10-Q 1 form10-q.htm FORM 10-Q Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
    
FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934

For the quarterly period ended June 30, 2016
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: 1-16095

Aetna Inc.
(Exact name of registrant as specified in its charter)

Pennsylvania
(State or other jurisdiction of incorporation or organization)
23-2229683
(I.R.S. Employer Identification No.)
151 Farmington Avenue, Hartford, CT
(Address of principal executive offices)
06156
(Zip Code)
Registrant’s telephone number, including area code:
(860) 273-0123
 
 
Former name, former address and former fiscal year, if changed since last report: N/A

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. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ Yes o No

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 þ
 
Accelerated filer o
Non-accelerated filer o  (Do not check if a smaller reporting company)
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). o Yes þ No

There were 350.8 million shares of the registrant’s voting common stock with a par value of $.01 per share outstanding at June 30, 2016.




Aetna Inc.
Form 10-Q
For the Quarterly Period Ended June 30, 2016

Unless the context otherwise requires, references to the terms “we”, “our” or “us” used throughout this Quarterly Report on Form 10-Q (except the Report of Independent Registered Public Accounting Firm on page 41), refer to Aetna Inc. (a Pennsylvania corporation) (“Aetna”) and its subsidiaries (collectively, the “Company”).


Table of Contents
Page
 
 
 
Part I
Financial Information
 
 
 
 
Item 1.
Financial Statements
1
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
42
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
60
Item 4.
Controls and Procedures
60
 
 
 
Part II
Other Information
 
 
 
 
Item 1.
Legal Proceedings
61
Item 1A.
Risk Factors
61
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
61
Item 4.
Mine Safety Disclosures
61
Item 6.
Exhibits
62
 
 
 
Signatures
63
Index to Exhibits
64






Part I.
Financial Information

Item 1.
Financial Statements

Consolidated Statements of Income
(Unaudited)
 
 
 
 
For the Three Months
 
For the Six Months
 
 
 
 
Ended June 30,
 
Ended June 30,
(Millions, except per common share data)
 
2016

 
2015

 
2016

 
2015

Revenue:
 
 
 
 
 
 
 
 
 
 
Health care premiums
 
 
 
$
13,629.5

 
$
12,936.5

 
$
27,098.5

 
$
25,876.6

Other premiums
 
 
 
547.2

 
546.0

 
1,087.3

 
1,084.0

Fees and other revenue (1)
 
 
 
1,473.5

 
1,509.0

 
2,940.5

 
2,884.0

Net investment income
 
 
 
251.0

 
247.4

 
468.7

 
480.3

Net realized capital gains
 
 
 
51.1

 
2.0

 
50.7

 
10.1

Total revenue
 
 
 
15,952.3

 
15,240.9

 
31,645.7

 
30,335.0

Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
Health care costs (2)
 
 
 
11,232.1

 
10,496.3

 
22,079.8

 
20,736.8

Current and future benefits
 
 
 
525.5

 
539.2

 
1,054.4

 
1,067.3

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Selling expenses
 
 
 
415.7

 
405.7

 
836.8

 
820.6

General and administrative expenses
 
 
 
2,367.4

 
2,394.8

 
4,809.9

 
4,795.4

Total operating expenses
 
 
 
2,783.1

 
2,800.5

 
5,646.7

 
5,616.0

Interest expense
 
 
 
123.7

 
79.6

 
225.5

 
159.8

Amortization of other acquired intangible assets
 
 
 
62.8

 
63.7

 
125.6

 
126.9

Reduction of reserve for anticipated future losses
 
 
 
 
 
 
 
 
 
 
on discontinued products
 
 
 
(128.5
)
 

 
(128.5
)
 

Total benefits and expenses
 
 
 
14,598.7

 
13,979.3

 
29,003.5

 
27,706.8

Income before income taxes
 
 
 
1,353.6

 
1,261.6

 
2,642.2

 
2,628.2

Income taxes:
 
 
 
 
 
 
 
 
 
 
Current
 
 
 
554.2

 
515.7

 
1,117.0

 
1,162.7

Deferred
 
 
 
6.7

 
11.3

 
(5.7
)
 
(45.4
)
Total income taxes
 
 
 
560.9

 
527.0

 
1,111.3

 
1,117.3

Net income including non-controlling interests
 
 
 
792.7

 
734.6

 
1,530.9

 
1,510.9

Less: Net income attributable to non-controlling interests
1.9

 
2.8

 
3.2

 
1.6

Net income attributable to Aetna
 
 
 
$
790.8

 
$
731.8

 
$
1,527.7

 
$
1,509.3

Earnings per common share:
 
 
 
 
 
 
 
 
 
 
Basic
 
 
 
$
2.25

 
$
2.10

 
$
4.35

 
$
4.32

Diluted
 
 
 
$
2.23

 
$
2.08

 
$
4.32

 
$
4.28

 
 
 
 
 
 
 
 
 
 
 
(1) 
Fees and other revenue include administrative services contract member co-payments and plan sponsor reimbursements related to our mail order and specialty pharmacy operations of $35.0 million and $59.4 million (net of pharmaceutical and processing costs of $332.7 million and $641.1 million) for the three and six months ended June 30, 2016, respectively, and $28.5 million and $52.6 million (net of pharmaceutical and processing costs of $327.9 million and $627.2 million) for the three and six months ended June 30, 2015, respectively.
(2) 
Health care costs have been reduced by Insured member co-payments related to our mail order and specialty pharmacy operations of $28.1 million and $62.1 million for the three and six months ended June 30, 2016, respectively, and $30.2 million and $63.6 million for the three and six months ended June 30, 2015, respectively.

Refer to accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).

Page 1



Consolidated Statements of Comprehensive Income
(Unaudited)

 
For the Three Months
 
For the Six Months
 
Ended June 30,
 
Ended June 30,
(Millions)
2016

 
2015

 
2016

 
2015

Net income including non-controlling interests
$
792.7

 
$
734.6

 
$
1,530.9

 
$
1,510.9

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
    Previously impaired debt securities: (1)
 
 
 
 
 
 
 
Net unrealized gains (losses)
 
 
 
 
 
 
 
($.2, $(2.7), ($4.0) and $(6.1) pretax)
.1

 
(1.8
)
 
(2.6
)
 
(4.0
)
Less: reclassification of (losses) gains to earnings
 
 
 
 
 
 
 
($(.6), $7.4, $(5.9) and $9.8 pretax)
(.4
)
 
4.8

 
(3.8
)
 
6.4

    Total previously impaired debt securities (1)
.5

 
(6.6
)
 
1.2

 
(10.4
)
    All other securities:
 
 
 
 
 
 
 
Net unrealized gains (losses)
 
 
 
 
 
 
 
($298.8, $(430.7), $616.2 and $(310.8) pretax)
194.2

 
(279.9
)
 
400.5

 
(202.0
)
Less: reclassification of gains (losses) to earnings
 
 
 
 
 
 
 
($45.2, $(28.4), $21.8 and $(39.4) pretax)

29.4

 
(18.4
)
 
14.2

 
(25.6
)
    Total all other securities
164.8

 
(261.5
)
 
386.3

 
(176.4
)
    Foreign currency and derivatives:
 
 
 
 
 
 
 
Net unrealized (losses) gains
 
 
 
 
 
 
 
($(23.7), $26.8, $(270.0) and $5.4 pretax)
(15.4
)
 
17.4

 
(175.5
)
 
3.5

Less: reclassification of losses to earnings
 
 
 
 
 
 
 
($(4.4), $(1.4), $(9.9) and $(2.9) pretax)
(2.9
)
 
(.9
)
 
(6.5
)
 
(1.9
)
    Total foreign currency and derivatives
(12.5
)
 
18.3

 
(169.0
)
 
5.4

    Pension and other postretirement employee benefit (“OPEB”) plans:
 
 
 
 
 
 
 
Less: amortization of net actuarial losses
 
 
 
 
 
 
 
($(15.9), $(16.0), $(31.9) and $(32.1) pretax)
(10.4
)
 
(10.4
)
 
(20.8
)
 
(20.9
)
Less: amortization of prior service credit
 
 
 
 
 
 
 
($1.1, $1.0, $2.1 and $2.0 pretax)
.7

 
.6

 
1.4

 
1.3

Total pension and OPEB plans
9.7

 
9.8

 
19.4

 
19.6

Other comprehensive income (loss)
162.5

 
(240.0
)
 
237.9

 
(161.8
)
Comprehensive income including non-controlling interests
955.2

 
494.6


1,768.8

 
1,349.1

Less: Comprehensive income attributable to non-controlling interests
1.9

 
2.8


3.2

 
1.6

Comprehensive income attributable to Aetna
$
953.3

 
$
491.8

 
$
1,765.6

 
$
1,347.5

 
 
 
 
 
 
 
 
(1) 
Represents unrealized gains (losses) on the non-credit related component of impaired debt securities that we do not intend to sell and subsequent changes in the fair value of any previously impaired security.


Refer to accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).


Page 2



Consolidated Balance Sheets
 
 
 
 
(Unaudited)

 
 
(Millions)
 
 
 
At June 30, 2016

 
At December 31,
2015

Assets:
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
$
17,119.4

 
$
2,524.3

Investments
 
 
 
2,981.8

 
3,014.8

Premiums receivable, net
 
 
 
3,090.4

 
1,753.1

Other receivables, net
 
 
 
2,799.2

 
2,443.2

Accrued investment income
 
 
 
229.3

 
227.7

Income taxes receivable
 
 
 

 
260.4

Other current assets
 
 
 
2,905.2

 
2,509.5

Total current assets
 
 
 
29,125.3

 
12,733.0

Long-term investments
 
 
 
22,423.0

 
21,664.8

Reinsurance recoverables
 
 
 
767.5

 
723.9

Goodwill
 
 
 
10,636.8

 
10,636.8

Other acquired intangible assets, net
 
 
 
1,563.7

 
1,688.3

Property and equipment, net
 
 
 
605.0

 
629.7

Other long-term assets
 
 
 
1,300.3

 
1,269.9

Separate Accounts assets
 
 
 
4,180.4

 
4,035.1

Total assets
 
 
 
$
70,602.0

 
$
53,381.5

 
 
 
 
 
 
 
Liabilities and shareholders’ equity:
 
 
 
 

 
 

Current liabilities:
 
 
 
 

 
 

Health care costs payable
 
 
 
$
6,942.7

 
$
6,305.7

Future policy benefits
 
 
 
660.4

 
671.8

Unpaid claims
 
 
 
766.3

 
772.3

Unearned premiums
 
 
 
582.4

 
549.2

Policyholders’ funds
 
 
 
2,575.5

 
2,262.5

Current portion of long-term debt
 
 
 
643.9

 

Income taxes payable
 
 
 
163.2

 

Accrued expenses and other current liabilities
 
 
 
5,939.5

 
4,920.0

Total current liabilities
 
 
 
18,273.9

 
15,481.5

Future policy benefits
 
 
 
6,039.8

 
6,268.2

Unpaid claims
 
 
 
1,686.3

 
1,655.6

Policyholders’ funds
 
 
 
930.4

 
885.6

Long-term debt, less current portion
 
 
 
20,019.1

 
7,785.4

Deferred income taxes
 
 
 
341.3

 
177.4

Other long-term liabilities
 
 
 
1,353.1

 
914.1

Separate Accounts liabilities
 
 
 
4,180.4

 
4,035.1

Total liabilities
 
 
 
52,824.3

 
37,202.9

Commitments and contingencies (Note 15)
 
 
 


 


Shareholders’ equity:
 
 
 
 
 
 

Common stock ($.01 par value; 2.5 billion shares authorized and 350.8 million shares issued
 
 

and outstanding in 2016; 2.5 billion shares authorized and 349.5 million shares issued and
 
 
 
 

outstanding in 2015) and additional paid-in capital
 
 
 
4,653.2

 
4,647.2

Retained earnings
 
 
 
14,149.8

 
12,797.4

Accumulated other comprehensive loss
 
 
 
(1,092.4
)
 
(1,330.3
)
Total Aetna shareholders’ equity
 
 
 
17,710.6

 
16,114.3

Non-controlling interests
 
 
 
67.1

 
64.3

Total equity
 
 
 
17,777.7

 
16,178.6

Total liabilities and equity
 
 
 
$
70,602.0

 
$
53,381.5

 
 
 
 
 
 
 
Refer to accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).

Page 3



Consolidated Statements of Shareholders’ Equity
(Unaudited)

 
 
 
Attributable to Aetna
 
 
 
 
(Millions)
Number of
Common
Shares
Outstanding

 
Common
Stock and
Additional
Paid-in
Capital

 
Retained
Earnings

Accumulated
Other
Comprehensive
Loss
 
 
Total Aetna
Shareholders’
Equity

 
Non-Controlling Interests

Total
Equity
 
Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
349.5

 
$
4,647.2

 
$
12,797.4

 
$
(1,330.3
)
 
$
16,114.3

 
$
64.3

 
$
16,178.6

Net income

 

 
1,527.7

 

 
1,527.7

 
3.2

 
1,530.9

Other decreases in non-
 
 
 
 
 
 
 
 
 
 
 
 
 
controlling interest

 

 

 

 

 
(.4
)
 
(.4
)
Other comprehensive income (Note 9)

 

 

 
237.9

 
237.9

 

 
237.9

Common shares issued for benefit
 
 
 
 
 
 
 
 
 
 
 
 
 
plans, net of employee tax
 
 
 
 
 
 
 
 
 
 
 
 
 
withholdings
1.3

 
6.0

 

 

 
6.0

 

 
6.0

Dividends declared

 

 
(175.3
)
 

 
(175.3
)
 

 
(175.3
)
Balance at June 30, 2016
350.8

 
$
4,653.2

 
$
14,149.8

 
$
(1,092.4
)
 
$
17,710.6

 
$
67.1

 
$
17,777.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
349.8

 
$
4,542.2

 
$
11,051.7

 
$
(1,111.3
)
 
$
14,482.6

 
$
69.2

 
$
14,551.8

Net income

 

 
1,509.3

 

 
1,509.3

 
1.6

 
1,510.9

Other decreases in non-
 
 
 
 
 
 
 
 
 
 
 
 
 
controlling interest

 

 

 

 

 
(9.6
)
 
(9.6
)
Other comprehensive loss (Note 9)

 

 

 
(161.8
)
 
(161.8
)
 

 
(161.8
)
Common shares issued for benefit
 
 
 
 
 
 
 
 
 
 
 
 
 
plans, including tax benefits, net of
 
 
 
 
 
 
 
 
 
 
 
 
 
employee tax withholdings
1.8

 
47.0

 

 

 
47.0

 

 
47.0

Repurchases of common shares
(3.0
)
 
(.1
)
 
(296.2
)
 

 
(296.3
)
 

 
(296.3
)
Dividends declared

 

 
(174.2
)
 

 
(174.2
)
 

 
(174.2
)
Balance at June 30, 2015
348.6

 
$
4,589.1

 
$
12,090.6

 
$
(1,273.1
)
 
$
15,406.6

 
$
61.2

 
$
15,467.8



Refer to accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).


Page 4



Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
 
Six Months Ended
 
 
 
 
June 30,
(Millions)
 
 
 
2016

 
2015

Cash flows from operating activities:
 
 
 
 
 
 
Net income including non-controlling interests
 
 
 
$
1,530.9

 
$
1,510.9

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Net realized capital gains
 
 
 
(50.7
)
 
(10.1
)
Depreciation and amortization
 
 
 
342.9

 
330.0

Debt fair value amortization
 
 
 
(14.8
)
 
(15.3
)
Equity in earnings of affiliates, net
 
 
 
(2.4
)
 
(35.7
)
Stock-based compensation expense
 
 
 
100.7

 
96.7

Reduction of reserve for anticipated future losses on discontinued products
 
 
 
(128.5
)
 

Amortization of net investment premium
 
 
 
39.5

 
42.8

Changes in assets and liabilities:
 
 
 
 
 
 
Accrued investment income
 
 
 
(1.6
)
 
(2.6
)
Premiums due and other receivables
 
 
 
(1,560.4
)
 
(1,588.7
)
Income taxes
 
 
 
418.4

 
230.0

Other assets and other liabilities
 
 
 
817.0

 
781.8

Health care and insurance liabilities
 
 
 
718.8

 
389.3

Net cash provided by operating activities
 
 
 
2,209.8

 
1,729.1

Cash flows from investing activities:
 
 
 
 

 
 

Proceeds from sales and maturities of investments
 
 
 
6,698.8

 
5,872.0

Cost of investments
 
 
 
(6,534.2
)
 
(6,193.8
)
Additions to property, equipment and software
 
 
 
(128.7
)
 
(187.8
)
Cash used for acquisitions, net of cash acquired
 
 
 

 
(20.6
)
Net cash provided by (used for) investing activities
 
 
 
35.9

 
(530.2
)
Cash flows from financing activities:
 
 
 
 

 
 

Issuance of long-term debt
 
 
 
12,885.7

 

Repayment of long-term debt
 
 
 

 
(228.8
)
Net repayment of short-term debt
 
 
 

 
(500.0
)
(Withdrawals) net of deposits and interest credited to investment contracts
 
 
 

 
(35.5
)
Common shares issued under benefit plans, net
 
 
 
(87.4
)
 
(95.2
)
Stock-based compensation tax benefits
 
 
 

 
38.5

Settlements from repurchase agreements
 
 
 

 
(201.7
)
Common shares repurchased
 
 
 

 
(296.3
)
Dividends paid to shareholders
 
 
 
(175.0
)
 
(174.3
)
Net (payment) receipt on interest rate derivatives
 
 
 
(273.5
)
 
9.5

Distributions, non-controlling interests
 
 
 
(.4
)
 
(9.7
)
Net cash provided by (used for) financing activities
 
 
 
12,349.4

 
(1,493.5
)
Net increase (decrease) in cash and cash equivalents
 
 
 
14,595.1

 
(294.6
)
Cash and cash equivalents, beginning of period
 
 
 
2,524.3

 
1,420.4

Cash and cash equivalents, end of period
 
 
 
$
17,119.4

 
$
1,125.8

Supplemental cash flow information:
 
 
 
 

 
 

Interest paid
 
 
 
$
171.9

 
$
173.2

Income taxes paid
 
 
 
702.5

 
848.0

 
 
 
 
 
 
 
 
 Refer to accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).

Page 5



Condensed Notes to Consolidated Financial Statements
(Unaudited)

1.
Organization

We conduct our operations in three business segments:

Health Care consists of medical, pharmacy benefit management services, dental, behavioral health and vision plans offered on both an Insured basis (where we assume all or a majority of the risk for medical and dental care costs) and an employer-funded basis (where the plan sponsor under an administrative services contract (“ASC”) assumes all or a majority of this risk) and emerging business products and services, such as Accountable Care Solutions, that complement and enhance our medical products. We also offer Medicare and Medicaid products and services and other medical products, such as medical management and data analytics services, medical stop loss insurance, workers’ compensation administrative services and products that provide access to our provider networks in select geographies.

Group Insurance primarily includes group life insurance and group disability products. Group life insurance products are offered on an Insured basis. Group disability products are offered to employers on both an Insured and an ASC basis. Group Insurance also includes long-term care products that were offered primarily on an Insured basis. We no longer solicit or accept new long-term care customers.

Large Case Pensions manages a variety of retirement products (including pension and annuity products) primarily for tax-qualified pension plans. These products provide a variety of funding and benefit payment distribution options and other services. Large Case Pensions also includes certain discontinued products (refer to Note 18 beginning on page 38 for additional information).

2.
Summary of Significant Accounting Policies

Interim Financial Statements
These interim financial statements necessarily rely on estimates, including assumptions as to annualized tax rates.  In the opinion of management, all adjustments necessary for a fair statement of results for the interim periods have been made.  All such adjustments are of a normal, recurring nature.  The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes presented in our 2015 Annual Report on Form 10-K (our “2015 Annual Report”).  Certain financial information that is normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), but that is not required for interim reporting purposes, has been condensed or omitted.  We have omitted certain footnote disclosures that would substantially duplicate the disclosures in our 2015 Annual Report, unless the information contained in those disclosures materially changed and is required by GAAP.  The Company has evaluated subsequent events that occurred after June 30, 2016 through the date the financial statements were issued and determined there were no subsequent events to disclose other than as disclosed in Notes 3 and 15 beginning on pages 10 and 32.

Reclassifications
Certain reclassifications were made to 2015 financial information to conform with the 2016 presentation.

Principles of Consolidation
The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP and include the accounts of Aetna and the subsidiaries we control.  All significant intercompany balances have been eliminated in consolidation.


Page 6



New Accounting Standards
Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
Effective January 1, 2016, we adopted new accounting guidance related to the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This guidance clarifies that awards with these provisions should be treated as performance conditions that affect vesting, and do not impact the award’s estimated grant-date fair value. The adoption of this new guidance did not have an impact on our financial position or operating results.

Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity
Effective January 1, 2016, we adopted new accounting guidance related to the approach used in determining whether the host contract in a hybrid financial instrument issued in the form of a share is more akin to debt or equity. The adoption of this new guidance did not have a material impact on our financial position or operating results.

Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items
Effective January 1, 2016, we adopted new accounting guidance related to the presentation of extraordinary items. The amendment eliminates the concept of extraordinary items, which are events that are both unusual and infrequent. Presentation and disclosure of items that are unusual or infrequent will be retained, and will be expanded to include items that are both unusual and infrequent. The adoption of this new guidance did not have a material impact on our financial position or operating results.

Amendments to the Consolidation Analysis
Effective January 1, 2016, we adopted new accounting guidance related to the evaluation of consolidation for certain legal entities. The amendment changes how a reporting entity assesses consolidation, including whether an entity is considered a variable interest entity, determination of the primary beneficiary and how related parties are considered in the analysis. The adoption of this new guidance required more of our other investments to be considered variable interest entities; however, it did not require additional investments to be consolidated or de-consolidated or have a material impact on our financial position or operating results. Our variable interest entity disclosures as of December 31, 2015 were retrospectively adjusted to conform with the new accounting guidance. Refer to Note 7 beginning on page 12 for further discussion.

Simplifying the Presentation of Debt Issuance Costs
Effective January 1, 2016, we adopted new accounting guidance related to the financial statement presentation of all debt issuance costs, including those related to line-of-credit arrangements. The amendment requires debt issuance costs to be presented as a direct deduction from the carrying amount of our debt liability, consistent with the approach used for debt premiums or discounts. We also elected to report debt issuance costs associated with any line-of-credit arrangements as a direct deduction from the carrying amount of our debt liability. Amortization of debt issuance costs also will be reported in our statements of income in interest expense, as opposed to general and administrative expenses. We are applying this new guidance on a full retrospective basis, with all prior periods restated for the new presentation. The adoption of this new guidance requires certain reclassifications in our financial statements and did not have a material impact on our financial position or operating results. As a result of adopting this guidance, we reclassified $43 million of other current and long-term assets as a reduction of long-term debt on our balance sheet at December 31, 2015. Additionally, we reclassified an immaterial amount of general and administrative expenses into interest expense for the three and six months ended June 30, 2015.

Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
Effective January 1, 2016, we adopted new accounting guidance related to the evaluation of fees paid by a customer in a cloud computing arrangement. The amendment provides additional guidance that aids in determining whether a cloud computing arrangement contains a software license. Arrangements that do not contain a software license must be accounted for as a service contract. If a software license is included in the cloud computing arrangement, the

Page 7



license element must be accounted for consistent with the acquisition of a software license. The adoption of this new guidance did not have a material impact on our financial position or operating results.

Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)
Effective January 1, 2016, we adopted new accounting guidance related to the presentation of investments in certain entities that calculate net asset value per share (or its equivalent). The amendment removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. This new guidance is applicable to certain of our investments that reside in our separate accounts and employee benefit plans. The adoption of this new guidance did not have a material impact on our financial position or operating results.

Simplifying the Accounting for Measurement-Period Adjustments
Effective January 1, 2016, we adopted new accounting guidance related to the recognition of adjustments to provisional amounts that are identified during the measurement period in a business combination. The new guidance eliminates the requirement to retrospectively account for measurement-period adjustments as part of a business combination and permits such adjustments to be recognized in the period in which the adjustment was determined. The adoption of this new guidance did not have a material impact on our financial position or operating results.

Improvements to Employee Share-Based Payment Accounting
Effective April 1, 2016, we elected to early adopt new accounting guidance related to the accounting for and financial statement presentation of employee share-based payments. As a result of adopting this new guidance, we recognized an immaterial amount of excess tax benefits in our statements of income that previously would have been recorded in additional paid-in capital for the three and six months ended June 30, 2016, and correspondingly reclassified the excess tax benefits for the six months ended June 30, 2016 from financing activities to operating activities in our statements of cash flows. We applied each of these provisions on a prospective basis, with adjustments reflected as of January 1, 2016, and prior periods were not retrospectively adjusted. Our ability under the new guidance to withhold more shares to satisfy our statutory income tax obligations had no impact on our financial statements and was adopted on a modified retrospective basis. We continue to estimate expected forfeitures of share-based payment awards in each period.

Future Application of Accounting Standards
Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern
Effective December 31, 2016, we will adopt new accounting guidance related to management’s evaluation of whether there is substantial doubt about an entity’s ability to continue as a going concern and the related disclosures. The adoption of this new guidance will not have a material impact on our financial position or operating results.

Disclosures about Short-Duration Insurance Contracts
Effective December 31, 2016, we will adopt new accounting guidance related to the disclosure of short-duration insurance contracts. The amendment requires insurance companies that issue short-duration contracts to include additional disclosures about those insurance liabilities, including disaggregation of certain disclosures, as appropriate. The adoption of this new guidance will not have a material impact on our financial position or operating results, however, the new guidance will require additional disclosure for our short-duration insurance liabilities that reside in our Health Care and Group Insurance segments.

Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships
Effective January 1, 2017, we will adopt new accounting guidance clarifying that the novation of a derivative contract in a hedge accounting relationship does not, in and of itself, require dedesignation of the hedge accounting relationship. The adoption of this new guidance is not expected to have a material impact on our financial position or operating results.



Page 8



Contingent Put and Call Options in Debt Instruments
Effective January 1, 2017, we will adopt new accounting guidance related to the assessment of embedded contingent put or call options in debt instruments. The new guidance clarifies that assessment of whether an embedded contingent put or call option is clearly and closely related to the debt host requires only an analysis of the four-step decision sequence. The adoption of this new guidance is not expected to have a material impact on our financial position or operating results.

Simplifying the Transition to the Equity Method of Accounting
Effective January 1, 2017, we will adopt new accounting guidance related to the accounting for investments that subsequently qualify for the equity method of accounting. The new accounting guidance eliminates the requirement that an entity retrospectively apply the equity method of accounting to an investment previously accounted for by another method when we subsequently obtain significant influence. The adoption of this new guidance is not expected to have a material impact on our financial position or operating results.

Revenue from Contracts with Customers
Effective January 1, 2018, we will adopt new accounting guidance related to revenue recognition from contracts with customers. This new guidance removes most industry-specific revenue recognition requirements (insurance contracts are not covered by this guidance) and requires that an entity recognize revenue for the transfer of goods or services to a customer at an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The new guidance also requires additional disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The new guidance allows an entity to adopt the standard either through a full retrospective approach or a modified retrospective approach with a cumulative effect adjustment to retained earnings. Early adoption of this new guidance is permitted as of January 1, 2017. We are still assessing the impact of this new guidance on our financial position and operating results in addition to evaluating the transition method we will use when we adopt this new guidance.

Recognition and Measurement of Financial Assets and Financial Liabilities
Effective January 1, 2018, we will adopt new accounting guidance related to the recognition and measurement of financial assets and financial liabilities. Under the new guidance, all equity investments in unconsolidated entities will be measured at fair value with changes in fair value recognized in net income. A reporting entity may elect to report equity investments without a readily determinable fair value at cost. The new guidance also revises certain disclosures regarding financial assets and liabilities. The adoption of this new guidance is not expected to have a material impact on our financial position or operating results.

Leases
Effective January 1, 2019, we will adopt new accounting guidance related to the recognition, measurement and disclosure requirements for leases. Under the new guidance, lessees will be required to recognize a right-of-use asset and corresponding lease liability on their balance sheets for all leases other than those that meet the definition of a short-term lease. The new guidance also revises certain disclosure requirements regarding leases. We are still assessing the impact of this new guidance on our financial position and operating results.

Measurement of Credit Losses on Financial Instruments
Effective January 1, 2020, we will adopt new accounting guidance related to the measurement of credit losses on financial assets and certain other instruments. The new guidance requires the use of a new forward-looking expected loss impairment model for trade and other receivables, held-to-maturity debt securities, loans and other instruments; requires impairments and recoveries for available-for-sale debt securities to be recorded through an allowance account; and revises certain disclosure requirements. We are still assessing the impact of this new guidance on our financial position and operating results.




Page 9



3.
Proposed Acquisition of Humana

On July 2, 2015, we entered into a definitive agreement (as it may be amended, the "Merger Agreement") to acquire Humana Inc. ("Humana") in a transaction valued at approximately $37 billion, based on the closing price of Aetna common shares on July 2, 2015, including the assumption of Humana debt and Humana cash and cash equivalents. Under the terms of the Merger Agreement, Humana stockholders will receive $125.00 in cash and 0.8375 Aetna common shares for each Humana share.

On October 19, 2015, Aetna and Humana each obtained the approval of their respective shareholders necessary for our proposed acquisition of Humana (the “Humana Acquisition”). On June 24, 2016, in accordance with the terms of the Merger Agreement, each of Aetna and Humana delivered a written notice to the other that such party had elected to extend the “End Date” (as defined in the Merger Agreement) from June 30, 2016 to December 31, 2016.

In June 2016, we issued $13 billion of senior notes (collectively, the “2016 Humana-related senior notes”) to partially fund the Humana Acquisition. If the Humana Acquisition has not been completed by December 31, 2016 (or such later date to which the “End Date” under the Merger Agreement is extended by agreement between us and Humana) or if, prior to such date, the Merger Agreement is terminated, we must redeem approximately $10.2 billion aggregate principal amount of certain of the 2016 Humana-related senior notes at a redemption price equal to 101% of the aggregate principal amount of those notes plus accrued and unpaid interest and recognize the entire unamortized portion of the related cash flow hedge losses, debt issuance costs and debt issuance discounts in our net income upon such redemption.

On July 21, 2016, the U.S. Department of Justice (the “DOJ”) and certain state attorneys general filed a civil complaint in the U.S. District Court for the District of Columbia against us and Humana charging that the Humana Acquisition would violate Section 7 of the Clayton Antitrust Act, and seeking a permanent injunction to prevent Aetna from acquiring Humana (the “DOJ litigation”). The DOJ litigation could extend beyond December 31, 2016. We plan to vigorously defend the Humana Acquisition.

In order to address the DOJ’s perceived competitive concerns regarding Medicare Advantage, on August 2, 2016, we entered into a definitive agreement (as it may be amended, the “Aetna APA”) to sell for cash to Molina Healthcare, Inc. (“Molina”) certain of our Medicare Advantage assets. Also on August 2, 2016, Humana entered into a substantially identical definitive agreement (as it may be amended, the “Humana APA”) to sell for cash to Molina certain of Humana’s Medicare Advantage assets. The sale price under the Aetna APA is approximately $76 million, based on the estimated membership in the plans that are involved in the transaction. The transactions contemplated by the Aetna APA and the Humana APA remain subject to the completion of the Humana Acquisition, the resolution of the DOJ litigation, CMS approvals and actions, and customary closing conditions, including approvals of state departments of insurance and other regulators.

The Humana Acquisition remains subject to resolution of the DOJ litigation and customary closing conditions, including approvals of state departments of insurance and other regulators, and, depending upon the resolution of the DOJ litigation, the completion of the transactions contemplated by the Aetna APA and the Humana APA. Neither the Humana Acquisition nor the transactions contemplated by the Aetna APA have been reflected in these financial statements.

4.
Earnings Per Common Share

Basic earnings per share (“EPS”) is computed by dividing net income attributable to Aetna by the weighted average number of common shares outstanding during the reporting period.  Diluted EPS is computed in a similar manner, except that the weighted average number of common shares outstanding is adjusted for the dilutive effects of our outstanding stock-based compensation awards, but only if the effect is dilutive.


Page 10



The computations of basic and diluted EPS for the three and six months ended June 30, 2016 and 2015 are as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(Millions, except per common share data)
2016

 
2015

 
2016

 
2015

Net income attributable to Aetna
$
790.8

 
$
731.8

 
$
1,527.7

 
$
1,509.3

Weighted average shares used to compute basic EPS
351.2

 
349.0

 
351.0

 
349.2

Dilutive effect of outstanding stock-based compensation awards
2.9

 
3.2

 
3.0

 
3.3

Weighted average shares used to compute diluted EPS
354.1

 
352.2

 
354.0

 
352.5

Basic EPS
$
2.25

 
$
2.10

 
$
4.35

 
$
4.32

Diluted EPS
$
2.23

 
$
2.08

 
$
4.32

 
$
4.28

 
 
 
 
 
 
 
 

The stock-based compensation awards excluded from the calculation of diluted EPS for the three and six months ended June 30, 2016 and 2015 are as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(Millions)
2016

 
2015

 
2016

 
2015

Stock appreciation rights (“SARs”) (1)
.1

 

 
.1

 
.9

Other stock-based compensation awards (2)
.8

 
.6

 
.9

 
.9

 
 
 
 
 
 
 
 
(1) 
SARs are excluded from the calculation of diluted EPS if the exercise price is greater than the average market price of Aetna common shares during the period (i.e., the awards are anti-dilutive).
(2) 
Performance stock units ("PSUs"), certain market stock units ("MSUs") with performance conditions, and performance stock appreciation rights ("PSARs") are excluded from the calculation of diluted EPS if all necessary performance conditions have not been satisfied at the end of the reporting period.

5.     Operating Expenses

For the three and six months ended June 30, 2016 and 2015, selling expenses (which include broker commissions, the variable component of our internal sales force compensation and premium taxes) and general and administrative expenses were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(Millions)
2016

 
2015

 
2016

 
2015

Selling expenses
$
415.7

 
$
405.7

 
$
836.8

 
$
820.6

General and administrative expenses:
 
 
 
 
 
 
 
Salaries and related benefits
1,225.2

 
1,216.4

 
2,479.1

 
2,423.0

  Other general and administrative expenses  (1)
1,142.2

 
1,178.4

 
2,330.8

 
2,372.4

Total general and administrative expenses
2,367.4

 
2,394.8

 
4,809.9

 
4,795.4

Total operating expenses
$
2,783.1

 
$
2,800.5

 
$
5,646.7

 
$
5,616.0

 
 
 
 
 
 
 
 
(1) 
The three and six months ended June 30, 2016 include estimated fees mandated by the ACA (as defined in Note 8 on page 19) comprised primarily of the health insurer fee of $203.2 million and $417.0 million, respectively, and our estimated contribution to the funding of the ACA’s reinsurance program of $29.6 million and $59.0 million, respectively. The three and six months ended June 30, 2015 include estimated fees mandated by the ACA comprised primarily of the health insurer fee of $213.8 million and $432.5 million, respectively, and our estimated contribution to the funding of the ACA’s reinsurance program of $52.2 million and $105.8 million, respectively.

6.     Cash and Cash Equivalents

Cash and cash equivalents include approximately $13 billion of highly rated money market fund investments related to the net proceeds received from the 2016 Humana-related senior notes we issued in June 2016 to partially

Page 11



fund the Humana Acquisition. These money market funds have average maturities of 60 days or less and are redeemable daily at par value plus accrued dividends with specified yield rates.

7.     Investments

Total investments at June 30, 2016 and December 31, 2015 were as follows:
 
June 30, 2016
 
December 31, 2015
(Millions)
Current

 
Long-term

 
Total

 
Current

 
Long-term

 
Total

Debt and equity securities available for sale
$
2,829.3

 
$
19,452.6

 
$
22,281.9

 
$
2,877.1

 
$
18,445.9

 
$
21,323.0

Mortgage loans
152.3

 
1,377.4

 
1,529.7

 
126.9

 
1,426.8

 
1,553.7

Other investments
.2

 
1,593.0

 
1,593.2

 
10.8

 
1,792.1

 
1,802.9

Total investments
$
2,981.8

 
$
22,423.0

 
$
25,404.8

 
$
3,014.8

 
$
21,664.8

 
$
24,679.6



Page 12



Debt and Equity Securities
Debt and equity securities available for sale at June 30, 2016 and December 31, 2015 were as follows:
(Millions)
Amortized
Cost

 
Gross
Unrealized
Gains

 
Gross
Unrealized
Losses

 
 
Fair
Value

June 30, 2016
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
U.S. government securities
$
1,819.1

 
$
131.7

 
$
(.3
)
 
 
$
1,950.5

States, municipalities and political subdivisions
4,883.2

 
358.0

 
(4.4
)
 
 
5,236.8

U.S. corporate securities
8,021.0

 
613.9

 
(16.2
)
 
 
8,618.7

Foreign securities
2,913.0

 
246.4

 
(11.9
)
 
 
3,147.5

Residential mortgage-backed securities
883.1

 
26.9

 
(.5
)
 
 
909.5

Commercial mortgage-backed securities
1,221.0

 
38.6

 
(.3
)
(1) 
 
1,259.3

Other asset-backed securities
998.4

 
9.8

 
(23.8
)
(1) 
 
984.4

Redeemable preferred securities
27.3

 
6.9

 

 
 
34.2

Total debt securities
20,766.1

 
1,432.2

 
(57.4
)
 
 
22,140.9

Equity securities
126.8

 
17.4

 
(3.2
)
 
 
141.0

Total debt and equity securities (2)
$
20,892.9

 
$
1,449.6

 
$
(60.6
)
 
 
$
22,281.9

December 31, 2015
 

 
 

 
 

 
 
 

Debt securities:
 

 
 

 
 

 
 
 

U.S. government securities
$
1,803.5

 
$
68.8

 
$
(.6
)
 
 
$
1,871.7

States, municipalities and political subdivisions
4,889.5

 
244.3

 
(9.3
)
 
 
5,124.5

U.S. corporate securities
7,981.5

 
339.5

 
(146.6
)
 
 
8,174.4

Foreign securities
2,910.2

 
148.3

 
(61.4
)
 
 
2,997.1

Residential mortgage-backed securities
914.6

 
16.6

 
(6.3
)
 
 
924.9

Commercial mortgage-backed securities
1,262.4

 
17.2

 
(9.0
)
(1) 
 
1,270.6

Other asset-backed securities
910.4

 
3.1

 
(19.2
)
(1) 
 
894.3

Redeemable preferred securities
33.0

 
11.5

 

 
 
44.5

Total debt securities
20,705.1

 
849.3

 
(252.4
)
 
 
21,302.0

Equity securities
22.8

 
4.1

 
(5.9
)
 
 
21.0

Total debt and equity securities (2)
$
20,727.9

 
$
853.4

 
$
(258.3
)
 
 
$
21,323.0

 
 
 
 
 
 
 
 
 
(1) 
At June 30, 2016 and December 31, 2015, we held securities for which we previously recognized $4.9 million and $5.4 million, respectively, of non-credit related impairments in accumulated other comprehensive loss. These securities had a net unrealized capital gain at June 30, 2016 and December 31, 2015 of $1.2 million and $1.9 million, respectively.
(2) 
Investment risks associated with our experience-rated and discontinued products generally do not impact our operating results (refer to Note 18 beginning on page 38 for additional information on our accounting for discontinued products).  At June 30, 2016, debt and equity securities with a fair value of approximately $3.2 billion, gross unrealized capital gains of $333.6 million and gross unrealized capital losses of $9.7 million and, at December 31, 2015, debt and equity securities with a fair value of approximately $3.0 billion, gross unrealized capital gains of $208.7 million and gross unrealized capital losses of $68.0 million were included in total debt and equity securities, but support our experience-rated and discontinued products.  Changes in net unrealized capital gains (losses) on these securities are not reflected in accumulated other comprehensive income.


Page 13



The fair value of debt securities at June 30, 2016 is shown below by contractual maturity.  Actual maturities may differ from contractual maturities because securities may be restructured, called or prepaid.
(Millions)
Fair
Value

Due to mature:
 
Less than one year
$
1,272.5

One year through five years
6,790.8

After five years through ten years
5,392.1

Greater than ten years
5,532.3

Residential mortgage-backed securities
909.5

Commercial mortgage-backed securities
1,259.3

Other asset-backed securities
984.4

Total
$
22,140.9

 
Mortgage-Backed and Other Asset-Backed Securities
All of our residential mortgage-backed securities at June 30, 2016 were issued by the Government National Mortgage Association, the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation and carry agency guarantees and explicit or implicit guarantees by the U.S. Government.  At June 30, 2016, our residential mortgage-backed securities had an average credit quality rating of AAA and a weighted average duration of 3.5 years.

Our commercial mortgage-backed securities have underlying loans that are dispersed throughout the United States.  Significant market observable inputs used to value these securities include loss severity and probability of default.  At June 30, 2016, these securities had an average credit quality rating of AA+ and a weighted average duration of 5.4 years.

Our other asset-backed securities have a variety of underlying collateral (e.g., automobile loans, credit card receivables, home equity loans and commercial loans).  Significant market observable inputs used to value these securities include the unemployment rate, loss severity and probability of default.  At June 30, 2016, these securities had an average credit quality rating of AA- and a weighted average duration of 1.3 years.

Unrealized Capital Losses and Net Realized Capital Gains (Losses)
When a debt or equity security is in an unrealized capital loss position, we monitor the duration and severity of the loss to determine if sufficient market recovery can occur within a reasonable period of time.  We recognize an other-than-temporary impairment (“OTTI”) when we intend to sell a debt security that is in an unrealized capital loss position or if we determine a credit-related loss on a debt or equity security has occurred.


Page 14



Summarized below are the debt and equity securities we held at June 30, 2016 and December 31, 2015 that were in an unrealized capital loss position, aggregated by the length of time the investments have been in that position:
 
Less than 12 months
 
Greater than 12 months
 
Total (1)
(Millions)
Fair
Value

 
Unrealized
Losses

 
Fair
Value

 
Unrealized
Losses

 
Fair
Value

 
Unrealized
Losses

June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government securities
$

 
$

 
$
10.3

 
$
.3

 
$
10.3

 
$
.3

States, municipalities and political subdivisions
166.7

 
1.8

 
130.1

 
2.6

 
296.8

 
4.4

U.S. corporate securities
249.2

 
4.4

 
268.8

 
11.8

 
518.0

 
16.2

Foreign securities
78.9

 
1.2

 
169.3

 
10.7

 
248.2

 
11.9

Residential mortgage-backed securities
3.1

 

 
52.1

 
.5

 
55.2

 
.5

Commercial mortgage-backed securities
59.7

 
.2

 
30.3

 
.1

 
90.0

 
.3

Other asset-backed securities
215.5

 
8.6

 
246.2

 
15.2

 
461.7

 
23.8

Total debt securities
773.1

 
16.2

 
907.1

 
41.2

 
1,680.2

 
57.4

Equity securities
7.1

 
.3

 
4.3

 
2.9

 
11.4

 
3.2

Total debt and equity securities (1)
$
780.2

 
$
16.5

 
$
911.4

 
$
44.1

 
$
1,691.6

 
$
60.6

December 31, 2015
 

 
 

 
 

 
 

 
 

 
 

Debt securities:
 

 
 

 
 

 
 

 
 

 
 

U.S. government securities
$
66.8

 
$
.2

 
$
12.6

 
$
.4

 
$
79.4

 
$
.6

States, municipalities and political subdivisions
714.2

 
6.1

 
91.6

 
3.2

 
805.8

 
9.3

U.S. corporate securities
3,168.7

 
130.8

 
144.3

 
15.8

 
3,313.0

 
146.6

Foreign securities
1,102.4

 
50.4

 
89.2

 
11.0

 
1,191.6

 
61.4

Residential mortgage-backed securities
328.7

 
2.9

 
89.5

 
3.4

 
418.2

 
6.3

Commercial mortgage-backed securities
562.0

 
8.6

 
23.8

 
.4

 
585.8

 
9.0

Other asset-backed securities
653.5

 
15.6

 
67.1

 
3.6

 
720.6

 
19.2

Total debt securities
6,596.3

 
214.6

 
518.1

 
37.8

 
7,114.4

 
252.4

Equity securities

 
5.0

 
1.3

 
.9

 
1.3

 
5.9

Total debt and equity securities (1)
$
6,596.3

 
$
219.6

 
$
519.4

 
$
38.7

 
$
7,115.7

 
$
258.3

 
 
 
 
 
 
 
 
 
 
 
 
(1) 
At June 30, 2016 and December 31, 2015, debt and equity securities in an unrealized capital loss position of $9.7 million and $68.0 million, respectively, and with related fair value of $175.8 million and $966.2 million, respectively, related to experience-rated and discontinued products.

We reviewed the securities in the tables above and concluded that these are performing assets generating investment income to support the needs of our business. In performing this review, we considered factors such as the quality of the investment security based on research performed by our internal credit analysts and external rating agencies and the prospects of realizing the carrying value of the security based on the investment’s current prospects for recovery.  At June 30, 2016, we did not intend to sell these securities, and we did not believe it was more likely than not that we would be required to sell these securities prior to anticipated recovery of their amortized cost basis.


Page 15



The maturity dates for debt securities in an unrealized capital loss position at June 30, 2016 were as follows:
 
Supporting discontinued and
experience-rated products
 
Supporting remaining
products
 
Total
(Millions)
Fair
Value

 
Unrealized
Losses

 
Fair
Value

 
Unrealized
Losses

 
Fair
Value

 
Unrealized
Losses

Due to mature:
 
 
 
 
 
 
 
 
 
 
 
Less than one year
$

 
$

 
$
74.2

 
$
.5

 
$
74.2

 
$
.5

One year through five years
10.3

 
.1

 
254.0

 
4.2

 
264.3

 
4.3

After five years through ten years
80.7

 
1.9

 
331.7

 
8.5

 
412.4

 
10.4

Greater than ten years
80.5

 
5.7

 
241.9

 
11.9

 
322.4

 
17.6

Residential mortgage-backed securities

 

 
55.2

 
.5

 
55.2

 
.5

Commercial mortgage-backed securities

 

 
90.0

 
.3

 
90.0

 
.3

Other asset-backed securities

 

 
461.7

 
23.8

 
461.7

 
23.8

Total
$
171.5

 
$
7.7

 
$
1,508.7

 
$
49.7

 
$
1,680.2

 
$
57.4

 
 
 
 
 
 
 
 
 
 
 
 

Net realized capital gains for the three and six months ended June 30, 2016 and 2015, excluding amounts related to experience-rated contract holders and discontinued products, were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(Millions)
2016

 
2015

 
2016

 
2015

OTTI losses on debt securities recognized in earnings
$
(.6
)
 
$
(7.6
)
 
$
(9.7
)
 
$
(10.0
)
Other net realized capital gains
51.7

 
9.6

 
60.4

 
20.1

Net realized capital gains
$
51.1

 
$
2.0

 
$
50.7

 
$
10.1

 
The net realized capital gains for the three and six months ended June 30, 2016 were primarily attributable to gains from the sales of debt securities, partially offset by losses on other investments. The net realized capital gains for the three and six months ended June 30, 2015 were primarily attributable to gains from the sale of debt securities partially offset by yield-related OTTI on debt securities.

We had no individually material realized capital losses on debt or equity securities that impacted our operating results during three or six months ended June 30, 2016 or 2015.

Excluding amounts related to experience-rated and discontinued products, proceeds from the sale of debt securities and the related gross realized capital gains and losses for the three and six months ended June 30, 2016 and 2015 were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(Millions)
2016

 
2015

 
2016

 
2015

Proceeds on sales
$
1,772.4

 
$
1,545.3

 
$
3,354.8

 
$
2,491.2

Gross realized capital gains
67.5

 
20.7

 
99.8

 
45.6

Gross realized capital losses
3.8

 
13.6

 
35.1

 
22.4

 
 
 
 
 
 
 
 


Page 16



Mortgage Loans
Our mortgage loans are collateralized by commercial real estate.  During the three and six months ended June 30, 2016 and 2015 we had the following activity in our mortgage loan portfolio:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(Millions)
2016

 
2015

 
2016

 
2015

New mortgage loans
$
76.6

 
$
24.4

 
$
88.8

 
$
37.1

Mortgage loans fully repaid
38.1

 
19.5

 
86.4

 
59.0

Mortgage loans foreclosed

 

 

 
9.0

 
 
 
 
 
 
 
 

At June 30, 2016 and December 31, 2015, we had no material problem, restructured or potential problem mortgage loans. We also had no material impairment reserves on these loans at June 30, 2016 or December 31, 2015.
 
We assess our mortgage loans on a regular basis for credit impairments, and annually assign a credit quality indicator to each loan.  Our credit quality indicator is internally developed and categorizes our portfolio on a scale from 1 to 7.  Category 1 represents loans of superior quality, and Category 7 represents loans where collections are potentially at risk.  The vast majority of our mortgage loans fall into the Category 2 to 4 ratings.  These ratings represent loans where credit risk is minimal to acceptable; however, these loans may display some susceptibility to economic changes.  Categories 5 and 6 represent loans where credit risk is not substantial, but these loans warrant management’s close attention.  These indicators are based upon several factors, including current loan to value ratios, property condition, market trends, creditworthiness of the borrower and deal structure. Based upon our most recent assessments at June 30, 2016 and December 31, 2015, our mortgage loans were given the following credit quality indicators:
(In Millions, except credit ratings indicator)
June 30,
2016

 
December 31,
2015

1
$
49.6

 
$
65.8

2 to 4
1,454.4

 
1,466.9

5 and 6
17.5

 
21.0

7
8.2

 

Total
$
1,529.7

 
$
1,553.7

 
 
 
 
 

Variable Interest Entities
As discussed in Note 2 beginning on page 6, we adopted the guidance of Accounting Standards Update (ASU) No. 2015-02, Amendments to the Consolidation Analysis (Topic 810) effective January 1, 2016. As a result of adopting the new guidance, we have investments in certain hedge fund and private equity investments and real estate partnerships that are considered Variable Interest Entities (“VIE’s”). We do not have a future obligation to fund losses or debts on behalf of these investments; however, we may voluntarily contribute funds.

In evaluating whether we are the primary beneficiary of a VIE, we considered several factors, including whether we (a) have the power to direct the activities that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses and the right to receive benefits that could potentially be significant to the VIE.

Variable Interest Entities - Primary Beneficiary
Upon adoption of the new guidance, we identified one hedge fund investment previously consolidated as a Voting Interest Entity in our statement of financial position and operating results that is determined to be a VIE under the new guidance. The investment represents a majority owned hedge fund where we are the investment manager and have the power to direct the activities that most significantly impact the VIE’s economic performance, including determining the hedge fund’s investment strategy. Accordingly, we are the primary beneficiary and will continue to consolidate the investment in our financial results. The fund invests in additional hedge funds that are VIEs; however, we are not the primary beneficiary of these underlying funds as discussed in further detail below.


Page 17



Substantially all of the assets of the VIE hedge fund are comprised of hedge fund investments reported as long-term investments on our balance sheets. The VIE hedge fund had no material liabilities at June 30, 2016 or December 31, 2015. The total amount of the VIE hedge fund’s assets included in long term investments on our balance sheets at June 30, 2016 and December 31, 2015 were $466 million and $477 million, respectively.

Variable Interest Entities - Other Variable Interest Holder
Our involvement with VIEs where we are not determined to be the primary beneficiary consist of the following:

Hedge fund and private equity investments - We invest in hedge fund and private equity investments in order to generate investment returns for our investment portfolio supporting our businesses.

Real estate partnerships - We invest in various real estate partnerships including those that construct, own and manage low-income housing developments. For the low income housing development investments, substantially all of the projected benefits to us are from tax credits and other tax benefits.

We are not the primary beneficiary of these investments because the nature of our involvement with the activities of the VIEs does not give us the power to direct the activities that most significantly impact their economic performance. We record the amount of our investment as long-term investments on our balance sheets and recognize our share of each VIE’s income or losses in earnings.  Our maximum exposure to loss is limited to our investment balances as disclosed below and the risk of recapture of tax credits related to real estate partnerships previously recognized, which we do not consider significant.

The total amount of other variable interest holder VIE assets included in long term investments on our balance sheets at June 30, 2016 and December 31, 2015 were as follows:
(Millions)
 
June 30,
2016

 
December 31, 2015

Hedge fund investments
 
$
397.0

 
$
418.1

Private equity investments
 
440.9

 
443.3

Real estate partnerships
 
262.3

 
253.3

Total
 
$
1,100.2

 
$
1,114.7


The carrying value of the total assets and liabilities of our other variable interest holder VIE investments at June 30, 2016 and December 31, 2015 were as follows:
(Millions)
 
June 30,
2016

 
December 31, 2015

Assets:
 
 
 
 
Hedge fund investments
 
$
34,149.1

 
$
33,065.7

Private equity investments
 
27,303.3

 
28,552.5

Real estate partnerships
 
6,711.6

 
6,808.7

Total
 
$
68,164.0

 
$
68,426.9

 
 
 
 
 
Liabilities:
 
 
 
 
Hedge fund investments
 
$
3,790.3

 
$
3,535.3

Private equity investments
 
2,954.2

 
3,235.7

Real estate partnerships
 
5,030.8

 
5,044.5

Total
 
$
11,775.3