10-Q 1 antm-2019331x10q.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, 2019
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)
 
 
220 VIRGINIA AVENUE
INDIANAPOLIS, INDIANA
(Address of principal executive offices)
 
46204
(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 every Interactive Data File required to be submitted 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 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
¨
 
  
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 15, 2019
Common Stock, $0.01 par value
 
257,195,705 shares
 
 
 



Anthem, Inc.
Quarterly Report on Form 10-Q
For the Period Ended March 31, 2019
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,
2019
 
December 31,
2018
(In millions, except share data)
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,482

 
$
3,934

Fixed maturity securities, current (amortized cost of $17,550 and $16,894)
17,795

 
16,692

Equity securities, current
1,211

 
1,493

Other invested assets, current
20

 
21

Accrued investment income
161

 
162

Premium receivables
5,049

 
4,465

Self-funded receivables
2,491

 
2,278

Other receivables
2,639

 
2,558

Income taxes receivable

 
10

Securities lending collateral
591

 
604

Other current assets
2,172

 
2,104

Total current assets
36,611

 
34,321

Long-term investments:
 
 
 
Fixed maturity securities (amortized cost of $482 and $486)
492

 
487

Equity securities
33

 
33

Other invested assets
3,710

 
3,726

Property and equipment, net
2,799

 
2,735

Goodwill
20,500

 
20,504

Other intangible assets
8,925

 
9,007

Other noncurrent assets
1,453

 
758

Total assets
$
74,523

 
$
71,571

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Liabilities
 
 
 
Current liabilities:
 
 
 
Policy liabilities:
 
 
 
Medical claims payable
$
8,242

 
$
7,454

Reserves for future policy benefits
78

 
75

Other policyholder liabilities
2,577

 
2,590

Total policy liabilities
10,897

 
10,119

Unearned income
998

 
902

Accounts payable and accrued expenses
3,951

 
4,959

Income taxes payable
105

 

Security trades pending payable
158

 
197

Securities lending payable
590

 
604

Short-term borrowings
1,095

 
1,145

Current portion of long-term debt
851

 
849

Other current liabilities
4,037

 
3,190

Total current liabilities
22,682

 
21,965

Long-term debt, less current portion
17,396

 
17,217

Reserves for future policy benefits, noncurrent
719

 
706

Deferred tax liabilities, net
2,116

 
1,960

Other noncurrent liabilities
1,612

 
1,182

Total liabilities
44,525

 
43,030

 
 
 
 
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 –
257,354,383 and 257,395,577
3

 
3

Additional paid-in capital
9,482

 
9,536

Retained earnings
21,136

 
19,988

Accumulated other comprehensive loss
(623
)
 
(986
)
Total shareholders’ equity
29,998

 
28,541

Total liabilities and shareholders’ equity
$
74,523

 
$
71,571


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)
2019
 
2018
Revenues
 
 
 
Premiums
$
22,843

 
$
20,903

Administrative fees and other revenue
1,545

 
1,439

Total operating revenue
24,388

 
22,342

Net investment income
210

 
229

Net realized gains (losses) on financial instruments
78

 
(26
)
Other-than-temporary impairment losses on investments:
 
 
 
Total other-than-temporary impairment losses on investments
(13
)
 
(8
)
Portion of other-than-temporary impairment losses recognized in other comprehensive income
3

 

Other-than-temporary impairment losses recognized in income
(10
)
 
(8
)
Total revenues
24,666

 
22,537

Expenses
 
 
 
Benefit expense
19,282

 
17,046

Selling, general and administrative expense
3,166

 
3,428

Interest expense
187

 
184

Amortization of other intangible assets
87

 
80

(Gain) loss on extinguishment of debt
(1
)
 
19

Total expenses
22,721

 
20,757

Income before income tax expense
1,945

 
1,780

Income tax expense
394

 
468

Net income
$
1,551

 
$
1,312

Net income per share
 
 
 
Basic
$
6.03

 
$
5.13

Diluted
$
5.91

 
$
4.99

Dividends per share
$
0.80

 
$
0.75
















See accompanying notes.

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Anthem, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited) 
 
 
Three Months Ended 
 March 31
(In millions)
 
2019
 
2018
Net income
 
$
1,551

 
$
1,312

Other comprehensive income (loss), net of tax:
 
 
 
 
Change in net unrealized gains/losses on investments
 
357

 
(245
)
Change in net unrealized losses on cash flow hedges
 
3

 
29

Change in net periodic pension and postretirement costs
 
3

 
7

Other comprehensive income (loss)
 
363

 
(209
)
Total comprehensive income
 
$
1,914

 
$
1,103


































See accompanying notes.

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Anthem, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended 
 March 31
(In millions)
2019
 
2018
Operating activities
 
 
 
Net income
$
1,551

 
$
1,312

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net realized (gains) losses on financial instruments
(78
)
 
26

Other-than-temporary impairment losses recognized in income
10

 
8

(Gain) loss on extinguishment of debt
(1
)
 
19

Deferred income taxes
55

 
(51
)
Amortization, net of accretion
255

 
240

Depreciation expense
34

 
30

Share-based compensation
70

 
42

Changes in operating assets and liabilities:
 
 
 
Receivables, net
(753
)
 
37

Other invested assets
(21
)
 
(7
)
Other assets
(125
)
 
(392
)
Policy liabilities
791

 
(561
)
Unearned income
96

 
1,182

Accounts payable and accrued expenses
(1,029
)
 
(300
)
Other liabilities
675

 
147

Income taxes
115

 
537

Other, net
(15
)
 
(54
)
Net cash provided by operating activities
1,630

 
2,215

Investing activities
 
 
 
Purchases of fixed maturity securities
(2,300
)
 
(2,236
)
Proceeds from fixed maturity securities:
 
 
 
Sales
1,075

 
1,864

Maturities, calls and redemptions
393

 
363

Purchases of equity securities
(3,691
)
 
(566
)
Proceeds from sales of equity securities
4,048

 
1,776

Purchases of other invested assets
(78
)
 
(72
)
Proceeds from sales of other invested assets
113

 
23

Changes in securities lending collateral
14

 
(158
)
Purchases of subsidiaries, net of cash acquired

 
(1,346
)
Purchases of property and equipment
(234
)
 
(218
)
Other, net
8

 
4

Net cash used in investing activities
(652
)
 
(566
)
Financing activities
 
 
 
Net proceeds from (repayments of) commercial paper borrowings
178

 
(108
)
Proceeds from long-term borrowings
2

 
836

Repayments of long-term borrowings
(63
)
 
(663
)
Proceeds from short-term borrowings
2,710

 
1,505

Repayments of short-term borrowings
(2,760
)
 
(1,655
)
Changes in securities lending payable
(14
)
 
158

Changes in bank overdrafts
20

 
(124
)
Repurchase and retirement of common stock
(294
)
 
(395
)
Change in collateral and settlements of debt-related derivatives

 
24

Cash dividends
(206
)
 
(192
)
Proceeds from issuance of common stock under employee stock plans
76

 
60

Taxes paid through withholding of common stock under employee stock plans
(78
)
 
(73
)
Net cash used in financing activities
(429
)
 
(627
)
Effect of foreign exchange rates on cash and cash equivalents
(1
)
 

Change in cash and cash equivalents
548

 
1,022

Cash and cash equivalents at beginning of period
3,934

 
3,609

Cash and cash equivalents at end of period
$
4,482

 
$
4,631


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) Income
 
Total
Shareholders’
Equity
(In millions)
Number of
Shares
 
Par
Value
 
December 31, 2018 (audited)
257.4

 
$
3

 
$
9,536

 
$
19,988

 
$
(986
)
 
$
28,541

Adoption of Accounting Standards Update No. 2016-02 (Note 2)

 

 

 
26

 

 
26

January 1, 2019
257.4

 
3

 
9,536

 
20,014

 
(986
)
 
28,567

Net income

 

 

 
1,551

 

 
1,551

Other comprehensive income

 

 

 

 
363

 
363

Repurchase and retirement of common stock
(1.1
)
 

 
(71
)
 
(223
)
 

 
(294
)
Dividends and dividend equivalents

 

 

 
(206
)
 

 
(206
)
Issuance of common stock under employee stock plans, net of related tax benefits
1.1

 

 
69

 

 

 
69

Convertible debenture repurchases and conversions

 

 
(52
)
 

 

 
(52
)
March 31, 2019
257.4

 
$
3

 
$
9,482

 
$
21,136

 
$
(623
)
 
$
29,998

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017 (audited)
256.1

 
$
3

 
$
8,547

 
$
18,054

 
$
(101
)
 
$
26,503

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

 

 

 
320

 
(320
)
 

January 1, 2018
256.1

 
3

 
8,547

 
18,374

 
(421
)
 
26,503

Net income

 

 

 
1,312

 

 
1,312

Other comprehensive loss

 

 

 

 
(209
)
 
(209
)
Repurchase and retirement of common stock
(1.7
)
 

 
(56
)
 
(338
)
 

 
(394
)
Dividends and dividend equivalents

 

 

 
(198
)
 

 
(198
)
Issuance of common stock under employee stock plans, net of related tax benefits
1.1

 

 
28

 

 

 
28

Convertible debenture repurchases and conversions

 

 
(30
)
 

 

 
(30
)
Adoption of Accounting Standards Update No. 2018-02 (Note 2)

 

 

 
91

 
(91
)
 

March 31, 2018
255.5

 
$
3

 
$
8,489

 
$
19,241

 
$
(721
)
 
$
27,012






See accompanying notes.

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Anthem, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2019
(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 approximately 41 medical members through our affiliated health plans as of March 31, 2019. 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, 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 the New York City metropolitan area and upstate New York), 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, and Empire Blue Cross Blue Shield or Empire Blue Cross. We also conduct business through arrangements with other BCBS licensees. Through our subsidiaries, we also serve customers in numerous states across the country as America’s 1st Choice, Amerigroup, Aspire Health, 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 2018 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 or adjusted to conform to the current year rounding convention of reporting financial data in whole millions of dollars, except as otherwise noted. 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, 2019 and 2018 have been recorded. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019, or any other period. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2018 included in our 2018 Annual Report on Form 10-K.
Certain of our subsidiaries operate outside of the United States and have functional currencies other than the U.S. dollar, or USD. We translate the assets and liabilities of those subsidiaries to USD using the exchange rate in effect at the end of the period. We translate the revenues and expenses of those subsidiaries to USD using the average exchange rates in effect during

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the period. The net effect of these translation adjustments is included in “Foreign currency translation adjustments” in our consolidated statements of comprehensive income.
Cash and Cash Equivalents: We control a number of bank accounts that are used exclusively to hold customer funds for the administration of customer benefits and have cash and cash equivalents on deposit to meet certain regulatory requirements. These amounts totaled $262 and $222 at March 31, 2019 and December 31, 2018, respectively and are included in the cash and cash equivalents line on our consolidated balance sheets.
Leases: We lease office space and certain computer and related equipment under noncancelable operating leases. We determine whether an arrangement is or contains a lease at its inception. We recognize lease liabilities based on the present value of the minimum lease payments not yet paid by using the lease term and discount rate determined at lease commencement. As our leases do not provide an implicit rate, we use our incremental secured borrowing rate commensurate with the underlying lease terms to determine the present value of our lease payments. Our leases may include options to extend or terminate a lease when it is reasonably certain that we will exercise that option. We recognize the operating right-of-use, or ROU, assets at an amount equal to the lease liability adjusted for prepaid or accrued rent, remaining balance of any lease incentives and unamortized initial direct costs.
The operating lease liabilities are reported in other current liabilities and other noncurrent liabilities and the related ROU assets are reported in other noncurrent assets on our consolidated balance sheet. Lease expense for our operating leases is calculated on a straight-line basis over the lease term and is reported in selling, general and administrative expense on our consolidated statements of income. For our office space leases, we account for the lease and non-lease components (such as common area maintenance) as a single lease component. We also do not recognize a lease liability or ROU asset for our office space leases whose lease terms, at commencement, are twelve months or less and that do not include a purchase option or option to extend that we are reasonably certain to exercise.
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 or contractual or government-mandated premium stabilization programs. Administrative fees and other revenues 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, 2018 included in our 2018 Annual Report on Form 10-K. In addition, see Note 15, “Segment Information,” herein for the disaggregation of revenues by segments and products.
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, 2019. For the three months ended March 31, 2019, 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 March 2019, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2019-01, Leases (Topic 842): Codification Improvements. In July 2018, the FASB issued Accounting Standards Update No. 2018-11, Leases (Topic 842): Targeted Improvements and Accounting Standards Update No. 2018-10, Codification Improvements to Topic 842, Leases. These updates provide additional clarification, an optional transition method, a practical expedient and implementation guidance on the previously issued Accounting Standards Update No. 2016-02, Leases (Topic 842). Collectively, these updates supersede the lease guidance in Accounting Standards Codification, or ASC, Topic 840 and require lessees 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 are required to recognize an ROU 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. We adopted this standard on January 1, 2019 by applying the optional transition method on the adoption date and did not adjust comparative periods. We also elected the package of practical

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expedients permitted, which among other things, allowed us to carry forward the lease classification for our existing leases. In preparation for the adoption of this standard and to enable preparation of the required financial information, we implemented a new lease accounting software solution as well as new internal controls. The adoption of this standard impacted our 2019 opening consolidated balance sheet as we recorded operating lease liabilities of $728 and ROU assets of $637, which equals the lease liabilities net of accrued rent, lease incentives and the carrying amount of ceased-use liabilities previously recorded on our balance sheet under the old guidance. We also recognized a cumulative-effect adjustment of $26 to our opening retained earnings for deferred gains on our previous sale-leaseback transactions. The adoption of this standard did not have an impact on our consolidated statements of income or cash flows.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13. The amendments in ASU 2018-13 eliminate, add, and modify certain disclosure requirements for fair value measurements. The amendments are effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for either the entire ASU or only the provisions that eliminate or modify requirements. We early adopted the provisions that eliminate and modify disclosure requirements, on a retrospective basis, effective in our 2018 Annual Report on Form 10-K. We will adopt the new disclosure requirements, on a prospective basis, effective for our interim and annual reporting periods beginning after December 15, 2019.
In February 2018, the 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 of stranded tax effects from accumulated other comprehensive loss to retained earnings on our consolidated balance sheet. 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. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, or ASU 2017-08. This update changes the amortization period for certain purchased callable debt securities held at a premium by shortening the amortization period for the premium to the earliest call date. Under current guidance, the premium is generally amortized over the contractual life of the instrument. The amendments are to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We adopted ASU 2017-08 on January 1, 2019, and the adoption of this standard did not have a material impact on our beginning retained earnings or on our consolidated financial position, results of operations or cash flows.
In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, or ASU 2017-07. This amendment requires entities to disaggregate the service cost component from the other components of the benefit cost and present the service cost component in the same income statement line item as other employee compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. Certain of our defined benefit plans have previously been frozen, resulting in no annual service

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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. 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. In April 2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. 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). 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). 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, which are recorded on the Premiums line item on our consolidated statements of income and will continue to be accounted for in accordance with the provisions of 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 item on our consolidated statements of income and represents approximately 6% 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, Statement of Cash Flow, 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 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 November 2018, the FASB issued Accounting Standards Update No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, or ASU 2018-19. The amendments in ASU 2018-19 provide additional clarification and implementation guidance on certain aspects of the previously issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13, and have the same effective date and transition requirements as ASU 2016-13. ASU 2016-13 introduces a current expected credit loss model for measuring expected credit losses for certain types of financial instruments held at the reporting date based on historical experience, current conditions and reasonable

-10-



supportable forecasts. ASU 2016-13 replaces the current incurred loss model for measuring expected credit losses, requires expected losses on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities and provides for additional disclosure requirements. ASU 2016-13 is effective for us on January 1, 2020, with early adoption permitted. We are currently evaluating the effects the adoption of ASU 2016-13 will have on our consolidated financial statements, results of operations and cash flows.
In August 2018, the FASB issued Accounting Standards Update No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, or ASU 2018-15. The amendments in ASU 2018-15 require implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance. The amendments also require an entity to disclose the nature of its hosting arrangements and adhere to certain presentation requirements in its balance sheet, income statement and statement of cash flows. ASU 2018-15 is effective for us on January 1, 2020, with early adoption permitted. The guidance can be applied either prospectively to all implementation costs incurred after the date of adoption or retrospectively. We are currently evaluating the effects the adoption of ASU 2018-15 will have on our consolidated financial position, results of operations and cash flows.
In August 2018, the FASB issued Accounting Standards Update No. 2018-14, Compensation—Retirement Benefits - Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, or ASU 2018-14. The amendments in ASU 2018-14 eliminate, add, and modify certain disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments are effective for our annual reporting periods beginning after December 15, 2020, with early adoption permitted. The guidance is to be applied on a retrospective basis to all periods presented. We are currently evaluating the effects the adoption of ASU 2018-14 will have on our disclosures.
In August 2018, the FASB issued Accounting Standards Update No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, or ASU 2018-12. The amendments in ASU 2018-12 make changes to a variety of areas to simplify or improve the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. The amendments require insurers to annually review the assumptions they make about their policyholders and update the liabilities for future policy benefits if the assumptions change. The amendments also simplify the amortization of deferred contract acquisition costs and add new disclosure requirements about the assumptions insurers use to measure their liabilities and how they may affect future cash flows. The amendments in ASU 2018-12 will be effective for our interim and annual reporting periods beginning after December 15, 2020. The amendments related to the liability for future policy benefits for traditional and limited-payment contracts and deferred acquisition costs are to be applied to contracts in force as of the beginning of the earliest period presented, with an option to apply such amendments retrospectively with a cumulative-effect adjustment to the opening balance of retained earnings as of the earliest period presented. The amendments for market risk benefits are to be applied retrospectively. We are currently evaluating the effects the adoption of ASU 2018-12 will have on our consolidated financial position, results of operations, cash flows, and related disclosures.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, or ASU 2017-04. This update removes Step 2 of the goodwill impairment test under current guidance, which requires a hypothetical purchase price allocation. The new guidance requires an impairment charge to be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. Upon adoption, the guidance is to be applied prospectively. ASU 2017-04 is effective for us on January 1, 2020, with early adoption permitted. The adoption of ASU 2017-04 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
There were no other new accounting pronouncements that were issued or became effective since the issuance of our 2018 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.

-11-



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. At the time of acquisition, through its Medicare Advantage plans, America’s 1st Choice served 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 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 fair value of net assets acquired resulted in goodwill of $1,029 at March 31, 2019, of which $296 was tax deductible. All of the goodwill was allocated to our Government Business segment. 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.
The fair value of the net assets acquired from America’s 1st Choice includes $711 of other intangible assets at March 31, 2019, which primarily consist of finite-lived customer relationships with amortization periods ranging from 9 to 13 years. The results of operations of America’s 1st Choice are included in our consolidated financial statements within our Government Business segment for the periods following February 15, 2018. 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. There were no individually significant other-than-temporary impairment losses on investments during the three months ended March 31, 2019 and 2018. 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, or OTTI, losses on investments may be recorded in future periods.

-12-



A summary of current and long-term fixed maturity securities, available-for-sale, at March 31, 2019 and December 31, 2018 is as follows:
 
 
 
 
 
 
 
 
 
Non-Credit
Component of
OTTIs
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, 2019
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
$
388

 
$
6

 
$

 
$
(1
)
 
$
393

 
$

Government sponsored securities
139

 
2

 

 
(1
)
 
140

 

States, municipalities and political subdivisions, tax-exempt
4,523

 
173

 

 
(3
)
 
4,693

 

Corporate securities
8,594

 
132

 
(24
)
 
(60
)
 
8,642

 
(3
)
Residential mortgage-backed securities
3,034

 
48

 
(1
)
 
(24
)
 
3,057

 

Commercial mortgage-backed securities
79

 
1

 

 
(1
)
 
79

 

Other securities
1,275

 
17

 
(3
)
 
(6
)
 
1,283

 

Total fixed maturity securities
$
18,032

 
$
379

 
$
(28
)
 
$
(96
)
 
$
18,287

 
$
(3
)
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
$
414

 
$
3

 
$

 
$
(1
)
 
$
416

 
$

Government sponsored securities
108

 
1

 

 
(1
)
 
108

 

States, municipalities and political subdivisions, tax-exempt
4,716

 
91

 
(3
)
 
(19
)
 
4,785

 

Corporate securities
8,189

 
33

 
(170
)
 
(115
)
 
7,937

 
(3
)
Residential mortgage-backed securities
2,769

 
31

 
(3
)
 
(47
)
 
2,750

 

Commercial mortgage-backed securities
69

 

 

 
(2
)
 
67

 

Other securities
1,115

 
14

 
(8
)
 
(5
)
 
1,116

 

Total fixed maturity securities
$
17,380

 
$
173

 
$
(184
)
 
$
(190
)
 
$
17,179

 
$
(3
)


-13-



For fixed maturity securities in an unrealized loss position at March 31, 2019 and December 31, 2018, 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, 2019
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
8

 
$
39

 
$

 
16

 
$
65

 
$
(1
)
Government sponsored securities
7

 
6

 

 
28

 
29

 
(1
)
States, municipalities and political subdivisions, tax-exempt
13

 
17

 

 
199

 
288

 
(3
)
Corporate securities
586

 
1,068

 
(24
)
 
1,295

 
2,273

 
(60
)
Residential mortgage-backed securities
87

 
157

 
(1
)
 
764

 
1,372

 
(24
)
Commercial mortgage-backed securities

 

 

 
12

 
23

 
(1
)
Other securities
125

 
413

 
(3
)
 
142

 
368

 
(6
)
Total fixed maturity securities
826

 
$
1,700

 
$
(28
)
 
2,456

 
$
4,418

 
$
(96
)
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
5

 
$
47

 
$

 
25

 
$
79

 
$
(1
)
Government sponsored securities
8

 
11

 

 
24

 
31

 
(1
)
States, municipalities and political subdivisions, tax-exempt
177

 
295

 
(3
)
 
604

 
1,032

 
(19
)
Corporate securities
2,185

 
4,503

 
(170
)
 
1,220

 
2,072

 
(115
)
Residential mortgage-backed securities
259

 
383

 
(3
)
 
816

 
1,458

 
(47
)
Commercial mortgage-backed securities
6

 
11

 

 
19

 
37

 
(2
)
Other securities
193

 
599

 
(8
)
 
93

 
237

 
(5
)
Total fixed maturity securities
2,833

 
$
5,849

 
$
(184
)
 
2,801

 
$
4,946

 
$
(190
)
The amortized cost and fair value of fixed maturity securities at March 31, 2019, 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
$
541

 
$
542

Due after one year through five years
5,431

 
5,466

Due after five years through ten years
5,068

 
5,153

Due after ten years
3,879

 
3,990

Mortgage-backed securities
3,113

 
3,136

Total fixed maturity securities
$
18,032

 
$
18,287


-14-



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, 2019 and 2018 are as follows:
 
Three Months Ended 
 March 31
 
2019
 
2018
Proceeds
$
1,468

 
$
2,227

Gross realized gains
18

 
30

Gross realized losses
(17
)
 
(36
)
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 marketable equity securities at March 31, 2019 and December 31, 2018 is as follows:
 
March 31, 2019
 
December 31, 2018
Equity securities:
 
 
 
Exchange traded funds
$
2

 
$
2

Fixed maturity mutual funds
589

 
557

Common equity securities
356

 
654

Private equity securities
297

 
313

Total
$
1,244

 
$
1,526

The gains and losses related to equity securities for the three months ended March 31, 2019 and 2018 are as follows:
 
Three Months Ended 
 March 31
 
2019
 
2018
Net realized gains (losses) recognized on equity securities
$
79

 
$
(43
)
Less: Net realized gains recognized on equity securities sold during the period
(21
)
 
(173
)
Unrealized gains (losses) recognized on equity securities still held at March 31, 2019
$
58

 
$
(216
)
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 $590 and $604 at March 31, 2019 and December 31, 2018, respectively. The value of the collateral represented 103% and 102% of the market value of the securities on loan at March 31, 2019 and December 31, 2018, 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.

-15-



The remaining contractual maturity of our securities lending agreements at March 31, 2019 is as follows:
 
Overnight and Continuous
Securities lending transactions
 
United States Government securities
$
25

Corporate securities
545

Equity securities
20

Total
$
590

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 minimum 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.

-16-



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 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 the London Interbank Offering Rate, or LIBOR.
Prior to 2019, we entered into a series of forward starting pay fixed interest rate swaps with the objective of reducing the variability of cash flows in the interest payments on anticipated future financings. The unrecognized loss for all expired and terminated cash flow hedges included in accumulated other comprehensive loss, net of tax, was $243 and $246 at March 31, 2019 and December 31, 2018, respectively.
For additional information relating to the fair value of our derivative assets and liabilities, see Note 6, “Fair Value,” of this Form 10-Q.
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 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.

-17-



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.

-18-



A summary of fair value measurements by level for assets and liabilities measured at fair value on a recurring basis at March 31, 2019 and December 31, 2018 is as follows:
 
Level I
 
Level II
 
Level III
 
Total
March 31, 2019
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
2,551

 
$

 
$

 
$
2,551

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

 
393

 

 
393

Government sponsored securities

 
140

 

 
140

States, municipalities and political subdivisions, tax-exempt

 
4,693

 

 
4,693

Corporate securities

 
8,345

 
297

 
8,642

Residential mortgage-backed securities

 
3,051

 
6

 
3,057

Commercial mortgage-backed securities

 
79

 

 
79

Other securities

 
1,269

 
14

 
1,283

Total fixed maturity securities, available-for-sale

 
17,970

 
317

 
18,287

Equity securities:


 


 


 


Exchange traded funds
2

 

 

 
2

Fixed maturity mutual funds

 
589

 

 
589

Common equity securities
315

 
41

 

 
356

Private equity securities

 

 
297

 
297

Total equity securities
317

 
630

 
297

 
1,244

Other invested assets, current
20

 

 

 
20

Securities lending collateral

 
591

 

 
591

Derivatives

 
15

 

 
15

Total assets
$
2,888

 
$
19,206

 
$
614

 
$
22,708

Liabilities:
 
 
 
 
 
 
 
Derivatives
$

 
$
(12
)
 
$

 
$
(12
)
Total liabilities
$

 
$
(12
)
 
$

 
$
(12
)
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
1,815

 
$

 
$

 
$
1,815

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

 
416

 

 
416

Government sponsored securities

 
108

 

 
108

States, municipalities and political subdivisions, tax-exempt

 
4,785

 

 
4,785

Corporate securities
2

 
7,648

 
287

 
7,937

Residential mortgage-backed securities

 
2,744

 
6

 
2,750

Commercial mortgage-backed securities

 
67

 

 
67

Other securities

 
1,099

 
17

 
1,116

Total fixed maturity securities, available-for-sale
2

 
16,867

 
310

 
17,179

Equity securities:


 


 


 


Exchange traded funds
2

 

 

 
2

Fixed maturity mutual funds

 
557

 

 
557

Common equity securities
601

 
53

 

 
654

Private equity securities

 

 
313

 
313

Total equity securities
603

 
610

 
313

 
1,526

Other invested assets, current
21

 

 

 
21

Securities lending collateral
314

 
290

 

 
604

Derivatives

 
16

 

 
16

Total assets
$
2,755

 
$
17,783

 
$
623

 
$
21,161

Liabilities:
 
 
 
 
 
 
 
Derivatives
$

 
$
(17
)
 
$

 
$
(17
)
Total liabilities
$

 
$
(17
)
 
$

 
$
(17
)

-19-



 
 
 
 
 
 
 
 
 
 
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, 2019 and 2018 is as follows:
 
Corporate
Securities
 
Residential
Mortgage-
backed
Securities
 
Other 
Securities
 
Equity
Securities
 
Total
Three Months Ended March 31, 2019
 
 
 
 
 
 

 
 
Beginning balance at January 1, 2019
$
287

 
$
6

 
$
17

 
$
313

 
$
623

Total (losses) gains:
 
 
 
 
 
 
 
 
 
Recognized in net income
(1
)
 

 

 
(2
)
 
(3
)
Recognized in accumulated other comprehensive loss
2

 

 

 

 
2

Purchases
33

 

 
2

 
7

 
42

Sales
(1
)
 

 

 
(21
)
 
(22
)
Settlements
(21
)
 

 
(1
)
 

 
(22
)
Transfers into Level III

 

 
3

 

 
3

Transfers out of Level III
(2
)
 

 
(7
)
 

 
(9
)
Ending balance at March 31, 2019
$
297

 
$
6

 
$
14

 
$
297

 
$
614

Change in unrealized losses included in net income related to assets still held at March 31, 2019
$

 
$

 
$

 
$
(2
)
 
$
(2
)
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
 
 
 
 
 

 
 
Beginning balance at January 1, 2018
$
229

 
$
5

 
$
16

 
$
287

 
$
537

Total losses recognized in net income

 

 

 
(239
)
 
(239
)
Purchases
20

 

 

 
256

 
276

Sales
(4
)
 

 

 
(1
)
 
(5
)
Settlements
(6
)
 

 
(1
)
 

 
(7
)
Transfers into Level III
21

 

 

 

 
21

Transfers out of Level III

 

 
(1
)
 

 
(1
)
Ending balance at March 31, 2018
$
260

 
$
5

 
$
14

 
$
303

 
$
582

Change in unrealized losses included in net income related to assets still held at March 31, 2018
$
(1
)
 
$

 
$

 
$

 
$
(1
)
There were no individually material transfers into or out of Level III during the three months ended March 31, 2019 or 2018.
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. As disclosed in Note 3, “Business Acquisitions,” we completed our acquisition of America's 1st Choice on February 15, 2018. The net assets acquired in our acquisition of America's 1st Choice and resulting goodwill and other intangible assets were recorded at fair value primarily using Level III inputs. The majority of America's 1st Choice's assets acquired and liabilities assumed were recorded at their carrying values as of the respective date of acquisition, as their carrying values approximated their fair values due to their short-term nature. The fair values of goodwill and other intangible assets acquired in our acquisition of America's 1st Choice were internally estimated based on the income approach. The income approach estimates fair value based on the present value of the cash flows that the assets could be expected to generate in the future. We developed internal estimates for the expected cash flows and discount rate in the present value calculation. Other than the assets acquired and liabilities assumed in our acquisition of America's 1st Choice described above, there were no material assets or liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2019 or 2018.

-20-



Our valuation policy is determined by members of our treasury and accounting departments. Whenever possible, our policy is to obtain quoted market prices in active markets to estimate fair values for recognition and disclosure purposes. Where quoted market prices in active markets are not available, fair values are estimated using discounted cash flow analyses, broker quotes or other valuation techniques. These techniques are significantly affected by our assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs are not considered in estimating fair values. Our valuation policy is generally to obtain quoted prices for each security from third party pricing services, which are derived through recently reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information. As we are responsible for the determination of fair value, we perform a monthly analysis on the prices received from the pricing services to determine whether the prices are reasonable estimates of fair value. This analysis is performed by our internal treasury personnel who are familiar with our investment portfolios, the pricing services engaged and the valuation techniques and inputs used. Our analysis includes procedures such as a review of month-to-month price fluctuations and price comparisons to secondary pricing services. There were no adjustments to quoted market prices obtained from the pricing services during the three months ended March 31, 2019 or 2018.
In addition to the preceding disclosures on assets recorded at fair value in the consolidated balance sheets, FASB guidance also requires the disclosure of fair values for certain other financial instruments for which it is practicable to estimate fair value, whether or not such values are recognized in our consolidated balance sheets.
Non-financial instruments such as real estate, property and equipment, other current assets, deferred income taxes, intangible assets and certain financial instruments, such as policy liabilities, are excluded from the fair value disclosures. Therefore, the fair value amounts cannot be aggregated to determine our underlying economic value.
The carrying amounts reported in our consolidated balance sheets for cash, accrued investment income, premium receivables, self-funded receivables, other receivables, income taxes receivable/payable, unearned income, accounts payable and accrued expenses, security trades pending payable, securities lending payable and certain other current liabilities approximate fair value because of the short term nature of these items. These assets and liabilities are not listed in the table below.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument that is recorded at its carrying value in our consolidated balance sheets:
Other invested assets, long-term: Other invested assets, long-term include primarily our investments in limited partnerships, joint ventures and other non-controlled corporations, as well as the cash surrender value of corporate-owned life insurance policies. Investments in limited partnerships, joint ventures and other non-controlled corporations are carried at our share in the entities’ undistributed earnings, which approximates fair value. The carrying value of corporate-owned life insurance policies represents the cash surrender value as reported by the respective insurer, which approximates fair value.
Short-term borrowings: The fair value of our short-term borrowings is based on quoted market prices for the same or similar debt, or, if no quoted market prices were available, on the current market interest rates estimated to be available to us for debt of similar terms and remaining maturities.
Long-term debt – commercial paper: The carrying amount for commercial paper approximates fair value, as the underlying instruments have variable interest rates at market value.
Long-term debt – senior unsecured notes and surplus notes: The fair values of our notes are based on quoted market prices in active markets for the same or similar debt, or, if no quoted market prices are available, on the current market observable rates estimated to be available to us for debt of similar terms and remaining maturities.
Long-term debt – convertible debentures: The fair value of our convertible debentures is based on the quoted market price in the active private market in which the convertible debentures trade.

-21-



A summary of the estimated fair values by level of each class of financial instrument that is recorded at its carrying value on our consolidated balance sheets at March 31, 2019 and December 31, 2018 is as follows:
 
Carrying
Value
 
Estimated Fair Value
 
 
Level I
 
Level II
 
Level III
 
Total
March 31, 2019
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Other invested assets, long-term
$
3,710

 
$

 
$

 
$
3,710

 
$
3,710

Liabilities:
 
 
 
 
 
 
 
 
 
Debt:
 
 
 
 
 
 
 
 
 
Short-term borrowings
1,095

 

 
1,095

 

 
1,095

Commercial paper
875

 

 
875

 

 
875

Notes
17,191

 

 
17,752

 

 
17,752

Convertible debentures
181

 

 
1,071

 

 
1,071

 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Other invested assets, long-term
$
3,726

 
$

 
$

 
$
3,726

 
$
3,726

Liabilities:
 
 
 
 
 
 
 
 
 
Debt:
 
 
 
 
 
 
 
 
 
Short-term borrowings
1,145

 

 
1,145

 

 
1,145

Commercial paper
697

 

 
697

 

 
697

Notes
17,178

 

 
17,145

 

 
17,145

Convertible debentures
191

 

 
1,030

 

 
1,030

7.
Income Taxes
During the three months ended March 31, 2019 and 2018, we recognized income tax expense of $394 and $468, respectively, which represent effective tax rates of 20.3% and 26.3%, respectively. The decrease in income tax expense and effective tax rate was primarily due to the suspension of the non-tax deductible Health Insurance Provider Fee, or HIP Fee, for 2019, which resulted in a decrease of income tax expense of $83.
8.
Retirement Benefits
 
 
 
 
 
 
 
 
The components of net periodic benefit credit included in our consolidated statements of income for the three months ended March 31, 2019 and 2018 are as follows:
 
Pension Benefits
 
Other Benefits
 
Three Months Ended 
 March 31
 
Three Months Ended 
 March 31
 
2019
 
2018
 
2019
 
2018
Service cost
$

 
$
2

 
$

 
$

Interest cost
16

 
14

 
4

 
4

Expected return on assets
(34
)
 
(37
)
 
(5
)
 
(6
)
Recognized actuarial loss
4

 
6

 

 
1

Settlement loss
2

 
6

 

 

Amortization of prior service credit

 

 
(3
)
 
(3
)
Net periodic benefit credit
$
(12
)
 
$
(9
)
 
$
(4
)
 
$
(4
)

-22-



For the year ending December 31, 2019, no material contributions are expected to be necessary to meet the Employee Retirement Income Security Act of 1974, as amended, or ERISA, required funding levels; however, we may elect to make discretionary contributions up to the maximum amount deductible for income tax purposes. No contributions were made to our retirement benefit plans during the three months ended March 31, 2019 and 2018.
9. Medical Claims Payable
A reconciliation of the beginning and ending balances for medical claims payable, by segment (see Note 15, “Segment Information”), for the three months ended March 31, 2019 is as follows:
 
Commercial
& Specialty
Business
 
Government
Business
 
Total
Gross medical claims payable, beginning of period
$
2,586

 
$
4,680

 
$
7,266

Ceded medical claims payable, beginning of period
(10
)
 
(24
)
 
(34
)
Net medical claims payable, beginning of period
2,576

 
4,656

 
7,232

Net incurred medical claims:
 
 
 
 
 
Current period
5,695

 
13,099

 
18,794

Prior periods redundancies
(197
)
 
(258
)
 
(455
)
Total net incurred medical claims
5,498

 
12,841

 
18,339

Net payments attributable to:
 
 
 
 
 
Current period medical claims
3,540

 
8,623

 
12,163

Prior periods medical claims
1,766

 
3,648

 
5,414

Total net payments
5,306

 
12,271

 
17,577

Net medical claims payable, end of period
2,768

 
5,226

 
7,994

Ceded medical claims payable, end of period
8

 
26

 
34

Gross medical claims payable, end of period
$
2,776

 
$
5,252

 
$
8,028

At March 31, 2019, the total of net incurred but not reported liabilities plus expected development on reported claims for the Commercial & Specialty Business was $87, $526 and $2,155 for the claim years 2017 and prior, 2018 and 2019, respectively.
At March 31, 2019, the total of net incurred but not reported liabilities plus expected development on reported claims for the Government Business was $51, $699 and $4,476 for the claim years 2017 and prior, 2018 and 2019, respectively.

-23-



A reconciliation of the beginning and ending balances for medical claims payable, by segment (see Note 15, “Segment Information”), for the three months ended March 31, 2018 is as follows:
 
Commercial
& Specialty
Business
 
Government
Business
 
Total
Gross medical claims payable, beginning of period
$
3,383

 
$
4,431

 
$
7,814

Ceded medical claims payable, beginning of period
(78
)
 
(27
)
 
(105
)
Net medical claims payable, beginning of period
3,305

 
4,404

 
7,709

Business combinations and purchase adjustments

 
199

 
199

Net incurred medical claims:
 
 
 
 
 
Current period
5,745

 
11,092

 
16,837

Prior periods redundancies
(335
)
 
(298
)
 
(633
)
Total net incurred medical claims
5,410

 
10,794

 
16,204

Net payments attributable to:
 
 
 
 
 
Current period medical claims
3,739

 
7,465

 
11,204

Prior periods medical claims
2,204

 
3,285

 
5,489

Total net payments
5,943

 
10,750

 
16,693

Net medical claims payable, end of period
2,772

 
4,647

 
7,419

Ceded medical claims payable, end of period
2

 
32

 
34

Gross medical claims payable, end of period
$
2,774

 
$
4,679

 
$
7,453

The reconciliation of net incurred medical claims to benefit expense included in our consolidated statements of income is as follows:
 
 
Three Months Ended 
 March 31
 
 
2019
 
2018