
|
|
85.15
|
|
|
|
|
|
Forfeited or expired
|
(0.1
|
)
|
|
135.90
|
|
|
|
|
|
Outstanding at June 30, 2017
|
5.0
|
|
|
121.72
|
|
|
6.45
|
|
$
|
330.8
|
|
Exercisable at June 30, 2017
|
2.7
|
|
|
97.59
|
|
|
4.45
|
|
$
|
245.4
|
|
A summary of the status of nonvested restricted stock activity, including restricted stock units, for the
six months ended June 30, 2017
is as follows:
|
|
|
|
|
|
|
|
|
Restricted
Stock Shares
and Units
|
|
Weighted-
Average
Grant Date
Fair Value
per Share
|
Nonvested at January 1, 2017
|
2.1
|
|
|
$
|
127.68
|
|
Granted
|
0.6
|
|
|
167.29
|
|
Vested
|
(0.8
|
)
|
|
109.86
|
|
Forfeited
|
(0.1
|
)
|
|
143.76
|
|
Nonvested at June 30, 2017
|
1.8
|
|
|
146.49
|
|
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, 2016
included in our
2016
Annual Report on Form 10-K.
The following weighted-average assumptions were used to estimate the fair values of options granted during the
six months ended June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
2017
|
|
2016
|
Risk-free interest rate
|
2.31
|
%
|
|
1.76
|
%
|
Volatility factor
|
32.00
|
%
|
|
32.00
|
%
|
Quarterly dividend yield
|
0.397
|
%
|
|
0.491
|
%
|
Weighted-average expected life (years)
|
4.00
|
|
|
4.10
|
|
The following weighted-average fair values per option or share were determined for the
six months ended June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
2017
|
|
2016
|
Options granted during the period
|
$
|
40.77
|
|
|
$
|
30.57
|
|
Restricted stock awards granted during the period
|
167.29
|
|
|
131.90
|
|
|
|
13.
|
Accumulated Other Comprehensive Loss
|
A reconciliation of the components of accumulated other comprehensive loss at
June 30, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
June 30
|
|
2017
|
|
2016
|
Investments, excluding non-credit component of other-than-temporary impairments:
|
|
|
|
Gross unrealized gains
|
$
|
941.6
|
|
|
$
|
1,099.0
|
|
Gross unrealized losses
|
(95.3
|
)
|
|
(115.0
|
)
|
Net pre-tax unrealized gains
|
846.3
|
|
|
984.0
|
|
Deferred tax liability
|
(304.0
|
)
|
|
(358.6
|
)
|
Net unrealized gains on investments
|
542.3
|
|
|
625.4
|
|
Non-credit components of other-than-temporary impairments on investments:
|
|
|
|
Unrealized losses
|
(0.2
|
)
|
|
(26.4
|
)
|
Deferred tax asset
|
0.1
|
|
|
9.3
|
|
Net unrealized non-credit component of other-than-temporary impairments on investments
|
(0.1
|
)
|
|
(17.1
|
)
|
Cash flow hedges:
|
|
|
|
Gross unrealized losses
|
(355.8
|
)
|
|
(825.6
|
)
|
Deferred tax asset
|
124.6
|
|
|
289.0
|
|
Net unrealized losses on cash flow hedges
|
(231.2
|
)
|
|
(536.6
|
)
|
Defined benefit pension plans:
|
|
|
|
Deferred net actuarial loss
|
(641.2
|
)
|
|
(621.5
|
)
|
Deferred prior service credits
|
(0.7
|
)
|
|
(0.1
|
)
|
Deferred tax asset
|
251.6
|
|
|
245.1
|
|
Net unrecognized periodic benefit costs for defined benefit pension plans
|
(390.3
|
)
|
|
(376.5
|
)
|
Postretirement benefit plans:
|
|
|
|
Deferred net actuarial loss
|
(140.9
|
)
|
|
(156.5
|
)
|
Deferred prior service costs
|
52.9
|
|
|
66.6
|
|
Deferred tax asset
|
34.4
|
|
|
35.4
|
|
Net unrecognized periodic benefit costs for postretirement benefit plans
|
(53.6
|
)
|
|
(54.5
|
)
|
Foreign currency translation adjustments:
|
|
|
|
Gross unrealized losses
|
(3.1
|
)
|
|
(8.7
|
)
|
Deferred tax asset
|
1.1
|
|
|
3.1
|
|
Net unrealized losses on foreign currency translation adjustments
|
(2.0
|
)
|
|
(5.6
|
)
|
Accumulated other comprehensive loss
|
$
|
(134.9
|
)
|
|
$
|
(364.9
|
)
|
Other comprehensive income (loss) reclassification adjustments for the
three months ended June 30, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
2017
|
|
2016
|
Investments:
|
|
|
|
Net holding gain on investment securities arising during the period, net of tax expense of ($67.0) and ($153.5), respectively
|
$
|
116.2
|
|
|
$
|
243.4
|
|
Reclassification adjustment for net realized gain on investment securities, net of tax expense of $8.3 and $18.1, respectively
|
(15.3
|
)
|
|
(33.6
|
)
|
Total reclassification adjustment on investments
|
100.9
|
|
|
209.8
|
|
Non-credit component of other-than-temporary impairments on investments:
|
|
|
|
Non-credit component of other-than-temporary impairments on investments, net of tax (expense) benefit of ($0.4) and $2.7, respectively
|
0.9
|
|
|
(5.4
|
)
|
Cash flow hedges:
|
|
|
|
Holding loss, net of tax benefit of $36.6 and $102.4, respectively
|
(79.8
|
)
|
|
(190.0
|
)
|
Other:
|
|
|
|
Net change in unrecognized periodic benefit costs for defined benefit pension and postretirement benefit plans, net of tax expense of ($2.9) and ($2.6), respectively
|
4.2
|
|
|
3.8
|
|
Foreign currency translation adjustment, net of tax (expense) benefit of ($0.4) and $0.5, respectively
|
0.7
|
|
|
(0.7
|
)
|
Net gain recognized in other comprehensive income, net of tax expense of ($25.8) and ($32.4), respectively
|
$
|
26.9
|
|
|
$
|
17.5
|
|
Other comprehensive income (loss) reclassification adjustments for the
six
months ended
June 30, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
2017
|
|
2016
|
Investments:
|
|
|
|
Net holding gain on investment securities arising during the period, net of tax expense of ($113.3) and ($239.1), respectively
|
$
|
210.4
|
|
|
$
|
390.9
|
|
Reclassification adjustment for net realized gain on investment securities, net of tax expense of $15.8 and $4.7, respectively
|
(29.3
|
)
|
|
(8.8
|
)
|
Total reclassification adjustment on investments
|
181.1
|
|
|
382.1
|
|
Non-credit component of other-than-temporary impairments on investments:
|
|
|
|
Non-credit component of other-than-temporary impairments on investments, net of tax (expense) benefit of ($2.5) and $3.9, respectively
|
4.5
|
|
|
(7.1
|
)
|
Cash flow hedges:
|
|
|
|
Holding loss, net of tax benefit of $33.9 and $245.3, respectively
|
(62.8
|
)
|
|
(455.5
|
)
|
Other:
|
|
|
|
Net change in unrecognized periodic benefit costs for defined benefit pension and postretirement benefit plans, net of tax expense of ($5.2) and ($5.0), respectively
|
8.1
|
|
|
7.6
|
|
Foreign currency translation adjustment, net of tax expense of ($1.1) and ($0.2), respectively
|
2.1
|
|
|
0.6
|
|
Net gain (loss) recognized in other comprehensive income, net of tax (expense) benefit of ($72.4) and $9.6, respectively
|
$
|
133.0
|
|
|
$
|
(72.3
|
)
|
The denominator for basic and diluted earnings per share for the
three and six
months ended
June 30, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
Six Months Ended
June 30
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Denominator for basic earnings per share – weighted-average shares
|
264.6
|
|
|
263.0
|
|
|
264.5
|
|
|
262.4
|
|
Effect of dilutive securities – employee stock options, nonvested restricted stock awards and convertible debentures
|
6.2
|
|
|
5.2
|
|
|
6.1
|
|
|
5.4
|
|
Denominator for diluted earnings per share
|
270.8
|
|
|
268.2
|
|
|
270.6
|
|
|
267.8
|
|
During the
three months ended June 30, 2017
and
2016
, weighted-average shares related to certain stock options of
1.0
and
2.6
, respectively, were excluded from the denominator for diluted earnings per share because the stock options were anti-dilutive. During the
six
months ended
June 30, 2017
and
2016
, weighted-average shares related to certain stock options of
0.7
and
2.2
, respectively, were excluded from the denominator for diluted earnings per share because the stock options were anti-dilutive. The Equity Units are potentially dilutive securities but were excluded from the denominator for diluted earnings per share for the
three and six
months ended
June 30, 2017
and
2016
as the dilutive stock price threshold was not met.
During the three and
six months ended June 30, 2017
, we issued approximately
0.1
and
0.6
of 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. During the
six months ended
June 30, 2016
, we issued approximately
1.0
of restricted stock units under our stock incentive plans,
0.5
of which vesting is contingent upon us meeting specified annual earnings targets for the three year period of 2016 through 2018. We did not issue any material amounts of restricted stock units under our stock incentive plans during the
three months ended June 30, 2016
. The contingent restricted stock units have been excluded from the denominator for diluted earnings per share and are included only if and when the contingency is met.
The results of our operations are described through
three
reportable segments: Commercial and 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, 2016
included in our
2016
Annual Report on Form 10-K.
Financial data by reportable segment for the
three and six
months ended
June 30, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and Specialty
Business
|
|
Government
Business
|
|
Other
|
|
Total
|
Three months ended June 30, 2017
|
|
|
|
|
|
|
|
Operating revenue
|
$
|
10,308.8
|
|
|
$
|
11,883.4
|
|
|
$
|
5.8
|
|
|
$
|
22,198.0
|
|
Operating gain (loss)
|
967.9
|
|
|
293.3
|
|
|
(34.2
|
)
|
|
1,227.0
|
|
Three months ended June 30, 2016
|
|
|
|
|
|
|
|
Operating revenue
|
$
|
9,898.3
|
|
|
$
|
11,371.1
|
|
|
$
|
5.1
|
|
|
$
|
21,274.5
|
|
Operating gain (loss)
|
1,075.3
|
|
|
450.5
|
|
|
(25.6
|
)
|
|
1,500.2
|
|
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
Operating revenue
|
$
|
20,598.4
|
|
|
$
|
23,909.1
|
|
|
$
|
10.0
|
|
|
$
|
44,517.5
|
|
Operating gain (loss)
|
2,270.3
|
|
|
611.9
|
|
|
(69.8
|
)
|
|
2,812.4
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
Operating revenue
|
$
|
19,408.1
|
|
|
$
|
22,165.0
|
|
|
$
|
10.8
|
|
|
$
|
41,583.9
|
|
Operating gain (loss)
|
2,368.3
|
|
|
775.5
|
|
|
(73.2
|
)
|
|
3,070.6
|
|
A reconciliation of reportable segments' operating revenues to the amounts of total revenues included in the consolidated statements of income for the
three and six
months ended
June 30, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
Six Months Ended
June 30
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Reportable segments' operating revenues
|
$
|
22,198.0
|
|
|
$
|
21,274.5
|
|
|
$
|
44,517.5
|
|
|
$
|
41,583.9
|
|
Net investment income
|
200.2
|
|
|
194.9
|
|
|
407.4
|
|
|
366.0
|
|
Net realized gains (losses) on financial instruments
|
16.2
|
|
|
12.5
|
|
|
23.5
|
|
|
(112.6
|
)
|
Other-than-temporary impairment losses recognized in income
|
(7.2
|
)
|
|
(25.7
|
)
|
|
(15.3
|
)
|
|
(92.6
|
)
|
Total revenues
|
$
|
22,407.2
|
|
|
$
|
21,456.2
|
|
|
$
|
44,933.1
|
|
|
$
|
41,744.7
|
|
A reconciliation of reportable segments' operating gain to income before income tax expense included in the consolidated statements of income for the
three and six
months ended
June 30, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
Six Months Ended
June 30
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Reportable segments' operating gain
|
$
|
1,227.0
|
|
|
$
|
1,500.2
|
|
|
$
|
2,812.4
|
|
|
$
|
3,070.6
|
|
Net investment income
|
200.2
|
|
|
194.9
|
|
|
407.4
|
|
|
366.0
|
|
Net realized gains (losses) on financial instruments
|
16.2
|
|
|
12.5
|
|
|
23.5
|
|
|
(112.6
|
)
|
Other-than-temporary impairment losses recognized in income
|
(7.2
|
)
|
|
(25.7
|
)
|
|
(15.3
|
)
|
|
(92.6
|
)
|
Interest expense
|
(189.9
|
)
|
|
(185.7
|
)
|
|
(424.9
|
)
|
|
(372.8
|
)
|
Amortization of other intangible assets
|
(40.6
|
)
|
|
(47.9
|
)
|
|
(82.4
|
)
|
|
(98.3
|
)
|
Income before income tax expense
|
$
|
1,205.7
|
|
|
$
|
1,448.3
|
|
|
$
|
2,720.7
|
|
|
$
|
2,760.3
|
|