UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended September 30, 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 46204

(Address of principal executive offices) (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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	ANTM	New York Stock Exchange

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 ☒ 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  ☒    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	☒	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  ☒

As of October 16, 2019, 253,563,697 shares of the Registrant’s Common Stock were outstanding.

Anthem, Inc.

Quarterly Report on Form 10-Q

For the Period Ended September 30, 2019

Table of Contents

		Page
PART I. FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
	Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018	2
	Consolidated Statements of Income (Unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018	3
	Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018	4
	Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2019 and 2018	5
	Consolidated Statements of Shareholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2019 and 2018	6
	Notes to Consolidated Financial Statements (Unaudited)	8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	41
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	57
ITEM 4.	CONTROLS AND PROCEDURES	57
PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	57
ITEM 1A.	RISK FACTORS	57
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	58
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	58
ITEM 4.	MINE SAFETY DISCLOSURES	58
ITEM 5.	OTHER INFORMATION	58
ITEM 6.	EXHIBITS	59
SIGNATURES		60

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Anthem, Inc.

Consolidated Balance Sheets

	September 30, 2019			December 31, 2018
(In millions, except share data)	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	4,190		$	3,934
Fixed maturity securities, current (amortized cost of $19,267 and $16,894)	19,960			16,692
Equity securities, current	2,300			1,493
Other invested assets, current	10			21
Accrued investment income	168			162
Premium receivables	4,782			4,465
Self-funded receivables	2,555			2,278
Other receivables	2,870			2,558
Income taxes receivable	91			10
Securities lending collateral	465			604
Other current assets	2,113			2,104
Total current assets	39,504			34,321
Long-term investments:
Fixed maturity securities (amortized cost of $500 and $486)	518			487
Equity securities	29			33
Other invested assets	3,914			3,726
Property and equipment, net	2,921			2,735
Goodwill	20,500			20,504
Other intangible assets	8,756			9,007
Other noncurrent assets	1,667			758
Total assets	$	77,809		$	71,571
Liabilities and shareholders’ equity
Liabilities
Current liabilities:
Policy liabilities:
Medical claims payable	$	8,977		$	7,454
Reserves for future policy benefits	77			75
Other policyholder liabilities	2,503			2,590
Total policy liabilities	11,557			10,119
Unearned income	948			902
Accounts payable and accrued expenses	4,445			4,959
Security trades pending payable	542			197
Securities lending payable	465			604
Short-term borrowings	710			1,145
Current portion of long-term debt	700			849
Other current liabilities	3,867			3,190
Total current liabilities	23,234			21,965
Long-term debt, less current portion	18,820			17,217
Reserves for future policy benefits, noncurrent	661			706
Deferred tax liabilities, net	2,140			1,960
Other noncurrent liabilities	1,622			1,182
Total liabilities	46,477			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 – 253,780,229 and 257,395,577	3			3
Additional paid-in capital	9,524			9,536
Retained earnings	22,104			19,988
Accumulated other comprehensive loss	(299		)	(986		)
Total shareholders’ equity	31,332			28,541
Total liabilities and shareholders’ equity	$	77,809		$	71,571

See accompanying notes.

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Anthem, Inc.

Consolidated Statements of Income

(Unaudited) 

	Three Months Ended   September 30						Nine Months Ended   September 30
(In millions, except per share data)	2019			2018			2019			2018
Revenues
Premiums	$	23,793		$	21,451		$	70,137		$	63,602
Administrative fees and other revenue	2,651			1,529			5,872			4,435
Total operating revenue	26,444			22,980			76,009			68,037
Net investment income	242			250			737			708
Net realized gains on financial instruments	1			27			90			5
Other-than-temporary impairment losses on investments:
Total other-than-temporary impairment losses on investments	(14		)	(8		)	(36		)	(20		)
Portion of other-than-temporary impairment losses recognized in other comprehensive income	1			2			6			2
Other-than-temporary impairment losses recognized in income	(13		)	(6		)	(30		)	(18		)
Total revenues	26,674			23,251			76,806			68,732
Expenses
Benefit expense	20,753			18,185			60,403			52,959
Cost of products sold	745			—			843			—
Selling, general and administrative expense	3,418			3,546			9,862			10,402
Interest expense	185			188			556			564
Amortization of other intangible assets	84			91			256			265
(Gain) loss on extinguishment of debt	—			(1		)	(1		)	17
Total expenses	25,185			22,009			71,919			64,207
Income before income tax expense	1,489			1,242			4,887			4,525
Income tax expense	306			282			1,014			1,200
Net income	$	1,183		$	960		$	3,873		$	3,325
Net income per share
Basic	$	4.64		$	3.70		$	15.11		$	12.89
Diluted	$	4.55		$	3.62		$	14.83		$	12.58
Dividends per share	$	0.80		$	0.75		$	2.40		$	2.25

See accompanying notes.

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Anthem, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited) 

	Three Months Ended   September 30						Nine Months Ended   September 30
(In millions)	2019			2018			2019			2018
Net income	$	1,183		$	960		$	3,873		$	3,325
Other comprehensive income (loss), net of tax:
Change in net unrealized gains/losses on investments	116			(36		)	711			(353		)
Change in non-credit component of other-than-temporary impairment losses on investments	(1		)	(2		)	(2		)	(2		)
Change in net unrealized losses on cash flow hedges	(34		)	2			(31		)	34
Change in net periodic pension and postretirement costs	4			7			10			22
Foreign currency translation adjustments	(1		)	—			(1		)	—
Other comprehensive income (loss)	84			(29		)	687			(299		)
Total comprehensive income	$	1,267		$	931		$	4,560		$	3,026

See accompanying notes.

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Anthem, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended   September 30
(In millions)	2019			2018
Operating activities
Net income	$	3,873		$	3,325
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized gains on financial instruments	(90		)	(5		)
Other-than-temporary impairment losses recognized in income	30			18
(Gain) Loss on extinguishment of debt	(1		)	17
Loss on disposal of assets	1			2
Deferred income taxes	(29		)	141
Amortization, net of accretion	778			752
Depreciation expense	109			92
Share-based compensation	226			135
Changes in operating assets and liabilities:
Receivables, net	(880		)	(823		)
Other invested assets	(30		)	(17		)
Other assets	(280		)	(734		)
Policy liabilities	1,394			(556		)
Unearned income	46			(42		)
Accounts payable and accrued expenses	(931		)	756
Other liabilities	675			190
Income taxes	(81		)	273
Other, net	(76		)	(160		)
Net cash provided by operating activities	4,734			3,364
Investing activities
Purchases of fixed maturity securities	(7,616		)	(6,790		)
Proceeds from fixed maturity securities:
Sales	3,919			4,971
Maturities, calls and redemptions	1,583			1,442
Purchases of equity securities	(9,408		)	(812		)
Proceeds from sales of equity securities	8,671			2,119
Purchases of other invested assets	(286		)	(324		)
Proceeds from sales of other invested assets	242			251
Changes in securities lending collateral	139			(286		)
Purchases of subsidiaries, net of cash acquired	—			(1,732		)
Purchases of property and equipment	(726		)	(888		)
Other, net	(33		)	17
Net cash used in investing activities	(3,515		)	(2,032		)
Financing activities
Net repayments of commercial paper borrowings	(197		)	(54		)
Proceeds from long-term borrowings	2,473			835
Repayments of long-term borrowings	(923		)	(1,393		)
Proceeds from short-term borrowings	6,480			5,300
Repayments of short-term borrowings	(6,915		)	(5,305		)
Changes in securities lending payable	(139		)	287
Changes in bank overdrafts	250			97
Proceeds from issuance of common stock under Equity Units stock purchase contracts	—			1,250
Repurchase and retirement of common stock	(1,396		)	(1,192		)
Change in collateral and settlements of debt-related derivatives	(34		)	22
Cash dividends	(616		)	(583		)
Proceeds from issuance of common stock under employee stock plans	137			133
Taxes paid through withholding of common stock under employee stock plans	(82		)	(77		)
Net cash used in financing activities	(962		)	(680		)
Effect of foreign exchange rates on cash and cash equivalents	(1		)	(1		)
Change in cash and cash equivalents	256			651
Cash and cash equivalents at beginning of period	3,934			3,609
Cash and cash equivalents at end of period	$	4,190		$	4,260

See accompanying notes.

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Anthem, Inc.

Consolidated Statements of Shareholders’ Equity

(Unaudited)

	Nine Months Ended September 30, 2019
	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
Net income	—		—		—			1,139			—			1,139
Other comprehensive income	—		—		—			—			240			240
Repurchase and retirement of common stock	(1.7	)	—		(70		)	(388		)	—			(458		)
Dividends and dividend equivalents	—		—		—			(208		)	—			(208		)
Issuance of common stock under employee stock plans, net of related tax benefits	0.2		—		91			—			—			91
Convertible debenture repurchases and conversions	—		—		(9		)	—			—			(9		)
June 30, 2019	255.9		3		9,494			21,679			(383		)	30,793
Net income	—		—		—			1,183			—			1,183
Other comprehensive income	—		—		—			—			84			84
Repurchase and retirement of common stock	(2.4	)	—		(90		)	(554		)	—			(644		)
Dividends and dividend equivalents	—		—		—			(204		)	—			(204		)
Issuance of common stock under employee stock plans, net of related tax benefits	0.3		—		120			—			—			120
September 30, 2019	253.8		$	3	$	9,524		$	22,104		$	(299	)	$	31,332

See accompanying notes.

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Anthem, Inc.

Consolidated Statements of Shareholders’ Equity (continued)

(Unaudited)

	Nine Months Ended September 30, 2018
	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, 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
Net income	—		—		—			1,053			—			1,053
Other comprehensive loss	—		—		—			—			(61		)	(61		)
Issuance of common stock under Equity Units stock purchase contracts	6.0		—		1,250			—			—			1,250
Repurchase and retirement of common stock	(1.7	)	—		(60		)	(341		)	—			(401		)
Dividends and dividend equivalents	—		—		—			(197		)	—			(197		)
Issuance of common stock under employee stock plans, net of related tax benefits	0.3		—		69			—			—			69
June 30, 2018	260.1		3		9,748			19,756			(782		)	28,725
Net income	—		—		—			960			—			960
Other comprehensive loss	—		—		—			—			(29		)	(29		)
Repurchase and retirement of common stock	(1.6	)	—		(58		)	(339		)	—			(397		)
Dividends and dividend equivalents	—		—		—			(195		)	—			(195		)
Issuance of common stock under employee stock plans, net of related tax benefits	0.4		—		95			—			—			95
Convertible debenture repurchases and conversions	—		—		(65		)	—			—			(65		)
September 30, 2018	258.9		$	3	$	9,720		$	20,182		$	(811	)	$	29,094

See accompanying notes.

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Anthem, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 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 September 30, 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 plans; traditional indemnity plans and other hybrid plans, including Consumer-Driven Health Plans, 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 our Federal Health Products & Services business.

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 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. Also, beginning in the second quarter of 2019, we provide pharmacy benefits management services through our IngenioRx subsidiary. 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. For additional information on prior year reclassifications, see Note 15, “Segment Information.” In the opinion of management, all adjustments, including normal recurring adjustments, necessary for a fair statement of the consolidated financial statements as of and for the three and nine months ended September 30, 2019 and 2018 have been recorded. The results of operations for the three and nine months ended September 30, 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

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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.

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 $242 and $222 at September 30, 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, any amounts probable of being owed under any residual value guarantees and discount rate determined at lease commencement. As our leases do not generally 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, the 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 as of September 30, 2019. 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. Beginning in the second quarter of 2019, administrative fees and other revenues also include unaffiliated revenue from services performed by IngenioRx. 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 September 30, 2019. For the three and nine months ended September 30, 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.

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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 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 consolidated 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 entirety of ASU 2018-13 or only the provisions that eliminate or modify disclosure 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 allowed 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 sheets. The adoption of ASU 2018-02 did not have any impact on our consolidated 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 ASC 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 the old guidance, the premium was 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

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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 consolidated results of operations, cash flows or 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 versus 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 represent 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, or on our consolidated results of operations, cash flows or 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 Flows, 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 consolidated results of operations or 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 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 sheets. 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 May 2019, the FASB issued Accounting Standards Update No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief, or ASU 2019-05. In April 2019, the FASB issued Accounting Standards Update No. 2019-04, Codification Improvements to Topic 326, Financial Instruments -

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Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. In November 2018, the FASB issued Accounting Standards Update No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. These updates provide an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost and 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 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 requires a cumulative-effect adjustment to the statement of financial position to the opening balance of retained earnings at the date of adoption and a prospective transition approach for debt securities for which an other-than-temporary impairment had been recognized before the adoption date. The effect of a prospective transition approach is to maintain the same amortized cost basis before and after the date of adoption. ASU 2016-13 is effective for us on January 1, 2020, with early adoption permitted. We are currently gathering data and evaluating the effects the adoption of ASU 2016-13 will have on our consolidated financial statements.

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. While we are continuing to evaluate the effects the adoption of ASU 2018-15 will have on our consolidated financial position, results of operations and cash flows; we intend to apply the prospective method of adoption.

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.

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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.

3. Business Acquisitions

Pending Acquisition of Beacon

On June 6, 2019, we announced our entrance into an agreement to acquire Beacon Health Options, Inc., or Beacon, the largest independently held behavioral health organization in the country. Beacon serves approximately forty million individuals across all fifty states. This acquisition aligns with our strategy to diversify into health services and deliver both integrated solutions and care delivery models that personalize care for people with complex and chronic conditions. The acquisition is expected to close late in the fourth quarter of 2019 and is subject to standard closing conditions and customary approvals.

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. Upon the conclusion of our one-year measurement period, the excess of the consideration transferred over the fair value of the net assets acquired resulted in goodwill of $1,029, of which $333 was tax deductible. All of the goodwill was allocated to our Government Business segment. 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.

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 and nine months ended September 30, 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 declines in fair value may occur and additional material other-than-temporary impairment, or OTTI, losses on investments may be recorded in future periods.

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A summary of current and long-term fixed maturity securities, available-for-sale, at September 30, 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
September 30, 2019
Fixed maturity securities:
United States Government securities	$	487	$	10	$	—	$	—	$	497	$	—
Government sponsored securities	125		6		—		—		131		—
States, municipalities and political subdivisions	4,469