10-Q 1 unh201333110-q.htm 10-Q UNH 2013.3.31 10-Q
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________ 
Form 10-Q
__________________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2013
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission file number: 1-10864
__________________________________________________________ 
    
UnitedHealth Group Incorporated
(Exact name of registrant as specified in its charter)
 __________________________________________________________ 
Minnesota
 
41-1321939
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
UnitedHealth Group Center
9900 Bren Road East
Minnetonka, Minnesota
 
55343
(Address of principal executive offices)
 
(Zip Code)
(952) 936-1300
(Registrant’s telephone number, including area code)
__________________________________________________________  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
x
 
Accelerated filer
o
 
Non-accelerated filer
o
 
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No x
As of May 3, 2013, there were 1,020,007,037 shares of the registrant’s Common Stock, $.01 par value per share, issued and outstanding.
 
 
 
 
 



UNITEDHEALTH GROUP
Table of Contents
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 5.
Item 6.





PART I
ITEM 1.    FINANCIAL STATEMENTS
UnitedHealth Group
Condensed Consolidated Balance Sheets
(Unaudited)
(in millions, except per share data)
 
March 31,
2013
 
December 31,
2012
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
10,038

 
$
8,406

Short-term investments
 
3,019

 
3,031

Accounts receivable, net
 
3,185

 
2,709

Other current receivables, net
 
2,614

 
2,889

Assets under management
 
2,659

 
2,773

Deferred income taxes
 
336

 
463

Prepaid expenses and other current assets
 
866

 
781

Total current assets
 
22,717

 
21,052

Long-term investments
 
17,998

 
17,711

Property, equipment and capitalized software, net
 
3,945

 
3,939

Goodwill
 
31,810

 
31,286

Other intangible assets, net
 
4,309

 
4,682

Other assets
 
2,347

 
2,215

Total assets
 
$
83,126

 
$
80,885

Liabilities and shareholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Medical costs payable
 
$
11,726

 
$
11,004

Accounts payable and accrued liabilities
 
6,559

 
6,984

Other policy liabilities
 
5,122

 
4,910

Commercial paper and current maturities of long-term debt
 
2,390

 
2,713

Unearned revenues
 
1,386

 
1,505

Total current liabilities
 
27,183

 
27,116

Long-term debt, less current maturities
 
15,659

 
14,041

Future policy benefits
 
2,447

 
2,444

Deferred income taxes
 
2,321

 
2,450

Other liabilities
 
1,571

 
1,535

Total liabilities
 
49,181

 
47,586

Commitments and contingencies (Note 8)
 
 
 


Redeemable noncontrolling interest
 
2,188

 
2,121

Shareholders’ equity:
 
 
 
 
Preferred stock, $0.001 par value - 10 shares authorized; no shares issued or outstanding
 

 

Common stock, $0.01 par value - 3,000 shares authorized;
 1,013 and 1,019 issued and outstanding
 
10

 
10

Additional paid-in capital
 

 
66

Retained earnings
 
31,359

 
30,664

Accumulated other comprehensive income
 
388

 
438

Total shareholders’ equity
 
31,757

 
31,178

Total liabilities and shareholders’ equity
 
$
83,126

 
$
80,885


See Notes to the Condensed Consolidated Financial Statements

1


UnitedHealth Group
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three Months Ended March 31,
(in millions, except per share data)
 
2013
 
2012
Revenues:
 
 
 
 
Premiums
 
$
27,274

 
$
24,631

Services
 
2,112

 
1,791

Products
 
751

 
688

Investment and other income
 
203

 
172

Total revenues
 
30,340

 
27,282

Operating costs:
 
 
 
 
Medical costs
 
22,569

 
19,939

Operating costs
 
4,614

 
4,096

Cost of products sold
 
682

 
634

Depreciation and amortization
 
336

 
296

Total operating costs
 
28,201

 
24,965

Earnings from operations
 
2,139

 
2,317

Interest expense
 
(178
)
 
(148
)
Earnings before income taxes
 
1,961

 
2,169

Provision for income taxes
 
(721
)
 
(781
)
Net earnings
 
1,240

 
1,388

Less: earnings attributable to noncontrolling interest
 
(48
)
 

Net earnings attributable to UnitedHealth Group common shareholders
 
$
1,192

 
$
1,388

Earnings per share attributable to UnitedHealth Group common shareholders:
 
 
 
 
Basic
 
$
1.17

 
$
1.34

Diluted
 
$
1.16

 
$
1.31

Basic weighted-average number of common shares outstanding
 
1,016

 
1,039

Dilutive effect of common stock equivalents
 
13

 
21

Diluted weighted-average number of common shares outstanding
 
1,029

 
1,060

Anti-dilutive shares excluded from the calculation of dilutive effect of common stock equivalents
 
16

 
24

Cash dividends declared per common share
 
$
0.2125

 
$
0.1625


See Notes to the Condensed Consolidated Financial Statements

2



UnitedHealth Group
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

 
 
Three Months Ended March 31,
(in millions)
 
2013
 
2012
Net earnings
 
$
1,240

 
$
1,388

Other comprehensive loss :
 
 
 
 
Gross unrealized holding (losses) gains on investment securities during the period
 
(48
)
 
30

Income tax effect
 
16

 
(11
)
Total unrealized (losses) gains, net of tax
 
(32
)
 
19

Gross reclassification adjustment for net realized gains included in net earnings
 
(57
)
 
(39
)
Income tax effect
 
21

 
14

Total reclassification adjustment, net of tax
 
(36
)
 
(25
)
Total foreign currency translation gains
 
18

 
3

Other comprehensive loss
 
(50
)
 
(3
)
Comprehensive income
 
1,190

 
1,385

Less: comprehensive income attributable to noncontrolling interests
 
(48
)
 

Comprehensive income attributable to UnitedHealth Group common shareholders
 
$
1,142

 
$
1,385


See Notes to the Condensed Consolidated Financial Statements

3


UnitedHealth Group
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
 
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Shareholders’
Equity
(in millions)
 
Shares
 
Amount
 
 
 
Net Unrealized Gains on Investments
 
Foreign Currency Translation (Losses) Gains
 
Balance at January 1, 2013
 
1,019

 
$
10

 
$
66

 
$
30,664

 
$
516

 
$
(78
)
 
$
31,178

Net earnings attributable to UnitedHealth Group common shareholders
 
 
 
 
 
 
 
1,192

 

 

 
1,192

Other comprehensive (loss) income
 
 
 
 
 
 
 
 
 
(68
)
 
18

 
(50
)
Issuances of common stock, and related tax effects
 
4

 

 
84

 
 
 

 

 
84

Share-based compensation, and related tax benefits
 
 
 
 
 
112

 
 
 

 

 
112

Common stock repurchases
 
(10
)
 

 
(262
)
 
(281
)
 
 
 
 
 
(543
)
Cash dividends paid on common stock
 
 
 
 
 
 
 
(216
)
 

 

 
(216
)
Balance at March 31, 2013
 
1,013

 
$
10

 
$

 
$
31,359

 
$
448

 
$
(60
)
 
$
31,757

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2012
 
1,039

 
$
10

 
$

 
$
27,821

 
$
476

 
$
(15
)
 
$
28,292

Net earnings
 
 
 
 
 
 
 
1,388

 

 

 
1,388

Other comprehensive (loss) income
 
 
 
 
 
 
 
 
 
(6
)
 
3

 
(3
)
Issuances of common stock, and related tax effects
 
13

 

 
129

 
 
 

 

 
129

Share-based compensation, and related tax benefits
 
 
 
 
 
209

 
 
 

 

 
209

Common stock repurchases
 
(19
)
 

 
(338
)
 
(653
)
 
 
 
 
 
(991
)
Cash dividends paid on common stock
 
 
 
 
 
 
 
(168
)
 

 

 
(168
)
Balance at March 31, 2012
 
1,033

 
$
10

 
$

 
$
28,388

 
$
470


$
(12
)
 
$
28,856

See Notes to the Condensed Consolidated Financial Statements

4


UnitedHealth Group
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Three Months Ended March 31,
(in millions)
 
2013
 
2012
Operating activities
 
 
 
 
Net earnings
 
$
1,240

 
$
1,388

Non-cash items:
 
 
 
 
Depreciation and amortization
 
336

 
296

Deferred income taxes
 
131

 
126

Share-based compensation
 
99

 
140

Other, net
 
(41
)
 
(88
)
Net change in other operating items, net of effects from acquisitions and changes in AARP balances:
 
 
 
 
Accounts receivable
 
(463
)
 
(316
)
Other assets
 
(556
)
 
(221
)
Medical costs payable
 
673

 
246

Accounts payable and other liabilities
 
(237
)
 
(202
)
Other policy liabilities
 

 
(248
)
Unearned revenues
 
(129
)
 
2,465

Cash flows from operating activities
 
1,053

 
3,586

Investing activities
 
 
 
 
Purchases of investments
 
(2,824
)
 
(2,326
)
Sales of investments
 
1,282

 
1,034

Maturities of investments
 
1,195

 
1,098

Cash paid for acquisitions, net of cash assumed
 
(279
)
 
(1,935
)
Cash received from dispositions
 
45

 

Purchases of property, equipment and capitalized software
 
(323
)
 
(269
)
Cash flows used for investing activities
 
(904
)
 
(2,398
)
Financing activities
 
 
 
 
Common stock repurchases
 
(543
)
 
(991
)
Proceeds from common stock issuances
 
116

 
257

Cash dividends paid
 
(216
)
 
(168
)
Proceeds from commercial paper, net
 
130

 
244

Proceeds from issuance of long-term debt
 
2,235

 
995

Repayments of long-term debt
 
(1,077
)
 

Customer funds administered
 
962

 
1,137

Checks outstanding
 
(80
)
 
(247
)
Other, net
 
(24
)
 
(183
)
Cash flows from financing activities
 
1,503

 
1,044

Effect of exchange rate changes on cash and cash equivalents
 
(20
)
 

Increase in cash and cash equivalents
 
1,632

 
2,232

Cash and cash equivalents, beginning of period
 
8,406

 
9,429

Cash and cash equivalents, end of period
 
$
10,038

 
$
11,661


See Notes to the Condensed Consolidated Financial Statements

5


UnitedHealth Group
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1.Basis of Presentation
UnitedHealth Group Incorporated (both individually and together with its consolidated subsidiaries referred to as “UnitedHealth Group” and the “Company”) is a diversified health and well-being company whose mission is to help people live healthier lives and make health care work better. The Company offers a broad spectrum of products and services through two distinct platforms: UnitedHealthcare, which provides health care coverage and benefits services; and Optum, which provides information and technology-enabled health services.
The Company has prepared the Condensed Consolidated Financial Statements according to U.S. Generally Accepted Accounting Principles (GAAP) and has included the accounts of UnitedHealth Group and its subsidiaries. The Company has eliminated intercompany balances and transactions. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC), the Company has omitted certain footnote disclosures that would substantially duplicate the disclosures contained in its annual audited Consolidated Financial Statements. Therefore, these Condensed Consolidated Financial Statements should be read together with the Consolidated Financial Statements and the Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the SEC (2012 10-K). The accompanying Condensed Consolidated Financial Statements include all normal recurring adjustments necessary to present the interim financial statements fairly.
Use of Estimates
These Condensed Consolidated Financial Statements include certain amounts based on the Company’s best estimates and judgments. The Company’s most significant estimates relate to medical costs payable, premium rebates and risk-adjusted and risk-sharing provisions related to revenues, valuation and impairment analysis of goodwill and other intangible assets, estimates of other policy liabilities and other current receivables, valuations of investments, and estimates and judgments related to income taxes and contingent liabilities. These estimates require the application of complex assumptions and judgments, often because they involve matters that are inherently uncertain and will likely change in subsequent periods. The impact of any changes in estimates is included in earnings in the period in which the estimate is adjusted.
Recently Adopted Accounting Standards
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updated (ASU) No. 2013-02,”Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (ASU 2013-02). ASU 2013-02 requires companies to report the effect of significant reclassifications out of accumulated other comprehensive income, by component, either on the face of the financial statements or in the notes to the financial statements and is intended to help entities improve the transparency of changes in other comprehensive income. ASU 2013-02 does not amend any existing requirements for reporting net income or other comprehensive income in the financial statements. ASU 2013-02 became effective for the Company's fiscal year 2013 and the new disclosures have been included with the Company’s investment disclosures in Note 2.
The Company has determined that there have been no other recently adopted or issued accounting standards that had, or will have, a material impact on its Condensed Consolidated Financial Statements.

6


2.Investments
A summary of short-term and long-term investments by major security type is as follows:
(in millions)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
March 31, 2013
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
2,442

 
$
30

 
$
(1
)
 
$
2,471

State and municipal obligations
 
6,340

 
352

 
(5
)
 
6,687

Corporate obligations
 
7,325

 
254

 
(6
)
 
7,573

U.S. agency mortgage-backed securities
 
2,022

 
56

 
(4
)
 
2,074

Non-U.S. agency mortgage-backed securities
 
630

 
30

 
(1
)
 
659

Total debt securities - available-for-sale
 
18,759

 
722

 
(17
)
 
19,464

Equity securities - available-for-sale
 
720

 
8

 
(2
)
 
726

Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
177

 
6

 

 
183

State and municipal obligations
 
28

 

 

 
28

Corporate obligations
 
622

 

 

 
622

Total debt securities - held-to-maturity
 
827

 
6

 

 
833

Total investments
 
$
20,306

 
$
736

 
$
(19
)
 
$
21,023

December 31, 2012
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
2,501

 
$
38

 
$
(1
)
 
$
2,538

State and municipal obligations
 
6,282

 
388

 
(3
)
 
6,667

Corporate obligations
 
6,930

 
283

 
(4
)
 
7,209

U.S. agency mortgage-backed securities
 
2,168

 
70

 

 
2,238

Non-U.S. agency mortgage-backed securities
 
538

 
36

 

 
574

Total debt securities - available-for-sale
 
18,419

 
815

 
(8
)
 
19,226

Equity securities - available-for-sale
 
668

 
10

 
(1
)
 
677

Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
168

 
6

 

 
174

State and municipal obligations
 
30

 

 

 
30

Corporate obligations
 
641

 
2

 

 
643

Total debt securities - held-to-maturity
 
839

 
8

 

 
847

Total investments
 
$
19,926

 
$
833

 
$
(9
)
 
$
20,750




7


The fair values of the Company’s mortgage-backed securities by credit rating (when multiple credit ratings are available for an individual security, the average of the available ratings is used) and origination as of March 31, 2013 were as follows:
(in millions)
 
AAA
 
AA
 
A
 
Non-Investment
Grade
 
Total Fair
Value
2013
 
$
59

 
$

 
$

 
$

 
$
59

2012
 
116

 

 

 

 
116

2011
 
26

 

 

 

 
26

2010
 
19

 
3

 

 

 
22

2009
 
1

 

 

 

 
1

2007
 
72

 

 

 
3

 
75

Pre - 2007
 
335

 
4

 
11

 
10

 
360

U.S. agency mortgage-backed securities
 
2,074

 

 

 

 
2,074

Total
 
$
2,702

 
$
7

 
$
11

 
$
13

 
$
2,733

The Company includes any securities backed by Alt-A or sub-prime mortgages and any commercial mortgage loans in default in the non-investment grade column in the table above.
The amortized cost and fair value of available-for-sale debt securities as of March 31, 2013, by contractual maturity, were as follows:
(in millions)
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
3,105

 
$
3,120

Due after one year through five years
 
6,626

 
6,849

Due after five years through ten years
 
4,717

 
5,010

Due after ten years
 
1,659

 
1,752

U.S. agency mortgage-backed securities
 
2,022

 
2,074

Non-U.S. agency mortgage-backed securities
 
630

 
659

Total debt securities - available-for-sale
 
$
18,759

 
$
19,464

The amortized cost and fair value of held-to-maturity debt securities as of March 31, 2013, by contractual maturity, were as follows:
(in millions)
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
424

 
$
425

Due after one year through five years
 
148

 
150

Due after five years through ten years
 
145

 
148

Due after ten years
 
110

 
110

Total debt securities - held-to-maturity
 
$
827

 
$
833


8


The fair value of available-for-sale investments with gross unrealized losses by major security type and length of time that individual securities have been in a continuous unrealized loss position were as follows:
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(in millions)
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
142

 
$
(1
)
 
$

 
$

 
$
142

 
$
(1
)
State and municipal obligations
 
417

 
(5
)
 

 

 
417

 
(5
)
Corporate obligations
 
1,120

 
(6
)
 

 

 
1,120

 
(6
)
U.S. agency mortgage-backed securities
 
420

 
(4
)
 

 

 
420

 
(4
)
Non-U.S. agency mortgage-backed securities
 
157

 
(1
)
 

 

 
157

 
(1
)
Total debt securities - available-for-sale
 
$
2,256

 
$
(17
)
 
$

 
$

 
$
2,256

 
$
(17
)
Equity securities - available-for-sale
 
$
40

 
$
(1
)
 
$
2

 
$
(1
)
 
$
42

 
$
(2
)
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
183

 
$
(1
)
 
$

 
$

 
$
183

 
$
(1
)
State and municipal obligations
 
362

 
(3
)
 

 

 
362

 
(3
)
Corporate obligations
 
695

 
(4
)
 

 

 
695

 
(4
)
Total debt securities - available-for-sale
 
$
1,240

 
$
(8
)

$

 
$

 
$
1,240

 
$
(8
)
Equity securities - available-for-sale
 
$
13

 
$
(1
)
 
$

 
$

 
$
13

 
$
(1
)
The unrealized losses from all securities as of March 31, 2013 were generated from approximately 2,000 positions out of a total of 18,000 positions. The Company believes that it will collect the principal and interest due on its investments that have an amortized cost in excess of fair value. The unrealized losses were primarily caused by interest rate increases and not by unfavorable changes in the credit ratings associated with these securities. At each reporting period, the Company evaluates securities for impairment when the fair value of the investment is less than its amortized cost. The Company evaluated the underlying credit quality and credit ratings of the issuers, noting neither a significant deterioration since purchase nor other factors leading to an other-than-temporary impairment (OTTI). The unrealized losses on mortgage-backed securities as of March 31, 2013 were primarily caused by higher interest rates in the marketplace. These unrealized losses represented less than 1% of the total amortized cost of the Company's mortgage-backed security holdings as of March 31, 2013. The Company believes these losses to be temporary. All of the Company's mortgage-backed securities in an unrealized loss position as of March 31, 2013 were rated “AAA” with no known deterioration or other factors leading to an OTTI. As of March 31, 2013, the Company did not have the intent to sell any of the securities in an unrealized loss position.
A portion of the Company’s investments in equity securities and venture capital funds consists of investments held in various public and nonpublic companies concentrated in the areas of health care services and related information technologies. Market conditions that affect the value of health care and related technology stocks will likewise impact the value of the Company’s equity portfolio. The equity securities and venture capital funds were evaluated for severity and duration of unrealized loss, overall market volatility and other market factors.

9


Net realized gains reclassified out of accumulated other comprehensive income were from the following sources:
 
 
Three Months Ended March 31,
(in millions)
 
2013
 
2012
Total OTTI
 
$
(3
)
 
$
(3
)
Portion of loss recognized in other comprehensive income
 

 

Net OTTI recognized in earnings
 
(3
)
 
(3
)
Gross realized losses from sales
 
(1
)
 
(1
)
Gross realized gains from sales
 
61

 
43

Net realized gains (included in Investment and Other Income on the Condensed Consolidated Statements of Operations)
 
57

 
39

Income tax effect (included in Provision for Income Taxes on the Condensed Consolidated Statements of Operations)
 
(21
)
 
(14
)
Realized gains, net of taxes
 
$
36

 
$
25

3.
Fair Value
Certain assets and liabilities are measured at fair value in the Condensed Consolidated Financial Statements or have fair values disclosed in the Notes to the Condensed Consolidated Financial Statements. These assets and liabilities are classified into one of three levels of a hierarchy defined by GAAP. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement is categorized in its entirety based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
The fair value hierarchy is summarized as follows:
Level 1 — Quoted prices (unadjusted) for identical assets/liabilities in active markets.
Level 2 — Other observable inputs, either directly or indirectly, including:
Quoted prices for similar assets/liabilities in active markets;
Quoted prices for identical or similar assets/liabilities in non-active markets (e.g., few transactions, limited information, non-current prices, high variability over time);
Inputs other than quoted prices that are observable for the asset/liability (e.g., interest rates, yield curves, implied volatilities, credit spreads); and
Inputs that are corroborated by other observable market data.
Level 3 — Unobservable inputs that cannot be corroborated by observable market data.
Transfers between levels, if any, are recorded as of the beginning of the reporting period in which the transfer occurs; there were no transfers between Levels 1, 2 or 3 of any financial assets or liabilities during 2013 or 2012.
Non-financial assets and liabilities or financial assets and liabilities that are measured at fair value on a nonrecurring basis are subject to fair value adjustments only in certain circumstances, such as when the Company records an impairment. There were no significant fair value adjustments for these assets and liabilities recorded during the three months ended March 31, 2013 or 2012.
The following methods and assumptions were used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument included in the tables below:
Cash and Cash Equivalents. The carrying value of cash and cash equivalents approximates fair value as maturities are less than three months. Fair values of cash equivalent instruments that do not trade on a regular basis in active markets are classified as Level 2.
Debt and Equity Securities. Fair values of debt and equity securities are based on quoted market prices, where available. The Company obtains one price for each security primarily from a third-party pricing service (pricing service), which generally uses quoted or other observable inputs for the determination of fair value. The pricing service normally derives the security prices through recently reported trades for identical or similar securities, and, if necessary, makes adjustments through the reporting date based upon available observable market information. For securities not actively traded, the pricing service 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. Inputs that are often used in the valuation methodologies include, but are not limited to, benchmark yields, credit spreads, default rates, prepayment speeds and non-binding broker quotes. As the Company is

10


responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Company compares the prices received from the pricing service to a secondary pricing source, prices reported by its custodian, its investment consultant and third-party investment advisors. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verification procedures and reviews of fair value methodology documentation provided by independent pricing services have not historically resulted in adjustment in the prices obtained from the pricing service.
Fair values of debt securities that do not trade on a regular basis in active markets but are priced using other observable inputs are classified as Level 2.
Fair value estimates for Level 1 and Level 2 equity securities are based on quoted market prices for actively traded equity securities and/or other market data for the same or comparable instruments and transactions in establishing the prices.
The Company’s Level 3 equity securities are primarily investments in venture capital securities. The fair values of Level 3 investments in venture capital portfolios are estimated using a market valuation technique that relies heavily on management assumptions and qualitative observations. Under the market approach, the fair values of the Company’s various venture capital investments are computed using limited quantitative and qualitative observations of activity for similar companies in the current market. The Company’s market modeling utilizes, as applicable, transactions for comparable companies in similar industries and having similar revenue and growth characteristics; and similar preferences in their capital structure. Key significant unobservable inputs in the market technique include implied earnings before interest, taxes, depreciation and amortization (EBITDA) multiples and revenue multiples. Additionally, the fair value of certain of the Company’s venture capital securities are based off of recent transactions in inactive markets for identical or similar securities. Significant changes in any of these inputs could result in significantly lower or higher fair value measurements.
Throughout the procedures discussed above in relation to the Company’s processes for validating third party pricing information, the Company validates the understanding of assumptions and inputs used in security pricing and determines the proper classification in the hierarchy based on that understanding.
AARP Program-related Investments. The Company provides health insurance products and services to members of AARP under a Supplemental Health Insurance Program (AARP Program). AARP Program-related investments consist of debt and equity securities held to fund costs associated with the AARP Program and are priced and classified using the same methodologies as the Company’s debt and equity securities.
Interest Rate and Currency Swaps. Fair values of the Company’s swaps are estimated using the terms of the swaps and publicly available information including market yield curves. Because the swaps are unique and not actively traded but are valued using other observable inputs, the fair values are classified as Level 2.
Long-term Debt. The fair value of the Company’s long-term debt is estimated and classified using the same methodologies as the Company’s investments in debt securities.
AARP Program-related Other Liabilities. AARP Program-related other liabilities consist of liabilities that represent the amount of net investment gains and losses related to AARP Program-related investments that accrue to the benefit of the AARP policyholders.

11


The following table presents a summary of fair value measurements by level and carrying values for items measured at fair value on a recurring basis in the Condensed Consolidated Balance Sheets excluding AARP Program-related assets and liabilities, which are presented in a separate table below:
(in millions)
 
Quoted Prices
in Active
Markets
(Level 1)
 
Other
Observable
Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
Fair and Carrying
Value
March 31, 2013
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
9,301

 
$
737

 
$

 
$
10,038

Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
1,748

 
723

 

 
2,471

State and municipal obligations
 

 
6,687

 

 
6,687

Corporate obligations
 
7

 
7,540

 
26

 
7,573

U.S. agency mortgage-backed securities
 

 
2,074

 

 
2,074

Non-U.S. agency mortgage-backed securities
 

 
653

 
6

 
659

Total debt securities - available-for-sale
 
1,755

 
17,677

 
32

 
19,464

Equity securities - available-for-sale
 
473

 
14

 
239

 
726

Interest rate swap assets
 

 
21

 

 
21

Total assets at fair value

$
11,529

 
$
18,449

 
$
271

 
$
30,249

Percentage of total assets at fair value
 
38
%
 
61
%
 
1
%
 
100
%
Interest rate and currency swap liabilities
 
$

 
$
11

 
$

 
$
11

December 31, 2012
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
7,615

 
$
791

 
$

 
$
8,406

Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
1,752

 
786

 

 
2,538

State and municipal obligations
 

 
6,667

 

 
6,667

Corporate obligations
 
13

 
7,185

 
11

 
7,209

U.S. agency mortgage-backed securities
 

 
2,238

 

 
2,238

Non-U.S. agency mortgage-backed securities
 

 
568

 
6

 
574

Total debt securities - available-for-sale
 
1,765

 
17,444

 
17

 
19,226

Equity securities - available-for-sale
 
450

 
3

 
224

 
677

Interest rate swap assets
 

 
14

 

 
14

Total assets at fair value
 
$
9,830

 
$
18,252

 
$
241

 
$
28,323

Percentage of total assets at fair value
 
35
%
 
64
%
 
1
%
 
100
%
Interest rate and currency swap liabilities
 
$

 
$
14

 
$

 
$
14


12


The following table presents a summary of fair value measurements by level and carrying values for certain financial instruments not measured at fair value on a recurring basis in the Condensed Consolidated Balance Sheets:
(in millions)
 
Quoted Prices
in Active
Markets
(Level 1)
 
Other
Observable
Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
Fair
Value
 
Total Carrying Value
March 31, 2013
 
 
 
 
 
 
 
 
 
 
Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
183

 
$

 
$

 
$
183

 
$
177

State and municipal obligations
 

 

 
28

 
28

 
28

Corporate obligations
 
16

 
345

 
261

 
622

 
622

Total debt securities - held-to-maturity
 
$
199

 
$
345

 
$
289

 
$
833

 
$
827

Long-term debt
 
$

 
$
17,967

 
$

 
$
17,967

 
$
16,330

December 31, 2012
 
 
 
 
 
 
 
 
 
 
Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
174

 
$

 
$

 
$
174

 
$
168

State and municipal obligations
 

 
1

 
29

 
30

 
30

Corporate obligations
 
10

 
346

 
287

 
643

 
641

Total debt securities - held-to-maturity
 
$
184

 
$
347

 
$
316

 
$
847

 
$
839

Long-term debt
 
$

 
$
17,034

 
$

 
$
17,034

 
$
15,167

The carrying amounts reported in the Condensed Consolidated Balance Sheets for accounts and other current receivables, unearned revenues, commercial paper, accounts payable and accrued liabilities approximate fair value because of their short-term nature. These assets and liabilities are not listed in the table above.
A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs is as follows:
 
 
March 31, 2013
 
March 31, 2012
(in millions)
 
Debt
Securities
 
Equity
Securities
 
Total
 
Debt
Securities
 
Equity
Securities
 
Total
Balance at beginning of period
 
$
17

 
$
224

 
$
241

 
$
208

 
$
209

 
$
417

Purchases
 
15

 
31

 
46

 

 
18

 
18

Sales
 

 
(21
)
 
(21
)
 

 
(2
)
 
(2
)
Net unrealized losses in accumulated other comprehensive income
 

 
(2
)
 
(2
)
 

 

 

Net realized gains in investment and other income
 

 
7

 
7

 

 

 

Transfers to held-to-maturity
 

 

 

 
(201
)
 
(21
)
 
(222
)
Balance at end of period
 
$
32

 
$
239

 
$
271

 
$
7

 
$
204

 
$
211

The following table presents quantitative information regarding unobservable inputs that were significant to the valuation of assets measured at fair value on a recurring basis using Level 3 inputs:
(in millions)
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Low
 
High
March 31, 2013
 
 
 
 
 
 
 
 
 
 
Equity securities - available-for-sale
 
 
 
 
 
 
 
 
 
 
Venture capital portfolios
 
$
222

 
Market approach - comparable companies
 
Revenue multiple
 
1.0
 
10.0
 
 
 
 
 
 
EBITDA multiple
 
8.0
 
10.0
 
 
17

 
Market approach - recent transactions
 
Inactive market transactions
 
N/A
 
N/A
Total equity securities
     available-for-sale
 
$
239

 
 
 
 
 
 
 
 
Also included in the Company’s assets measured at fair value on a recurring basis using Level 3 inputs were $32 million of available-for-sale debt securities at March 31, 2013, which were not significant.

13


 
The Company elected to measure the entirety of the AARP Assets Under Management at fair value pursuant to the fair value option. See Note 2 of Notes to the Consolidated Financial Statements in the Company’s 2012 10-K for further detail on AARP. The following table presents fair value information about the AARP Program-related financial assets and liabilities:
(in millions)
 
Quoted Prices
in Active
Markets
(Level 1)
 
Other
Observable
Inputs
(Level 2)
 
Total
Fair and Carrying
Value
March 31, 2013
 
 
 
 
 
 
Cash and cash equivalents
 
$
57

 
$

 
$
57

Debt securities:
 
 
 
 
 
 
U.S. government and agency obligations
 
506

 
243

 
749

State and municipal obligations
 

 
57

 
57

Corporate obligations
 

 
1,200

 
1,200

U.S. agency mortgage-backed securities
 

 
446

 
446

Non-U.S. agency mortgage-backed securities
 

 
147

 
147

Total debt securities
 
506

 
2,093

 
2,599

Equity securities - available-for-sale
 

 
3

 
3

Total assets at fair value
 
$
563

 
$
2,096

 
$
2,659

Other liabilities
 
$
20

 
$
51

 
$
71

December 31, 2012
 
 
 
 
 
 
Cash and cash equivalents
 
$
230

 
$

 
$
230

Debt securities:
 
 
 
 
 
 
U.S. government and agency obligations
 
545

 
244

 
789

State and municipal obligations
 

 
51

 
51

Corporate obligations
 

 
1,118

 
1,118

U.S. agency mortgage-backed securities
 

 
427

 
427

Non-U.S. agency mortgage-backed securities
 

 
155

 
155

Total debt securities
 
545

 
1,995

 
2,540

Equity securities - available-for-sale
 

 
3

 
3

Total assets at fair value
 
$
775

 
$
1,998

 
$
2,773

Other liabilities
 
$
23

 
$
58

 
$
81


14


4.
Medicare Part D Pharmacy Benefits
The Condensed Consolidated Balance Sheets include the following amounts associated with the Medicare Part D program:

 
 
March 31, 2013
 
December 31, 2012
(in millions)
 
Subsidies
 
Drug Discount
 
Risk-Share
 
Subsidies
 
Drug Discount
 
Risk-Share
Other current receivables
 
$
35

 
$
158

 
$

 
$
461

 
$
314

 
$

Other policy liabilities
 

 
250

 
424

 

 
319

 
438

The Catastrophic Reinsurance and Low-Income Member Cost Sharing Subsidies (Subsidies) and drug discounts represent cost reimbursements under the Medicare Part D program. The Company is fully reimbursed by the Centers for Medicare and Medicaid Services (CMS) for costs incurred for these contract elements and, accordingly, there is no insurance risk to the Company. Amounts received for these contract elements are not reflected as premium revenues, but rather are accounted for as a reduction of receivables and/or increase in deposit liabilities. CMS provides prospective payments, which the Company records as liabilities when received. The drug discounts are ultimately funded by the pharmaceutical manufacturers. The Company bills them for claims under the program and records those bills as receivables. Related cash flows are presented as customer funds administered within financing activities in the Condensed Consolidated Statements of Cash Flows.
Premiums from CMS are subject to risk-sharing provisions based on a comparison of the Company’s annual bid estimates of prescription drug costs and the actual costs incurred. Variances may result in CMS making additional payments to the Company or require the Company to remit funds to CMS subsequent to the end of the year. The Company records risk-share adjustments to premium revenue and other current receivables or other policy liabilities in the Condensed Consolidated Balance Sheets.
5.
Medical Costs and Medical Costs Payable
Favorable development was $280 million and $530 million for the three months ended March 31, 2013 and 2012, respectively. Lower than expected health system utilization levels were a significant driver in both periods. The Company’s reserve development in the first quarter of 2013 also reflected comparatively greater stability in utilization patterns and consistency in operations processing performance.


15


6.     Commercial Paper and Long-Term Debt
Commercial paper and long-term debt consisted of the following:
 
 
March 31, 2013
 
December 31, 2012
(in millions, except percentages)
 
Par
Value
 
Carrying
Value
 
Fair
Value
 
Par
Value
 
Carrying
Value
 
Fair
Value
Commercial Paper
 
$
1,719

 
$
1,719

 
$
1,719

 
$
1,587

 
$
1,587

 
$
1,587

4.875% senior unsecured notes due February 2013
 

 

 

 
534

 
534

 
536

4.875% senior unsecured notes due April 2013
 
409

 
409

 
409

 
409

 
411

 
413

4.750% senior unsecured notes due February 2014
 
172

 
177

 
178

 
172

 
178

 
180

5.000% senior unsecured notes due August 2014
 
389

 
407

 
413

 
389

 
411

 
414

Senior unsecured floating-rate notes due August 2014
 
250

 
250

 
250

 

 

 

4.875% senior unsecured notes due March 2015 (a)
 
416

 
442

 
449

 
416

 
444

 
453

0.850% senior unsecured notes due October 2015 (a)
 
625

 
626

 
627

 
625

 
623

 
627

5.375% senior unsecured notes due March 2016 (a)
 
601

 
658

 
677

 
601

 
660

 
682

1.875% senior unsecured notes due November 2016
 
400

 
397

 
413

 
400

 
397

 
412

5.360% senior unsecured notes due November 2016
 
95

 
95

 
110

 
95

 
95

 
110

6.000% senior unsecured notes due June 2017
 
441

 
486

 
524

 
441

 
489

 
528

1.400% senior unsecured notes due October 2017 (a)
 
625

 
626

 
630

 
625

 
622

 
626

6.000% senior unsecured notes due November 2017
 
156

 
170

 
186

 
156

 
170

 
191

6.000% senior unsecured notes due February 2018
 
1,100

 
1,119

 
1,330

 
1,100

 
1,120

 
1,339

1.625% senior unsecured notes due March 2019
 
500

 
498

 
501

 

 

 

3.875% senior unsecured notes due October 2020
 
450

 
443

 
494

 
450

 
442

 
499

4.700% senior unsecured notes due February 2021
 
400

 
417

 
459

 
400

 
417

 
466

3.375% senior unsecured notes due November 2021 (a)
 
500

 
514

 
528

 
500

 
512

 
533

2.875% senior unsecured notes due March 2022
 
1,100

 
1,000

 
1,113

 
1,100

 
998

 
1,128

0.000% senior unsecured notes due November 2022
 
15

 
9

 
11

 
15

 
9

 
11

2.750% senior unsecured notes due February 2023 (a)
 
625

 
619

 
617

 
625

 
619

 
631

2.875% senior unsecured notes due March 2023
 
750

 
747

 
749

 

 

 

5.800% senior unsecured notes due March 2036
 
850

 
845

 
1,010

 
850

 
845

 
1,025

6.500% senior unsecured notes due June 2037
 
500

 
495

 
645

 
500

 
495

 
659

6.625% senior unsecured notes due November 2037
 
650

 
645

 
847

 
650

 
645

 
860

6.875% senior unsecured notes due February 2038
 
1,100

 
1,084

 
1,480

 
1,100

 
1,084

 
1,510

5.700% senior unsecured notes due October 2040
 
300

 
298

 
355

 
300

 
298

 
364

5.950% senior unsecured notes due February 2041
 
350

 
348

 
429

 
350

 
348

 
440

4.625% senior unsecured notes due November 2041
 
600

 
593

 
625

 
600

 
593

 
641

4.375% senior unsecured notes due March 2042
 
502

 
486

 
506

 
502

 
486

 
521