10-Q 1 antm-20180331x10qforq1.htm FORM 10-Q Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission file number: 001-16751
ANTHEM, INC.
(Exact name of registrant as specified in its charter)
INDIANA
 
35-2145715
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
120 MONUMENT CIRCLE
INDIANAPOLIS, INDIANA
(Address of principal executive offices)
 
46204-4903
(Zip Code)
Registrant’s telephone number, including area code: (800) 331-1476
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
x
 
  
Accelerated filer
¨
Non-accelerated filer
¨
 (Do not check if a smaller reporting company)
  
Smaller reporting company
¨
Emerging growth company
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Title of Each Class
 
Outstanding at April 12, 2018
Common Stock, $0.01 par value
 
255,199,261 shares
 
 
 



Anthem, Inc.
Quarterly Report on Form 10-Q
For the Period Ended March 31, 2018
Table of Contents
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
PART II. OTHER INFORMATION
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.

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PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Anthem, Inc.
Consolidated Balance Sheets
 
March 31,
2018
 
December 31,
2017
(In millions, except share data)
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,630.6

 
$
3,608.9

Fixed maturity securities, current (amortized cost of $17,070.2 and $17,054.5)
17,091.5

 
17,377.3

Equity securities, current
2,341.9

 
3,599.2

Other invested assets, current
24.3

 
17.2

Accrued investment income
160.2

 
162.5

Premium and self-funded receivables
6,255.9

 
6,184.9

Other receivables
2,305.2

 
2,266.5

Income taxes receivable

 
341.9

Securities lending collateral
612.2

 
455.1

Other current assets
3,552.3

 
2,249.3

Total current assets
36,974.1

 
36,262.8

Long-term investments:
 
 
 
Fixed maturity securities (amortized cost of $504.1 and $556.0)
501.5

 
560.8

Equity securities
32.9

 
32.8

Other invested assets
3,460.8

 
3,343.8

Property and equipment, net
2,237.6

 
2,174.9

Goodwill
20,185.5

 
19,231.2

Other intangible assets
9,076.0

 
8,368.4

Other noncurrent assets
832.0

 
565.3

Total assets
$
73,300.4

 
$
70,540.0

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Liabilities
 
 
 
Current liabilities:
 
 
 
Policy liabilities:
 
 
 
Medical claims payable
$
7,640.3

 
$
7,991.5

Reserves for future policy benefits
71.5

 
69.9

Other policyholder liabilities
2,918.8

 
2,950.3

Total policy liabilities
10,630.6

 
11,011.7

Unearned income
2,115.9

 
860.3

Accounts payable and accrued expenses
5,816.7

 
5,024.4

Income taxes payable
194.9

 

Security trades pending payable
134.7

 
112.6

Securities lending payable
611.8

 
454.4

Short-term borrowings
1,125.0

 
1,275.0

Current portion of long-term debt
650.8

 
1,274.6

Other current liabilities
3,475.5

 
3,343.0

Total current liabilities
24,755.9

 
23,356.0

Long-term debt, less current portion
18,110.1

 
17,382.2

Reserves for future policy benefits, noncurrent
666.8

 
647.3

Deferred tax liabilities, net
1,812.9

 
1,726.5

Other noncurrent liabilities
942.3

 
925.1

Total liabilities
46,288.0

 
44,037.1

 
 
 
 
Commitment and contingencies – Note 11


 


Shareholders’ equity
 
 
 
Preferred stock, without par value, shares authorized – 100,000,000; shares issued and outstanding – none

 

Common stock, par value $0.01, shares authorized – 900,000,000; shares issued and outstanding –
255,544,728 and 256,084,913
2.6

 
2.6

Additional paid-in capital
8,489.3

 
8,547.4

Retained earnings
19,241.1

 
18,054.4

Accumulated other comprehensive loss
(720.6
)
 
(101.5
)
Total shareholders’ equity
27,012.4

 
26,502.9

Total liabilities and shareholders’ equity
$
73,300.4

 
$
70,540.0


See accompanying notes.

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Anthem, Inc.
Consolidated Statements of Income
(Unaudited) 
 
Three Months Ended 
 March 31
(In millions, except per share data)
2018
 
2017
Revenues
 
 
 
Premiums
$
20,902.8

 
$
20,951.3

Administrative fees
1,408.8

 
1,363.2

Other revenue
30.7

 
5.0

Total operating revenue
22,342.3

 
22,319.5

Net investment income
229.2

 
207.2

Net realized (losses) gains on financial instruments
(26.1
)
 
7.3

Other-than-temporary impairment losses on investments:
 
 
 
Total other-than-temporary impairment losses on investments
(7.9
)
 
(9.6
)
Portion of other-than-temporary impairment losses recognized in other comprehensive income

 
1.5

Other-than-temporary impairment losses recognized in income
(7.9
)
 
(8.1
)
Total revenues
22,537.5

 
22,525.9

Expenses
 
 
 
Benefit expense
17,045.9

 
17,542.8

Selling, general and administrative and expense:
 
 
 
Selling expense
318.2

 
348.6

General and administrative expense
3,110.3

 
2,842.7

Total selling, general and administrative expense
3,428.5

 
3,191.3

Interest expense
184.2

 
235.0

Amortization of other intangible assets
79.5

 
41.8

Loss on extinguishment of debt
19.1

 

Total expenses
20,757.2

 
21,010.9

Income before income tax expense
1,780.3

 
1,515.0

Income tax expense
467.8

 
505.1

Net income
$
1,312.5

 
$
1,009.9

Net income per share
 
 
 
Basic
$
5.13

 
$
3.82

Diluted
$
4.99

 
$
3.73

Dividends per share
$
0.75

 
$
0.65











See accompanying notes.

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Anthem, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited) 
 
Three Months Ended 
 March 31
(In millions)
2018
 
2017
Net income
$
1,312.5

 
$
1,009.9

Other comprehensive (loss) income, net of tax:
 
 
 
Change in net unrealized gains/losses on investments
(244.7
)
 
80.2

Change in non-credit component of other-than-temporary impairment losses on investments
0.2

 
3.6

Change in net unrealized losses on cash flow hedges
28.8

 
17.0

Change in net periodic pension and postretirement costs
7.7

 
3.9

Foreign currency translation adjustments
0.4

 
1.4

Other comprehensive (loss) income
(207.6
)
 
106.1

Total comprehensive income
$
1,104.9

 
$
1,116.0



































See accompanying notes.

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Anthem, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended 
 March 31
(In millions)
2018
 
2017
Operating activities
 
 
 
Net income
$
1,312.5

 
$
1,009.9

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net realized losses (gains) on financial instruments
26.1

 
(7.3
)
Other-than-temporary impairment losses recognized in income
7.9

 
8.1

Loss on extinguishment of debt
19.1

 

Loss on disposal of assets

 
0.7

Deferred income taxes
(51.5
)
 
(157.2
)
Amortization, net of accretion
239.7

 
193.4

Depreciation expense
30.0

 
27.3

Share-based compensation
42.2

 
42.7

Changes in operating assets and liabilities:
 
 
 
Receivables, net
36.7

 
276.3

Other invested assets
(6.8
)
 
(14.8
)
Other assets
(391.8
)
 
(205.2
)
Policy liabilities
(560.8
)
 
130.1

Unearned income
1,182.2

 
954.2

Accounts payable and accrued expenses
(300.4
)
 
(223.8
)
Other liabilities
147.4

 
40.3

Income taxes
536.8

 
659.7

Other, net
(54.4
)
 
(46.2
)
Net cash provided by operating activities
2,214.9

 
2,688.2

Investing activities
 
 
 
Purchases of fixed maturity securities
(2,235.4
)
 
(4,030.1
)
Proceeds from fixed maturity securities:
 
 
 
Sales
1,864.4

 
2,851.8

Maturities, calls and redemptions
362.9

 
522.7

Purchases of equity securities
(566.3
)
 
(367.0
)
Proceeds from sales of equity securities
1,775.8

 
63.0

Purchases of other invested assets
(72.3
)
 
(73.7
)
Proceeds from sales of other invested assets
23.1

 
76.5

Change in collateral and settlements of non-hedging derivatives

 
0.4

Changes in securities lending collateral
(157.4
)
 
(154.5
)
Purchases of subsidiaries, net of cash acquired
(1,346.1
)
 

Purchases of property and equipment
(218.2
)
 
(127.9
)
Other, net
3.6

 
11.8

Net cash used in investing activities
(565.9
)
 
(1,227.0
)
Financing activities
 
 
 
Net (repayments of) proceeds from commercial paper borrowings
(108.0
)
 
1,719.1

Proceeds from long-term borrowings
836.0

 

Repayments of long-term borrowings
(662.7
)
 
(401.1
)
Proceeds from short-term borrowings
1,505.0

 
1,170.0

Repayments of short-term borrowings
(1,655.0
)
 
(1,070.0
)
Changes in securities lending payable
157.4

 
154.5

Changes in bank overdrafts
(124.4
)
 
(168.9
)
Proceeds from sale of put options
0.3

 

Repurchase and retirement of common stock
(394.7
)
 
(50.7
)
Change in collateral and settlements of debt-related derivatives
24.1

 
(8.0
)
Cash dividends
(191.9
)
 
(172.2
)
Proceeds from issuance of common stock under employee stock plans
59.4

 
103.5

Taxes paid through withholding of common stock under employee stock plans
(73.2
)
 
(41.9
)
Net cash (used in) provided by financing activities
(627.7
)
 
1,234.3

Effect of foreign exchange rates on cash and cash equivalents
0.4

 
1.6

Change in cash and cash equivalents
1,021.7

 
2,697.1

Cash and cash equivalents at beginning of period
3,608.9

 
4,075.3

Cash and cash equivalents at end of period
$
4,630.6

 
$
6,772.4


See accompanying notes.

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Anthem, Inc.
Consolidated Statements of Shareholders’ Equity
(Unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
(In millions)
Number of
Shares
 
Par
Value
 
December 31, 2017 (audited)
256.1

 
$
2.6

 
$
8,547.4

 
$
18,054.4

 
$
(101.5
)
 
$
26,502.9

Adoption of Accounting Standards Update No 2016-01 (Note 2)

 

 

 
320.2

 
(320.2
)
 

January 1, 2018
256.1

 
2.6

 
8,547.4

 
18,374.6

 
(421.7
)
 
26,502.9

Net income

 

 

 
1,312.5

 

 
1,312.5

Other comprehensive loss

 

 

 

 
(207.6
)
 
(207.6
)
Premiums for and settlement of equity options

 

 
0.3

 

 

 
0.3

Repurchase and retirement of common stock
(1.7
)
 

 
(56.5
)
 
(338.2
)
 

 
(394.7
)
Dividends and dividend equivalents

 

 

 
(199.1
)
 

 
(199.1
)
Issuance of common stock under employee stock plans, net of related tax benefits
1.1

 

 
28.4

 

 

 
28.4

Convertible debenture repurchases and conversions

 

 
(30.3
)
 

 

 
(30.3
)
Adoption of Accounting Standards Update No 2018-02 (Note 2)

 

 

 
91.3

 
(91.3
)
 

March 31, 2018
255.5

 
$
2.6

 
$
8,489.3

 
$
19,241.1

 
$
(720.6
)
 
$
27,012.4

 
 
 
 
 
 
 
 
 
 
 
 
January 1, 2017
263.7

 
$
2.6

 
$
8,805.1

 
$
16,560.6

 
$
(267.9
)
 
$
25,100.4

Net income

 

 

 
1,009.9

 

 
1,009.9

Other comprehensive income

 

 

 

 
106.1

 
106.1

Repurchase and retirement of common stock
(0.3
)
 

 
(10.5
)
 
(40.2
)
 

 
(50.7
)
Dividends and dividend equivalents

 

 

 
(172.6
)
 

 
(172.6
)
Issuance of common stock under employee stock plans, net of related tax benefits
1.7

 

 
99.9

 

 

 
99.9

Convertible debenture repurchases and conversions

 

 
(1.1
)
 

 

 
(1.1
)
March 31, 2017
265.1

 
$
2.6

 
$
8,893.4

 
$
17,357.7

 
$
(161.8
)
 
$
26,091.9












See accompanying notes.

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Anthem, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2018
(In Millions, Except Per Share Data or As Otherwise Stated Herein)
 
1.
Organization
References to the terms “we,” “our,” “us” or “Anthem” used throughout these Notes to Consolidated Financial Statements refer to Anthem, Inc., an Indiana corporation, and unless the context otherwise requires, its direct and indirect subsidiaries. References to the “states” include the District of Columbia, unless the context otherwise requires.
We are one of the largest health benefits companies in the United States in terms of medical membership, serving 39.6 medical members through our affiliated health plans as of March 31, 2018. We offer a broad spectrum of network-based managed care plans to Large Group, Small Group, Individual, Medicaid and Medicare markets. Our managed care plans include: Preferred Provider Organizations, or PPOs; health maintenance organizations, or HMOs; Point-of-Service, or POS, plans; traditional indemnity plans and other hybrid plans, including Consumer-Driven Health Plans, or CDHPs; and hospital only and limited benefit products. In addition, we provide a broad array of managed care services to self-funded customers, including claims processing, underwriting, stop loss insurance, actuarial services, provider network access, medical cost management, disease management, wellness programs and other administrative services. We provide an array of specialty and other insurance products and services such as dental, vision, life and disability insurance benefits, radiology benefit management and analytics-driven personal health care. We also provide services to the federal government in connection with the Federal Employee Program®.
We are an independent licensee of the Blue Cross and Blue Shield Association, or BCBSA, an association of independent health benefit plans. We serve our members as the Blue Cross licensee for California and as the Blue Cross and Blue Shield, or BCBS, licensee for Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri (excluding 30 counties in the Kansas City area), Nevada, New Hampshire, New York (in varying counties as BCBS, Blue Cross or Empire BlueCross BlueShield HealthPlus), Ohio, Virginia (excluding the Northern Virginia suburbs of Washington, D.C.) and Wisconsin. In a majority of these service areas, we do business as Anthem Blue Cross, Anthem Blue Cross and Blue Shield, Blue Cross and Blue Shield of Georgia, and Empire Blue Cross Blue Shield or Empire Blue Cross (in our New York service areas). We also conduct business through arrangements with other BCBS licensees in Louisiana, South Carolina and western New York. Through our subsidiaries, we also serve customers in over 15 states across the country as America’s 1st Choice, Amerigroup, CareMore, Freedom Health, HealthLink, HealthSun, Optimum HealthCare, Simply Healthcare, and/or Unicare. We are licensed to conduct insurance operations in all 50 states and the District of Columbia through our subsidiaries.
2.
Basis of Presentation and Significant Accounting Policies
Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. We have omitted certain footnote disclosures that would substantially duplicate the disclosures in our 2017 Annual Report on Form 10-K, unless the information contained in those disclosures materially changed or is required by GAAP. Certain prior year amounts have been reclassified to conform to the current year presentation. In the opinion of management, all adjustments, including normal recurring adjustments, necessary for a fair statement of the consolidated financial statements as of and for the three months ended March 31, 2018 and 2017 have been recorded. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2018. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2017 included in our 2017 Annual Report on Form 10-K.
Cash and Cash Equivalents: Certain of our subsidiaries operate outside of the United States and have functional currencies other than the U.S. dollar, or USD. We translate the assets and liabilities of those subsidiaries to USD using the exchange rate in effect at the end of the period. We translate the revenues and expenses of those subsidiaries to USD using the average exchange rates in effect during the period. The net effect of these translation adjustments is included in “Foreign currency translation adjustments” in our consolidated statements of comprehensive income. Additionally, we control a

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number of bank accounts that are used exclusively to hold customer funds for the administration of customer benefits and have cash and cash equivalents on deposit to meet certain regulatory requirements. These amounts totaled $230.5 and $182.3 at March 31, 2018 and December 31, 2017, respectively and are included in the cash and cash equivalents line on our consolidated balance sheets.
Revenue Recognition: Premiums for fully-insured contracts are recognized as revenue over the period insurance coverage is provided, and, if applicable, net of amounts recognized for the minimum medical loss ratio rebates, risk adjustment, reinsurance, risk corridor or contractual or government-mandated premium stabilization programs. Administrative fees include revenue from certain group contracts that provide for the group to be at risk for all, or with supplemental insurance arrangements, a portion of their claims experience. We charge these self-funded groups an administrative fee, which is based on the number of members in a group or the group’s claim experience. Under our self-funded arrangements, revenue is recognized as administrative services are performed, and benefit payments under these programs are excluded from benefit expense. For additional information about our revenues, see Note 2, "Basis of Presentation and Significant Accounting Policies" and Note 19, "Segment Information," to our audited consolidated financial statements as of and for the year ended December 31, 2017 included in our 2017 Annual Report on Form 10-K. In addition, see Note 15, "Segment Information," herein, for the disaggregation of revenues by segments and products.
Premium and self-funded receivables include the uncollected amounts from fully-insured and self-funded groups, individuals and government programs. At March 31, 2018, premium and self-funded receivables were $3,797.4 and $2,458.5, respectively. At December 31, 2017, premium and self-funded receivables were $3,605.2 and $2,579.7, respectively. Premium and self-funded receivables are reported net of an allowance for doubtful accounts of $369.8 and $455.3 at March 31, 2018 and December 31, 2017, respectively.
For our non-fully-insured contracts, we had no material contract assets, contract liabilities or deferred contract costs recorded on our consolidated balance sheet at March 31, 2018. For the three months ended March 31, 2018, revenue recognized from performance obligations related to prior periods, such as due to changes in transaction price, was not material. For contracts that have an original expected duration of greater than one year, revenue expected to be recognized in future periods related to unfulfilled contractual performance obligations and contracts with variable consideration related to undelivered performance obligations is not material.
Recently Adopted Accounting Guidance: In February 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, or ASU 2018-02. On December 22, 2017, the federal government enacted a tax bill, H.R.1, An act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, or the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act contains significant changes to corporate taxation, including, but not limited to, reducing the U.S. federal corporate income tax rate from 35% to 21% and modifying or limiting many business deductions. Current FASB guidance requires adjustments of deferred taxes due to a change in the federal corporate income tax rate to be included in income from operations. As a result, the tax effects of items within accumulated other comprehensive loss did not reflect the appropriate tax rate. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive loss to retained earnings for stranded tax effects resulting from the change in the federal corporate income tax rate. We adopted the amendments in ASU 2018-02 for our interim and annual reporting periods beginning on January 1, 2018 and reclassified $91.3 of stranded tax effects from accumulated other comprehensive loss to retained earnings on our consolidated balance sheets. The adoption of ASU 2018-02 did not have any impact on our results of operations or cash flows.
In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, or ASU 2017-09. This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. We adopted ASU 2017-09 on January 1, 2018. The guidance has been and will be applied prospectively to awards modified on or after the adoption date. The adoption of ASU 2017-09 did not have any impact on our consolidated financial position, results of operations or cash flows.
In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, or ASU 2017-07. This amendment requires entities to disaggregate the service cost component from the other components of the

-8-


benefit cost and present the service cost component in the same income statement line item as other employee compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. Certain of our defined benefit plans have previously been frozen, resulting in no annual service costs, and the remaining service costs for our non-frozen plan are not material. We adopted ASU 2017-07 on January 1, 2018 and it did not have a material impact on our results of operations, cash flows or consolidated financial position.
In December 2016, the FASB issued Accounting Standards Update No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, or ASU 2016-20. In May 2016, the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, or ASU 2016-12. In April 2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, or ASU 2016-10. In March 2016, the FASB issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross verses Net), or ASU 2016-08. These updates provide additional clarification and implementation guidance on the previously issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09. Collectively, these updates require a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. These updates supersede almost all existing revenue recognition guidance under GAAP, with certain exceptions, including an exception for our premium revenues, recorded on the Premiums line item on our consolidated statements of income, which will continue to be accounted for in accordance with the provisions of Accounting Standards Codification, or ASC, Topic 944, Financial Services - Insurance. Our administrative service and other contracts that are subject to these Accounting Standards Updates are recorded in the Administrative fees and Other revenue line items on our consolidated statements of income and represent approximately 6.0% of our consolidated total operating revenue. We adopted these standards on January 1, 2018 using the modified retrospective approach. The adoption of these standards did not have a material impact on our beginning retained earnings, results of operations, cash flows or consolidated financial position.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, or ASU 2016-18. This update amends ASC Topic 230 to add and clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. We adopted ASU 2016-18 on January 1, 2018 using a retrospective approach. The adoption of ASU 2016-18 did not have a material impact on our consolidated statements of cash flows and did not impact our results of operations or consolidated financial position.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, or ASU 2016-15. This update addresses the presentation and classification on the statement of cash flows for eight specific items, with the objective of reducing existing diversity in practice in how certain cash receipts and cash payments are presented and classified. We adopted ASU 2016-15 on January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on our consolidated statements of cash flows, results of operations or consolidated financial position.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01. The amendments in ASU 2016-01 change the accounting for non-consolidated equity investments that are not accounted for under the equity method of accounting by requiring changes in fair value to be recognized in income. Additionally, ASU 2016-01 simplifies the impairment assessment of equity investments without readily determinable fair values; requires entities to use the exit price when estimating the fair value of financial instruments; and modifies various presentation disclosure requirements for financial instruments. We adopted ASU 2016-01 on January 1, 2018 as a cumulative-effect adjustment and reclassified $320.2 of unrealized gains on equity investments, net of tax, from accumulated other comprehensive loss to retained earnings on our consolidated balance sheet. Effective January 1, 2018, our results of operations include the changes in fair value of these financial instruments.
Recent Accounting Guidance Not Yet Adopted: In February 2018, the FASB issued Accounting Standards Update No. 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2018-03. This amendment clarifies certain aspects of the

-9-


new guidance (ASU 2016-01) on recognizing and measuring financial instruments and presentation requirements for certain fair value option liabilities. ASU 2018-03 is effective for interim periods beginning after June 15, 2018 and will be effective for our 2018 annual reporting period. The standard requires entities to record a cumulative-effect adjustment to the statement of financial position at the beginning of the fiscal year in which the amendments are adopted. We are currently evaluating the effects the adoption of ASU 2018-03 will have on our consolidated financial position and related disclosures.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842), or ASU 2016-02. Upon the effective date, ASU 2016-02 will supersede the current lease guidance in Topic 840, Leases. Under the new guidance, lessees will be required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis. Concurrently, lessees will be required to recognize a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The guidance is required to be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements. We are currently evaluating the effects the adoption of ASU 2016-02 will have on our consolidated financial statements, results of operations and cash flows.
There were no other new accounting pronouncements that were issued or became effective since the issuance of our 2017 Annual Report on Form 10-K that had, or are expected to have, a material impact on our consolidated financial position, results of operations or cash flows.
3.
Business Acquisitions
Acquisition of America’s 1st Choice
On February 15, 2018, we completed our acquisition of Freedom Health, Inc., Optimum HealthCare, Inc., America’s 1st Choice of South Carolina, Inc. and related entities, or collectively, America’s 1st Choice, a Medicare Advantage organization that offers HMO products, including Chronic Special Needs Plans and Dual-Eligible Special Needs Plans under its Freedom Health and Optimum HealthCare brands in Florida and its America’s 1st Choice of South Carolina brand in South Carolina. Through its Medicare Advantage plans, America’s 1st Choice currently serves approximately one hundred and thirty five thousand members in twenty-five Florida and three South Carolina counties. This acquisition aligns with our plans for continued growth in the Medicare Advantage and Special Needs populations.
In accordance with FASB accounting guidance for business combinations, the consideration transferred was allocated to the preliminary fair value of America's 1st Choice's assets acquired and liabilities assumed, including identifiable intangible assets. The excess of the consideration transferred over the preliminary fair value of net assets acquired resulted in preliminary goodwill of $989.7 at March 31, 2018, all of which was allocated to our Government Business segment. Preliminary goodwill recognized from the acquisition of America's 1st Choice primarily relates to the future economic benefits arising from the assets acquired and is consistent with our stated intentions to strengthen our position and expand operations in the government sector to service Medicare Advantage and Special Needs populations. Any additional payments or receipts of cash resulting from contractual purchase price adjustments or any subsequent adjustments made to the assets acquired or liabilities assumed during the measurement period will be recorded as an adjustment to goodwill.
The preliminary fair value of the net assets acquired from America's 1st Choice includes $722.0 of other intangible assets, which primarily consist of finite-lived customer relationships and provider networks with amortization periods ranging from 8 to 20 years. The results of operations of America's 1st Choice are included in our consolidated financial statements within our Government Business segment for the period following February 15, 2018. The pro forma effects of this acquisition for prior periods were not material to our consolidated results of operations.

-10-


Acquisition of HealthSun
On December 21, 2017, we completed our acquisition of HealthSun, which serves approximately forty thousand members in the state of Florida through its Medicare Advantage plans, which received a five-star rating from the Centers for Medicare & Medicaid Services. This acquisition aligns with our plans for continued growth in the Medicare Advantage and dual-eligible populations.
In accordance with FASB accounting guidance for business combinations, the consideration transferred was allocated to the preliminary fair value of HealthSun's assets acquired and liabilities assumed, including identifiable intangible assets. The excess of the consideration transferred over the preliminary fair value of net assets acquired resulted in preliminary goodwill of $1,607.2 at March 31, 2018, all of which was allocated to our Government Business segment. Preliminary goodwill recognized from the acquisition of HealthSun primarily relates to the future economic benefits arising from the assets acquired and is consistent with our stated intentions to strengthen our position and expand operations in the government sector to service Medicare Advantage and dual-eligible enrollees. As of March 31, 2018, the initial accounting for the acquisition has not been finalized. Any subsequent adjustments made to the assets acquired or liabilities assumed during the measurement period will be recorded as an adjustment to goodwill. During the three months ended March 31, 2018, we reduced preliminary goodwill by $36.2 due to adjustments made to acquired intangible assets.
The preliminary fair value of the net assets acquired from HealthSun includes $637.0 of other intangible assets, which primarily consist of finite-lived customer relationships with amortization periods ranging from 7 to 20 years. The results of operations of HealthSun are included in our consolidated financial statements within our Government Business segment for the period following December 21, 2017. The pro forma effects of this acquisition for prior periods were not material to our consolidated results of operations.
4.
Investments
Fixed Maturity Securities
We evaluate our available-for-sale fixed maturity securities for other-than-temporary declines based on qualitative and quantitative factors. Other-than-temporary impairment losses recognized in income totaled $7.9 and $8.1 for the three months ended March 31, 2018 and 2017, respectively. There were no individually significant other-than-temporary impairment losses on investments during the three months ended March 31, 2018 and 2017. We continue to review our investment portfolios under our impairment review policy. Given the inherent uncertainty of changes in market conditions and the significant judgments involved, there is a continuing risk that further declines in fair value may occur and additional material other-than-temporary impairment losses on investments may be recorded in future periods.

-11-


A summary of current and long-term fixed maturity securities, available-for-sale, at March 31, 2018 and December 31, 2017 is as follows:
 
 
 
 
 
 
 
 
 
Non-Credit
Component of
Other-Than-
Temporary
Impairments
Recognized in
Accumulated
Other
Comprehensive
Loss
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized Losses
 
Estimated
Fair Value
 
 
 
 
Less than
12 Months
 
12 Months
or Greater
 
 
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
$
589.0

 
$
2.3

 
$
(6.9
)
 
$
(0.9
)
 
$
583.5

 
$

Government sponsored securities
105.6

 
0.2

 
(0.5
)
 
(0.5
)
 
104.8

 

States, municipalities and political subdivisions, tax-exempt
5,312.3

 
102.1

 
(23.3
)
 
(11.5
)
 
5,379.6

 

Corporate securities
7,651.6

 
85.9

 
(97.0
)
 
(18.2
)
 
7,622.3

 

Residential mortgage-backed securities
2,786.1

 
32.2

 
(32.7
)
 
(20.0
)
 
2,765.6

 

Commercial mortgage-backed securities
78.0

 
0.3

 
(0.4
)
 
(2.2
)
 
75.7

 

Other securities
1,051.7

 
16.1

 
(5.3
)
 
(1.0
)
 
1,061.5

 

Total fixed maturity securities
$
17,574.3

 
$
239.1

 
$
(166.1
)
 
$
(54.3
)
 
$
17,593.0

 
$

December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
$
649.0

 
$
2.2

 
$
(5.0
)
 
$
(0.7
)
 
$
645.5

 
$

Government sponsored securities
90.3

 
0.3

 
(0.1
)
 
(0.4
)
 
90.1

 

States, municipalities and political subdivisions, tax-exempt
5,854.6

 
192.6

 
(5.0
)
 
(7.3
)
 
6,034.9

 

Corporate securities
7,362.8

 
165.8

 
(30.2
)
 
(12.6
)
 
7,485.8

 
(0.3
)
Residential mortgage-backed securities
2,520.0

 
38.5

 
(8.0
)
 
(11.6
)
 
2,538.9

 

Commercial mortgage-backed securities
80.1

 
0.7

 
(0.1
)
 
(2.0
)
 
78.7

 

Other securities
1,053.7

 
14.4

 
(2.4
)
 
(1.5
)
 
1,064.2

 

Total fixed maturity securities
$
17,610.5

 
$
414.5

 
$
(50.8
)
 
$
(36.1
)
 
$
17,938.1

 
$
(0.3
)


-12-


For fixed maturity securities in an unrealized loss position at March 31, 2018 and December 31, 2017, the following table summarizes the aggregate fair values and gross unrealized losses by length of time those securities have continuously been in an unrealized loss position: 
 
Less than 12 Months
 
12 Months or Greater
(Securities are whole amounts)
Number of
Securities
 
Estimated
Fair Value
 
Gross
Unrealized
Loss
 
Number of
Securities
 
Estimated
Fair Value
 
Gross
Unrealized
Loss
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
36

 
$
291.9

 
$
(6.9
)
 
13

 
$
82.8

 
$
(0.9
)
Government sponsored securities
19

 
28.4

 
(0.5
)
 
16

 
14.0

 
(0.5
)
States, municipalities and political subdivisions, tax-exempt
848

 
1,638.9

 
(23.3
)
 
167

 
277.5

 
(11.5
)
Corporate securities
2,023

 
4,225.6

 
(97.0
)
 
262

 
304.5

 
(18.2
)
Residential mortgage-backed securities
712

 
1,572.8

 
(32.7
)
 
287

 
470.8

 
(20.0
)
Commercial mortgage-backed securities
15

 
26.2

 
(0.4
)
 
12

 
25.5

 
(2.2
)
Other securities
172

 
528.7

 
(5.3
)
 
17

 
23.4

 
(1.0
)
Total fixed maturity securities
3,825

 
$
8,312.5

 
$
(166.1
)
 
774

 
$
1,198.5

 
$
(54.3
)
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
36

 
$
450.4

 
$
(5.0
)
 
11

 
$
56.1

 
$
(0.7
)
Government sponsored securities
12

 
16.3

 
(0.1
)
 
16

 
14.8

 
(0.4
)
States, municipalities and political subdivisions, tax-exempt
414

 
641.4

 
(5.0
)
 
189

 
355.5

 
(7.3
)
Corporate securities
1,081

 
2,200.1

 
(30.2
)
 
279

 
329.7

 
(12.6
)
Residential mortgage-backed securities
445

 
1,050.3

 
(8.0
)
 
287

 
478.0

 
(11.6
)
Commercial mortgage-backed securities
7

 
13.7

 
(0.1
)
 
12

 
27.2

 
(2.0
)
Other securities
132

 
406.1

 
(2.4
)
 
20

 
35.8

 
(1.5
)
Total fixed maturity securities
2,127

 
$
4,778.3

 
$
(50.8
)
 
814

 
$
1,297.1

 
$
(36.1
)
The amortized cost and fair value of fixed maturity securities at March 31, 2018, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations.
 
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
$
526.5

 
$
526.3

Due after one year through five years
4,969.7

 
4,973.8

Due after five years through ten years
5,322.5

 
5,313.4

Due after ten years
3,891.5

 
3,938.2

Mortgage-backed securities
2,864.1

 
2,841.3

Total fixed maturity securities
$
17,574.3

 
$
17,593.0


-13-


Proceeds from sales, maturities, calls or redemptions of fixed maturity securities and the related gross realized gains and gross realized losses for the three months ended March 31, 2018 and 2017 are as follows:
 
Three Months Ended 
 March 31
 
2018
 
2017
Proceeds
$
2,227.3

 
$
3,374.5

Gross realized gains
29.7

 
45.5

Gross realized losses
(36.4
)
 
(23.7
)
In the ordinary course of business, we may sell securities at a loss for a number of reasons, including, but not limited to: (i) changes in the investment environment; (ii) expectation that the fair value could deteriorate further; (iii) desire to reduce exposure to an issuer or an industry; (iv) changes in credit quality; or (v) changes in expected cash flow.
All securities sold resulting in investment gains and losses are recorded on the trade date. Realized gains and losses are determined on the basis of the cost or amortized cost of the specific securities sold.
Equity Securities
A summary of current and long-term equity securities, at March 31, 2018 and December 31, 2017 is as follows:
 
March 31, 2018
 
December 31, 2017
Equity securities:
 
 
 
Exchange traded funds
$
510.6

 
$
1,300.3

Fixed maturity mutual funds
656.4

 
790.6

Common equity securities
904.4

 
1,253.7

Private equity securities
303.4

 
287.4

Total
$
2,374.8

 
$
3,632.0

The gross losses and gains related to equity securities for the three months ended March 31, 2018 is as follows:
 
Three Months Ended March 31, 2018
Gross realized gains recognized on securities sold during the period
$
172.9

Gross unrealized losses recognized on securities still held at March 31, 2018
(215.9
)
Net realized losses recognized
$
(43.0
)
The gross gains and losses recognized on sales of equity securities were $14.2 and $2.0, respectively, for the three months ended March 31, 2017.
Securities Lending Programs
We participate in securities lending programs whereby marketable securities in our investment portfolio are transferred to independent brokers or dealers in exchange for cash and securities collateral. The fair value of the collateral received at the time of the transactions amounted to $611.8 and $454.4 at March 31, 2018 and December 31, 2017, respectively. The value of the collateral represented 102% and 104% of the market value of the securities on loan at March 31, 2018 and December 31, 2017, respectively. We recognize the collateral as an asset under the caption “Securities lending collateral” on our consolidated balance sheets and we recognize a corresponding liability for the obligation to return the collateral to the borrower under the caption “Securities lending payable.” The securities on loan are reported in the applicable investment category on our consolidated balance sheets.

-14-


The remaining contractual maturity of our securities lending agreements at March 31, 2018 is as follows:
 
Overnight and Continuous
Securities lending transactions
 
United States Government securities
$
20.8

Corporate securities
447.2

Equity securities
143.8

Total
$
611.8

The market value of loaned securities and that of the collateral pledged can fluctuate in non-synchronized fashions. To the extent the loaned securities' value appreciates faster or depreciates slower than the value of the collateral pledged, we are exposed to the risk of the shortfall. As a primary mitigating mechanism, the loaned securities and collateral pledged are marked to market on a daily basis and the shortfall, if any, is collected accordingly. Secondarily, the collateral level is set at 102% of the value of the loaned securities, which provides a cushion before any shortfall arises. The investment of the cash collateral is subject to market risk, which is managed by limiting the investments to higher quality and shorter duration instruments.

-15-


5.
Derivative Financial Instruments
We primarily invest in the following types of derivative financial instruments: interest rate swaps, futures, forward contracts, put and call options, swaptions, embedded derivatives and warrants. We also enter into master netting agreements which reduce credit risk by permitting net settlement of transactions. We had posted collateral of $5.9 and $11.5 related to our derivative financial instruments at March 31, 2018 and December 31, 2017, respectively.
A summary of the aggregate contractual or notional amounts and estimated fair values related to derivative financial instruments at March 31, 2018 and December 31, 2017 is as follows:
 
Contractual/
Notional
Amount
 
Balance Sheet Location
 
Estimated Fair Value
 
Asset
 
(Liability)
March 31, 2018
 
 
 
 
 
 
 
Hedging instruments
 
 
 
 
 
 
 
Interest rate swaps - fixed to floating
$
1,000.0

 
Other assets/other liabilities
 
$
1.1

 
$
(11.7
)
Non-hedging instruments
 
 
 
 
 
 
 
Interest rate swaps
253.3

 
Equity securities 
 
1.4

 
(7.8
)
Futures
264.2

 
Equity securities 
 
1.0

 
(5.1
)
Subtotal non-hedging
517.5

 
Subtotal non-hedging
 
2.4

 
(12.9
)
Total derivatives
$
1,517.5

 
Total derivatives
 
3.5

 
(24.6
)
 
 
 
Amounts netted
 
(2.9
)
 
2.9

 
 
 
Net derivatives
 
$
0.6

 
$
(21.7
)
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Hedging instruments
 
 
 
 
 
 
 
Interest rate swaps - fixed to floating
$
1,235.0

 
Other assets/other liabilities
 
$
2.0

 
$
(5.3
)
Interest rate swaps - forward starting pay fixed
425.0

 
Other assets/other liabilities
 

 
(8.9
)
Subtotal hedging
1,660.0

 
Subtotal hedging
 
2.0

 
(14.2
)
Non-hedging instruments
 
 
 
 
 
 
 
Interest rate swaps
171.3

 
Equity securities 
 
1.0

 
(4.7
)
Options
100.0

 
Other assets/other liabilities
 

 
(0.1
)
Futures
116.8

 
Equity securities 
 
0.1

 
(2.5
)
Subtotal non-hedging
388.1

 
Subtotal non-hedging
 
1.1

 
(7.3
)
Total derivatives
$
2,048.1

 
Total derivatives
 
3.1

 
(21.5
)
 
 
 
Amounts netted
 
(1.6
)
 
1.6

 
 
 
Net derivatives
 
$
1.5

 
$
(19.9
)

-16-


Fair Value Hedges
We have entered into various interest rate swap contracts to convert a portion of our interest rate exposure on our long-term debt from fixed rates to floating rates. The floating rates payable on all of our fair value hedges are benchmarked to LIBOR. A summary of our outstanding fair value hedges at March 31, 2018 and December 31, 2017 is as follows:
Type of Fair Value Hedges
 
Year
Entered
Into
 
Outstanding Notional Amount
 
Interest Rate
Received
 
Expiration Date
 
March 31, 2018
 
December 31, 2017
 
Interest rate swap
 
2018
 
$
300.0

 
$

 
3.300
%
 
January 15, 2023
Interest rate swap
 
2018
 
90.0

 

 
4.350
 
 
August 15, 2020
Interest rate swap
 
2017
 
50.0

 
50.0

 
4.350
 
 
August 15, 2020
Interest rate swap
 
2015
 
200.0

 
200.0

 
4.350
 
 
August 15, 2020
Interest rate swap
 
2014
 
150.0

 
150.0

 
4.350
 
 
August 15, 2020
Interest rate swap
 
2013
 
10.0

 
10.0

 
4.350
 
 
August 15, 2020
Interest rate swap
 
2012
 
200.0

 
200.0

 
4.350
 
 
August 15, 2020
Interest rate swap
 
2012
 

 
625.0

 
1.875
 
 
January 15, 2018
Total notional amount outstanding
 
 
 
$
1,000.0

 
$
1,235.0

 
 
 
 
 
The following amounts were recorded on our consolidated balance sheets related to cumulative basis adjustments for fair value hedges at March 31, 2018 and December 31, 2017:
Balance Sheet Classification in Which Hedged Item is Included
 
Carrying Amount of Hedged Liability
 
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
Current portion of long term-debt
 
$
650.8

 
$
1,274.6

 
$
1.1

 
$
2.0

Long-term debt
 
18,110.1

 
17,382.2

 
(11.7
)
 
(5.3
)
Cash Flow Hedges
We have entered into a series of forward starting pay fixed interest rate swaps with the objective of eliminating the variability of cash flows in the interest payments on anticipated future financings. We had $425.0 in notional amounts outstanding under forward starting pay fixed interest rate swaps at December 31, 2017. During the three months ended March 31, 2018, swaps in the notional amount of $425.0 were terminated. We received an aggregate of $24.4 from the swap counter parties upon termination.
The unrecognized loss for all outstanding, expired and terminated cash flow hedges included in accumulated other comprehensive loss, net of tax, was $254.4 and $233.0 at March 31, 2018 and December 31, 2017, respectively. As of March 31, 2018, the total amount of amortization over the next twelve months for all cash flow hedges is estimated to increase interest expense by approximately $14.0. No amounts were excluded from effectiveness testing.

-17-


A summary of the effect of cash flow hedges in accumulated other comprehensive loss for the three months ended March 31, 2018 and 2017 is as follows:
 
 
Hedge
Income
Recognized
in Other
Comprehensive
(Loss) Income
 
Income Statement Location of
Loss Reclassification from
Accumulated Other Comprehensive Loss
 
Hedge Loss
Reclassified from
Accumulated
Other
Comprehensive
Loss
Type of Cash Flow Hedge
 
 
 
Three months ended March 31, 2018
 
 
 
 
 
 
Forward starting pay fixed swaps
 
$
33.3

 
Interest expense
 
$
(3.2
)
Three months ended March 31, 2017
 
 
 
 
 
 
Forward starting pay fixed swaps
 
$
18.3

 
Interest expense
 
$
(1.5
)
Forward starting pay fixed swaps
 
 
 
Net realized (losses) gains on financial instruments
 
$
(12.0
)
Income Statement Relationship of Fair Value and Cash Flow Hedging
A summary of the relationship between the effects of fair value and cash flow hedges on the total amount of income and expense presented in our consolidated statements of income for the three months ended March 31, 2018 and 2017 is as follows:
 
Classification and Amount of (Loss) Gain Recognized in Income on Fair Value and Cash Flow Hedging Relationships
 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2017
 
Net Realized (Losses) Gains on Financial Instruments
 
Interest Expense
 
Net Realized (Losses) Gains on Financial Instruments
 
Interest Expense
Total amount of income or expense in the income statement in which the effects of fair value or cash flow hedges are recorded
$
(26.1
)
 
$
(184.2
)
 
$
7.3

 
$
(235.0
)
 
 
 
 
 
 
 
 
Loss (gain) on fair value hedging relationships:
 
 
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
 
 
Hedged items

 
(0.4
)
 

 
(0.2
)
Derivatives designated as hedging instruments

 
0.4

 

 
0.2

 
 
 
 
 
 
 
 
Loss on cash flow hedging relationships:
 
 
 
 
 
 
 
Forward starting pay fixed swaps
 
 
 
 
 
 
 
Amount of loss reclassified from accumulated other comprehensive loss into net income

 
(3.2
)
 

 
(1.5
)
Amount of loss reclassified from accumulated other comprehensive loss into net income due to ineffectiveness and missed forecasted transactions

 

 
(12.0
)
 


-18-


Non-Hedging Derivatives
A summary of the effect of non-hedging derivatives on our consolidated statements of income for the three months ended March 31, 2018 and 2017 is as follows:
Type of Non-hedging Derivatives
 
Income Statement Location of Loss Recognized
 
Derivative
Gain (Loss)
Recognized
Three months ended March 31, 2018
 
 
 
 
Interest rate swaps
 
Net realized (losses) gains on financial instruments
 
$
(2.4
)
Options
 
Net realized (losses) gains on financial instruments
 
(0.7
)
Futures
 
Net realized (losses) gains on financial instruments
 
3.0

Total
 
 
 
$
(0.1
)
Three months ended March 31, 2017
 
 
 
 
Interest rate swaps
 
Net realized (losses) gains on financial instruments
 
$
0.6

Options
 
Net realized (losses) gains on financial instruments
 
(10.5
)
Futures
 
Net realized (losses) gains on financial instruments
 
(0.4
)
Total
 
 
 
$
(10.3
)
6.
Fair Value
Assets and liabilities recorded at fair value in our consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Level inputs, as defined by FASB guidance for fair value measurements and disclosures, are as follows:
Level Input
 
Input Definition
Level I
 
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level II
 
Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date.
Level III
 
Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
The following methods, assumptions and inputs were used to determine the fair value of each class of the following assets and liabilities recorded at fair value in our consolidated balance sheets:
Cash equivalents: Cash equivalents primarily consist of highly rated money market funds with maturities of three months or less and are purchased daily at par value with specified yield rates. Due to the high ratings and short-term nature of the funds, we designate all cash equivalents as Level I.
Fixed maturity securities, available-for-sale: Fair values of available-for-sale fixed maturity securities are based on quoted market prices, where available. These fair values are obtained primarily from third party pricing services, which generally use Level I or Level II inputs for the determination of fair value to facilitate fair value measurements and disclosures. Level II securities primarily include United States Government securities, corporate securities, securities from states, municipalities and political subdivisions, mortgage-backed securities and certain other asset-backed securities. For securities not actively traded, the pricing services may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. We have controls in place to review the pricing services’ qualifications and procedures used to determine fair values. In addition, we periodically review the pricing services’ pricing methodologies, data sources and pricing inputs to ensure the fair values obtained are reasonable. Inputs that are often used in the valuation methodologies include, but are not limited to, broker quotes, benchmark yields, credit spreads, default rates and prepayment speeds. We also have certain fixed maturity securities, primarily corporate debt securities, which are designated Level III securities. For these securities, the valuation methodologies may incorporate broker quotes or discounted cash flow analyses using assumptions for inputs such as

-19-


expected cash flows, benchmark yields, credit spreads, default rates and prepayment speeds that are not observable in the markets.
Equity securities: Fair values of equity securities are generally designated as Level I and are based on quoted market prices. For certain equity securities, quoted market prices for the identical security are not always available and the fair value is estimated by reference to similar securities for which quoted prices are available. These securities are designated Level II. We also have certain equity securities, including private equity securities, for which the fair value is estimated based on each security’s current condition and future cash flow projections. Such securities are designated Level III. The fair values of these private equity securities are generally based on either broker quotes or discounted cash flow projections using assumptions for inputs such as the weighted-average cost of capital, long-term revenue growth rates and earnings before interest, taxes, depreciation and amortization, and/or revenue multiples that are not observable in the markets.
Other invested assets, current: Other invested assets, current include securities held in rabbi trusts that are classified as trading. These securities are designated Level I securities, as fair values are based on quoted market prices.
Securities lending collateral: Fair values of securities lending collateral are based on quoted market prices, where available. These fair values are obtained primarily from third party pricing services, which generally use Level I or Level II inputs for the determination of fair value, to facilitate fair value measurements and disclosures.
Derivatives: Fair values are based on the quoted market prices by the financial institution that is the counterparty to the derivative transaction. We independently verify prices provided by the counterparties using valuation models that incorporate observable market inputs for similar derivative transactions. Derivatives are designated as Level II securities. Derivatives presented within the fair value hierarchy table below are presented on a gross basis and not on a master netting basis by counterparty.

-20-


A summary of fair value measurements by level for assets and liabilities measured at fair value on a recurring basis at March 31, 2018 and December 31, 2017 is as follows:
 
Level I
 
Level II
 
Level III
 
Total
March 31, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
1,542.6

 
$

 
$

 
$
1,542.6

Fixed maturity securities, available-for-sale:
 
 
 
 
 
 
 
United States Government securities

 
583.5

 

 
583.5

Government sponsored securities

 
104.8

 

 
104.8

States, municipalities and political subdivisions, tax-exempt

 
5,379.6

 

 
5,379.6

Corporate securities
39.5

 
7,322.3

 
260.5

 
7,622.3

Residential mortgage-backed securities

 
2,760.9

 
4.7

 
2,765.6

Commercial mortgage-backed securities

 
75.7

 

 
75.7

Other securities

 
1,047.8

 
13.7

 
1,061.5

Total fixed maturity securities, available-for-sale
39.5

 
17,274.6

 
278.9

 
17,593.0

Equity securities:


 


 


 


Exchange traded funds
510.6

 

 

 
510.6

Fixed maturity mutual funds

 
656.4

 

 
656.4

Common equity securities
836.3

 
68.1

 

 
904.4

Private equity securities

 

 
303.4

 
303.4

Total equity securities
1,346.9

 
724.5

 
303.4

 
2,374.8

Other invested assets, current
24.3

 

 

 
24.3

Securities lending collateral
433.9

 
178.3

 

 
612.2

Derivatives

 
3.5

 

 
3.5

Total assets
$
3,387.2

 
$
18,180.9

 
$
582.3

 
$
22,150.4

Liabilities:
 
 
 
 
 
 
 
Derivatives
$

 
$
(24.6
)
 
$

 
$
(24.6
)
Total liabilities
$

 
$
(24.6
)
 
$

 
$
(24.6
)
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
1,956.4

 
$

 
$

 
$
1,956.4

Fixed maturity securities, available-for-sale:
 
 
 
 
 
 
 
United States Government securities

 
645.5

 

 
645.5

Government sponsored securities

 
90.1

 

 
90.1

States, municipalities and political subdivisions, tax-exempt

 
6,034.9

 

 
6,034.9

Corporate securities
24.8

 
7,231.8

 
229.2

 
7,485.8

Residential mortgage-backed securities

 
2,533.9

 
5.0

 
2,538.9

Commercial mortgage-backed securities

 
78.7

 

 
78.7

Other securities
75.2

 
973.1

 
15.9

 
1,064.2

Total fixed maturity securities, available-for-sale
100.0

 
17,588.0

 
250.1

 
17,938.1

Equity securities:


 


 


 


Exchange traded funds
1,300.3

 

 

 
1,300.3

Fixed maturity mutual funds

 
790.6

 

 
790.6

Common equity securities
1,146.6

 
107.1

 

 
1,253.7

Private equity securities

 

 
287.4

 
287.4

Total equity securities
2,446.9

 
897.7

 
287.4

 
3,632.0

Other invested assets, current
17.2

 

 

 
17.2

Securities lending collateral
214.1

 
241.0

 

 
455.1

Derivatives

 
3.1

 

 
3.1

Total assets
$
4,734.6

 
$
18,729.8

 
$
537.5

 
$
24,001.9

Liabilities:
 
 
 
 
 
 
 
Derivatives
$

 
$
(21.5
)
 
$

 
$
(21.5
)
Total liabilities
$

 
$
(21.5
)
 
$

 
$
(21.5
)
 
 
 
 
 
 
 
 
 
 

-21-


A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level III inputs for the three months ended March 31, 2018 and 2017 is as follows:
 
Corporate
Securities
 
Residential
Mortgage-
backed
Securities
 
Other 
Securities
 
Equity
Securities
 
Total
Three Months Ended March 31, 2018
 
 
 
 
 
 

 
 
Beginning balance at January 1, 2018
$
229.2

 
$
5.0

 
$
15.9

 
$
287.4

 
$
537.5

Total (losses) gains:
 
 
 
 
 
 
 
 
 
Recognized in net income
(0.3
)
 

 

 
(238.7
)
 
(239.0
)
Recognized in accumulated other comprehensive loss
0.5

 

 
(0.1
)
 

 
0.4

Purchases
19.9

 
0.1

 

 
255.6

 
275.6

Sales
(3.6
)
 

 

 
(0.9
)
 
(4.5
)
Settlements
(6.0
)
 
(0.4
)
 
(0.7
)
 

 
(7.1
)
Transfers into Level III
20.8

 

 

 

 
20.8

Transfers out of Level III

 

 
(1.4
)
 

 
(1.4
)
Ending balance at March 31, 2018
$
260.5

 
$
4.7

 
$
13.7

 
$
303.4

 
$
582.3

Change in unrealized losses included in net income related to assets still held for the three months ended March 31, 2018
$
(0.5
)
 
$

 
$

 
$

 
$
(0.5
)
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 
 
 
 
 
 

 
 
Beginning balance at January 1, 2017
$
238.8

 
$
12.0

 
$
42.8

 
$
187.8

 
$
481.4

Total (losses) gains:
 
 
 
 
 
 
 
 
 
Recognized in net income
(1.3
)
 

 

 
0.3

 
(1.0
)
Recognized in accumulated other comprehensive loss
3.6

 

 
0.1

 
(0.4
)
 
3.3

Purchases
34.8

 
1.5

 
9.5

 
36.0

 
81.8

Sales
(32.6
)
 
(1.5
)
 

 
(0.4
)
 
(34.5
)
Settlements
(19.6
)
 
(0.2
)
 
(0.4
)
 

 
(20.2
)
Transfers into Level III
8.3

 

 
1.2

 

 
9.5

Transfers out of Level III
(2.0
)
 
(4.6
)
 
(24.6
)
 

 
(31.2
)
Ending balance at March 31, 2017
$
230.0

 
$
7.2

 
$
28.6

 
$
223.3

 
$
489.1

Change in unrealized losses included in net income related to assets still held for the three months ended March 31, 2017
$
(1.7
)
 
$