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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2020
OR
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☐ | 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)
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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:
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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:
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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 21, 2020, 248,704,310 shares of the Registrant’s Common Stock were outstanding.
Anthem, Inc.
Quarterly Report on Form 10-Q
For the Period Ended September 30, 2020
Table of Contents
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PART I. FINANCIAL INFORMATION | |
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ITEM 1. | | |
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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
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| September 30, 2020 | | December 31, 2019 |
(In millions, except share data) | (Unaudited) | | |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 3,984 | | | $ | 4,937 | |
Fixed maturity securities (amortized cost of $21,867 and $19,021; allowance for credit losses of $12 and $0) | 22,707 | | | 19,676 | |
Equity securities | 3,075 | | | 1,009 | |
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Premium receivables | 5,343 | | | 5,014 | |
Self-funded receivables | 2,985 | | | 2,570 | |
Other receivables | 3,209 | | | 2,807 | |
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Other current assets | 4,147 | | | 3,020 | |
Total current assets | 45,450 | | | 39,033 | |
Long-term investments: | | | |
Fixed maturity securities (amortized cost of $530 and $487; allowance for credit losses of $0 and $0) | 558 | | | 505 | |
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Other invested assets | 4,170 | | | 4,258 | |
Property and equipment, net | 3,363 | | | 3,133 | |
Goodwill | 21,687 | | | 20,500 | |
Other intangible assets | 9,497 | | | 8,674 | |
Other noncurrent assets | 1,849 | | | 1,350 | |
Total assets | $ | 86,574 | | | $ | 77,453 | |
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Liabilities and shareholders’ equity | | | |
Liabilities | | | |
Current liabilities: | | | |
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Medical claims payable | $ | 10,252 | | | $ | 8,842 | |
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Other policyholder liabilities | 3,804 | | | 3,050 | |
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Unearned income | 961 | | | 1,017 | |
Accounts payable and accrued expenses | 5,550 | | | 4,198 | |
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Short-term borrowings | 150 | | | 700 | |
Current portion of long-term debt | 1,599 | | | 1,598 | |
Other current liabilities | 6,245 | | | 4,127 | |
Total current liabilities | 28,561 | | | 23,532 | |
Long-term debt, less current portion | 19,094 | | | 17,787 | |
Reserves for future policy benefits | 784 | | | 759 | |
Deferred tax liabilities, net | 2,375 | | | 2,227 | |
Other noncurrent liabilities | 1,839 | | | 1,420 | |
Total liabilities | 52,653 | | | 45,725 | |
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Commitments and contingencies – Note 12 | | | |
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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 – 249,444,426 and 252,922,161 | 3 | | | 3 | |
Additional paid-in capital | 9,352 | | | 9,448 | |
Retained earnings | 24,678 | | | 22,573 | |
Accumulated other comprehensive loss | (112) | | | (296) | |
Total shareholders’ equity | 33,921 | | | 31,728 | |
Total liabilities and shareholders’ equity | $ | 86,574 | | | $ | 77,453 | |
See accompanying notes.
Anthem, Inc.
Consolidated Statements of Income
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(In millions, except per share data) | 2020 | | 2019 | | 2020 | | 2019 |
Revenues | | | | | | | |
Premiums | $ | 26,392 | | | $ | 23,793 | | | $ | 77,001 | | | $ | 70,137 | |
Product revenue | 2,598 | | | 1,116 | | | 7,485 | | | 1,260 | |
Administrative fees and other revenue | 1,659 | | | 1,535 | | | 4,789 | | | 4,612 | |
Total operating revenue | 30,649 | | | 26,444 | | | 89,275 | | | 76,009 | |
Net investment income | 280 | | | 242 | | | 591 | | | 737 | |
Net realized gains on financial instruments | 247 | | | 1 | | | 241 | | | 90 | |
Impairment losses on investments: | | | | | | | |
Total impairment losses on investments | (24) | | | (14) | | | (119) | | | (36) | |
Portion of impairment losses recognized in other comprehensive income | 6 | | | 1 | | | 55 | | | 6 | |
Impairment losses recognized in income | (18) | | | (13) | | | (64) | | | (30) | |
Total revenues | 31,158 | | | 26,674 | | | 90,043 | | | 76,806 | |
Expenses | | | | | | | |
Benefit expense | 22,921 | | | 20,753 | | | 63,957 | | | 60,403 | |
Cost of products sold | 2,222 | | | 745 | | | 6,431 | | | 843 | |
Selling, general and administrative expense | 5,305 | | | 3,418 | | | 13,132 | | | 9,862 | |
Interest expense | 198 | | | 185 | | | 593 | | | 556 | |
Amortization of other intangible assets | 93 | | | 84 | | | 269 | | | 256 | |
Loss (gain) on extinguishment of debt | 30 | | | — | | | 34 | | | (1) | |
| | | | | | | |
Total expenses | 30,769 | | | 25,185 | | | 84,416 | | | 71,919 | |
Income before income tax expense | 389 | | | 1,489 | | | 5,627 | | | 4,887 | |
Income tax expense | 167 | | | 306 | | | 1,606 | | | 1,014 | |
| | | | | | | |
| | | | | | | |
Net income | $ | 222 | | | $ | 1,183 | | | $ | 4,021 | | | $ | 3,873 | |
Net income per share | | | | | | | |
| | | | | | | |
| | | | | | | |
Basic | $ | 0.88 | | | $ | 4.64 | | | $ | 15.96 | | | $ | 15.11 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Diluted | $ | 0.87 | | | $ | 4.55 | | | $ | 15.75 | | | $ | 14.83 | |
Dividends per share | $ | 0.95 | | | $ | 0.80 | | | $ | 2.85 | | | $ | 2.40 | |
See accompanying notes.
Anthem, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(In millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Net income | | $ | 222 | | | $ | 1,183 | | | $ | 4,021 | | | $ | 3,873 | |
Other comprehensive income, net of tax: | | | | | | | | |
Change in net unrealized losses/gains on investments | | 113 | | | 116 | | | 154 | | | 711 | |
Change in non-credit component of impairment losses on investments | | 16 | | | (1) | | | (6) | | | (2) | |
Change in net unrealized gains/losses on cash flow hedges | | 4 | | | (34) | | | 10 | | | (31) | |
Change in net periodic pension and postretirement costs | | 8 | | | 4 | | | 25 | | | 10 | |
Foreign currency translation adjustments | | 1 | | | (1) | | | 1 | | | (1) | |
Other comprehensive income | | 142 | | | 84 | | | 184 | | | 687 | |
Total comprehensive income | | $ | 364 | | | $ | 1,267 | | | $ | 4,205 | | | $ | 4,560 | |
See accompanying notes.
Anthem, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | | | | |
| Nine Months Ended September 30 |
(In millions) | 2020 | | 2019 |
Operating activities | | | |
Net income | $ | 4,021 | | | $ | 3,873 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Net realized gains on financial instruments | (241) | | | (90) | |
Depreciation and amortization | 864 | | | 887 | |
| | | |
| | | |
| | | |
| | | |
Deferred income taxes | (102) | | | (29) | |
| | | |
| | | |
Impairment of property and equipment | 195 | | | — | |
Share-based compensation | 214 | | | 226 | |
| | | |
Changes in operating assets and liabilities: | | | |
Receivables, net | (845) | | | (880) | |
Other invested assets | 6 | | | (30) | |
Other assets | (988) | | | (280) | |
Policy liabilities | 1,624 | | | 1,394 | |
Unearned income | (95) | | | 46 | |
Accounts payable and other liabilities | 1,953 | | | (256) | |
| | | |
| | | |
Income taxes | 104 | | | (81) | |
Other, net | 165 | | | (46) | |
Net cash provided by operating activities | 6,875 | | | 4,734 | |
Investing activities | | | |
| | | |
| | | |
| | | |
Purchases of investments | (16,708) | | | (17,310) | |
Proceeds from sale of investments | 8,739 | | | 12,832 | |
Maturities, calls and redemptions from investments | 3,763 | | | 1,583 | |
| | | |
| | | |
| | | |
| | | |
| | | |
Changes in securities lending collateral | (668) | | | 139 | |
Purchases of subsidiaries, net of cash acquired | (1,973) | | | — | |
| | | |
Purchases of property and equipment | (743) | | | (726) | |
| | | |
Other, net | (39) | | | (33) | |
Net cash used in investing activities | (7,629) | | | (3,515) | |
Financing activities | | | |
Net repayments of commercial paper borrowings | (400) | | | (197) | |
Proceeds from long-term borrowings | 2,485 | | | 2,473 | |
Repayments of long-term borrowings | (964) | | | (923) | |
Proceeds from short-term borrowings | 970 | | | 6,480 | |
Repayments of short-term borrowings | (1,520) | | | (6,915) | |
Changes in securities lending payable | 668 | | | (139) | |
| | | |
| | | |
| | | |
| | | |
Repurchase and retirement of common stock | (1,342) | | | (1,396) | |
| | | |
Cash dividends | (720) | | | (616) | |
Proceeds from issuance of common stock under employee stock plans | 112 | | | 137 | |
Taxes paid through withholding of common stock under employee stock plans | (112) | | | (82) | |
| | | |
Other, net | 623 | | | 216 | |
Net cash used in financing activities | (200) | | | (962) | |
Effect of foreign exchange rates on cash and cash equivalents | 1 | | | (1) | |
Change in cash and cash equivalents | (953) | | | 256 | |
Cash and cash equivalents at beginning of period | 4,937 | | | 3,934 | |
Cash and cash equivalents at end of period | $ | 3,984 | | | $ | 4,190 | |
See accompanying notes.
Anthem, Inc.
Consolidated Statements of Shareholders’ Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity |
(In millions) | Number of Shares | | Par Value | |
December 31, 2019 (audited) | 252.9 | | | $ | 3 | | | $ | 9,448 | | | $ | 22,573 | | | $ | (296) | | | $ | 31,728 | |
Adoption of Accounting Standards Update No. 2016-13 (Note 2) | — | | | — | | | — | | | (35) | | | — | | | (35) | |
January 1, 2020 | 252.9 | | | 3 | | | 9,448 | | | 22,538 | | | (296) | | | 31,693 | |
Net income | — | | | — | | | — | | | 1,523 | | | — | | | 1,523 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (712) | | | (712) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Repurchase and retirement of common stock | (1.9) | | | — | | | (71) | | | (458) | | | — | | | (529) | |
Dividends and dividend equivalents | — | | | — | | | — | | | (243) | | | — | | | (243) | |
Issuance of common stock under employee stock plans, net of related tax benefits | 1.0 | | | — | | | 3 | | | — | | | — | | | 3 | |
Convertible debenture repurchases and conversions | — | | | — | | | (42) | | | — | | | — | | | (42) | |
March 31, 2020 | 252.0 | | | 3 | | | 9,338 | | | 23,360 | | | (1,008) | | | 31,693 | |
Net income | — | | | — | | | — | | | 2,276 | | | — | | | 2,276 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 754 | | | 754 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Repurchase and retirement of common stock | (0.2) | | | — | | | (9) | | | (46) | | | — | | | (55) | |
Dividends and dividend equivalents | — | | | — | | | — | | | (244) | | | — | | | (244) | |
Issuance of common stock under employee stock plans, net of related tax benefits | 0.3 | | | — | | | 113 | | | — | | | — | | | 113 | |
| | | | | | | | | | | |
Convertible debenture repurchases and conversions | — | | | — | | | (82) | | | — | | | — | | | (82) | |
June 30, 2020 | 252.1 | | | 3 | | | 9,360 | | | 25,346 | | | (254) | | | 34,455 | |
Net income | — | | | — | | | — | | | 222 | | | — | | | 222 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 142 | | | 142 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Repurchase and retirement of common stock | (2.9) | | | — | | | (106) | | | (652) | | | — | | | (758) | |
Dividends and dividend equivalents | — | | | — | | | — | | | (238) | | | — | | | (238) | |
Issuance of common stock under employee stock plans, net of related tax benefits | 0.2 | | | — | | | 98 | | | — | | | — | | | 98 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
September 30, 2020 | 249.4 | | | $ | 3 | | | $ | 9,352 | | | $ | 24,678 | | | $ | (112) | | | $ | 33,921 | |
See accompanying notes.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Anthem, Inc. Consolidated Statements of Shareholders’ Equity (continued) (Unaudited) |
| | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | 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 | — | | | — | | | — | | | 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 loss | — | | | — | | | — | | | — | | | 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.
Anthem, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2020
(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 43 million medical members through our affiliated health plans as of September 30, 2020. 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 pharmacy benefits management, or PBM, dental, vision, life and disability insurance benefits, radiology benefit management and analytics-driven personal healthcare. We also provide services to the federal government in connection with our Federal Health Products & Services business, which administers the Federal Employees Health Benefits, or FEHB, 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 as well as other strategic partners. Through our subsidiaries, we also serve customers in numerous states across the country as AIM Specialty Health, Amerigroup, Aspire Health, Beacon, CareMore, Freedom Health, HealthLink, HealthSun, Optimum HealthCare, Simply Healthcare, and/or Unicare. Also, in the second quarter of 2019, we began providing PBM 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 2019 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. For additional information on prior year reclassifications, see Note 16, “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, 2020 and 2019 have been recorded. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2020, 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, 2019 included in our 2019 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 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 we have cash and cash equivalents on deposit to meet certain regulatory requirements. These amounts totaled $179 and $215 at September 30, 2020 and December 31, 2019, respectively, and are included in the cash and cash equivalents line on our consolidated balance sheets.
Investments: Prior to 2020, our fixed maturities were evaluated for other-than-temporary impairment where credit-related impairments were presented within the other-than-temporary impairment losses recognized in our consolidated statements of income with an adjustment to the security’s amortized cost basis. Effective January 1, 2020, if a fixed maturity security is in an unrealized loss position and we have the intent to sell the fixed maturity security, or it is more likely than not that we will have to sell the fixed maturity security before recovery of its amortized cost basis, we write down the fixed maturity security’s cost basis to fair value and record an impairment loss in our consolidated statements of income. For impaired fixed maturity securities that we do not intend to sell or if it is more likely than not that we will not have to sell such securities, but we expect that we will not fully recover the amortized cost basis, we recognize the credit component of the impairment as an allowance for credit loss in our consolidated balance sheets and record an impairment loss in our consolidated statements of income. The non-credit component of the impairment is recognized in accumulated other comprehensive loss. Furthermore, unrealized losses entirely caused by non-credit-related factors related to fixed maturity securities for which we expect to fully recover the amortized cost basis continue to be recognized in accumulated other comprehensive loss.
The credit component of an impairment is determined primarily by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed maturity security. The net present value is calculated by discounting our best estimate of projected future cash flows at the effective interest rate implicit in the fixed maturity security at the date of purchase. For mortgage-backed and asset-backed securities, cash flow estimates are based on assumptions regarding the underlying collateral, including prepayment speeds, vintage, type of underlying asset, geographic concentrations, default rates, recoveries and changes in value. For all other securities, cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings and estimates regarding timing and amount of recoveries associated with a default.
For asset-backed securities included in fixed maturity securities, we recognize income using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The net investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied since the purchase date of the securities. Such adjustments are reported within net investment income.
In accordance with the Financial Accounting Standards Board, or FASB, guidance, the changes in fair value of our marketable equity securities are recognized in our results of operations within net realized gains and losses on financial instruments.
We have corporate-owned life insurance policies on certain participants in our deferred compensation plans and other members of management. The cash surrender value of the corporate-owned life insurance policies is reported under the caption “Other invested assets” in our consolidated balance sheets.
We use the equity method of accounting for investments in companies in which our ownership interest may enable us to influence the operating or financial decisions of the investee company. Our proportionate share of equity in net income of these unconsolidated affiliates is reported within net investment income. The equity method investments are reported under the caption “Other invested assets” in our consolidated balance sheets.
Investment income is recorded when earned. 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.
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. Under FASB guidance related to accounting for transfers and servicing of financial assets and extinguishments of liabilities, we recognize the collateral as an asset, which is reported under the caption “Other current assets” in our consolidated balance sheets, and we record a corresponding liability for the obligation to return the collateral to the borrower, which is reported under the caption “Other current liabilities” in our consolidated balance sheets. The securities on loan are reported in the applicable investment category on our consolidated balance sheets. Unrealized gains or losses on securities lending collateral are included in accumulated other comprehensive loss as a separate component of shareholders’ equity. The market value of loaned securities and that of the collateral pledged can fluctuate in non-synchronized fashions. To the extent the loaned securities’ value appreciates faster or depreciates slower than the value of the collateral pledged, we are exposed to the risk of the shortfall. As a primary mitigating mechanism, the loaned securities and collateral pledged are marked to market on a daily basis and the shortfall, if any, is collected accordingly. Secondarily, the collateral level is set at 102% of the value of the loaned securities, which provides a cushion before any shortfall arises. The investment of the cash collateral is subject to market risk, which is managed by limiting the investments to higher quality and shorter duration instruments.
Receivables: Receivables are reported net of amounts for expected credit losses. The allowance for doubtful accounts is based on historical collection trends, future forecasts and our judgment regarding the ability to collect specific accounts.
Premium receivables include the uncollected amounts from insured groups, individuals and government programs. Premium receivables are reported net of an allowance for doubtful accounts of $250 and $237 at September 30, 2020 and December 31, 2019, respectively.
Self-funded receivables include administrative fees, claims and other amounts due from self-funded customers. Self-funded receivables are reported net of an allowance for doubtful accounts of $55 and $46 at September 30, 2020 and December 31, 2019, respectively.
Other receivables include pharmacy rebates, provider advances, claims recoveries, reinsurance receivables, proceeds due from brokers on investment trades, other government receivables and other miscellaneous amounts due to us. These receivables are reported net of an allowance for doubtful accounts of $390 and $242 at September 30, 2020 and December 31, 2019, respectively.
Revenue Recognition: 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, 2020. For the three and nine months ended September 30, 2020, 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 November 2019, the FASB issued Accounting Standards Update No. 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. In May 2019, the FASB issued Accounting Standards Update No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. In April 2019, the FASB issued Accounting Standards Update No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - 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 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 opening balance of retained earnings on the balance sheet 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. We adopted ASU 2016-13 on January 1, 2020, and recognized a cumulative-effect adjustment of $35 to our opening retained earnings for credit related allowances on receivables. The adoption did not have an impact on our consolidated statements of income or cash flows.
In August 2018, the FASB issued Accounting Standards Update No. 2018-15, 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. We adopted ASU 2018-15 on January 1, 2020 using a prospective approach for all implementation costs incurred after the date of adoption, and the adoption did not have an impact on our consolidated financial position, results of operations 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 adopted the new disclosure requirements on January 1, 2020, on a prospective basis.
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 required 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. We adopted ASU 2017-04 on January 1, 2020, and the adoption did not have an impact on our consolidated financial position, results of operations or cash flows.
Recent Accounting Guidance Not Yet Adopted: In October 2020, the FASB issued Accounting Standards Update No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs, or ASU 2020-08. The amendments clarify when an entity should assess whether a callable debt security is within the scope of accounting guidance, which impacts the amortization period for nonrefundable fees and other costs. ASU 2020-08 is effective for interim and annual reporting periods beginning after December 15, 2020, with early adoption permitted. Upon adoption, the amendments are to be applied on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. We are currently evaluating the effects the adoption of ASU 2020-08 will have on our consolidated financial statements.
In August 2020, the FASB issued Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, or ASU 2020-06. The amendments eliminate two of the three accounting models that require separate accounting for convertible features of debt securities, simplify the contract settlement assessment for equity classification, require the use of the if-converted method for all convertible instruments in the diluted earnings per share calculation and expand disclosure requirements. The amendments are effective for our annual and interim reporting periods beginning after December 15, 2021, with early adoption permitted for reporting periods beginning after December 15, 2020. The guidance can be applied on a full retrospective basis to all periods presented or a modified retrospective basis with a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption. We are currently evaluating the effects the adoption of ASU 2020-06 will have on our consolidated financial statements and disclosures.
In March 2020, the FASB issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, or ASU 2020-04. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate, or LIBOR, or another reference rate expected to
be discontinued because of the reference rate reform. The provisions must be applied at a Topic, Subtopic, or Industry Subtopic level for all transactions other than derivatives, which may be applied at a hedging relationship level. The provisions within ASU 2020-04 are available until December 31, 2022, when the reference rate replacement activity is expected to have been completed. We are currently evaluating the provisions within ASU 2020-04.
In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, or ASU 2019-12. The amendments in ASU 2019-12 remove certain exceptions to the general principles in Accounting Standards Codification Topic 740. The amendments also clarify and amend existing guidance to improve consistent application. The amendments are effective for our annual reporting periods beginning after December 15, 2020, with early adoption permitted. The transition method (retrospective, modified retrospective, or prospective basis) related to the amendments depends on the applicable guidance, and all amendments for which there is no transition guidance specified are to be applied on a prospective basis. We are currently evaluating the effects the adoption of ASU 2019-12 will have on our consolidated financial statements.
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, 2021. 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.
There were no other new accounting pronouncements that were issued or became effective since the issuance of our 2019 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 Acquisition
Beacon Health Options, Inc.
On February 28, 2020, we completed our acquisition of Beacon Health Options, Inc., or Beacon, the largest independently held behavioral health organization in the country. At the time of acquisition, Beacon served more than thirty-four 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.
In accordance with FASB accounting guidance for business combinations, the consideration transferred was allocated to the preliminary fair value of Beacon’s assets acquired and liabilities assumed, including identifiable intangible assets. The excess of the consideration transferred over the preliminary fair value of net assets acquired resulted in preliminary goodwill of $1,067 at September 30, 2020, all of which was allocated to our Other segment. Preliminary goodwill recognized from the
acquisition of Beacon primarily relates to the future economic benefits arising from the assets acquired and is consistent with our stated intentions and strategy. As of September 30, 2020, the initial accounting for the acquisition has not been finalized. Any additional payments or receipts of cash resulting from contractual purchase price adjustments or any subsequent adjustments made to the assets acquired or liabilities assumed during the measurement period will continue to be recorded as an adjustment to goodwill.
The preliminary fair value of the net assets acquired from Beacon includes $752 of other intangible assets at September 30, 2020, which primarily consist of finite-lived customer relationships with amortization periods ranging from 9 to 21 years. The results of operations of Beacon are included in our consolidated financial statements within our Other segment for the period following February 28, 2020. The pro forma effects of this acquisition for prior periods were not material to our consolidated results of operations.
4. Business Optimization Initiatives
During the third quarter of 2020, management introduced enterprise-wide initiatives to optimize our business and, as a result, we recorded a charge of $607 in selling, general and administrative expenses. We believe these initiatives represent the next step forward in our progression towards becoming a more agile organization, including process automation and a reduction in our office space footprint. This charge includes $224 for impairment and abandonment of operating-lease related right-of-use assets, $195 for impairment and abandonment of property and equipment and $188 for future payments for employee termination costs in connection with the repositioning and reskilling of our workforce and contract exit costs. We expect most of the employee termination and contract exit costs to be paid by the end of 2021.
The charges recognized in the Commercial & Specialty Business, Government Business, IngenioRx and Other segments (see Note 16, “Segment Information”) in the third quarter of 2020, were $299, $183, $3 and $122, respectively.
5. Investments
Fixed Maturity Securities
We evaluate our available-for-sale fixed maturity securities for declines based on qualitative and quantitative factors. We have established an allowance for credit loss and recorded credit loss expense as a reflection of our expected impairment losses. 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 impairment losses on investments may be recorded in future periods.
A summary of current and long-term fixed maturity securities, available-for-sale, at September 30, 2020 and December 31, 2019 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost or Amortized Cost | | | | | | | | | | Non-Credit Component of Impairment Recognized in Accumulated Other Comprehensive Loss |
| | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance For Credit Losses | | Estimated Fair Value | |
| | | Less than 12 Months | | 12 Months or Greater | | | |
September 30, 2020 | | | | | | | | | | | | | |
Fixed maturity securities: | | | | | | | | | | | | | |
United States Government securities | $ | 802 | | | $ | 17 | | | $ | (6) | | | $ | — | | | $ | — | | | $ | 813 | | | $ | — | |
Government sponsored securities | 75 | | | 6 | | | — | | | — | | | — | | | 81 | | | — | |
Foreign government securities | 296 | | | 10 | | | (13) | | | — | | | (1) | | | 292 | | | — | |
States, municipalities and political subdivisions | 5,042 | | | 339 | | | (18) | | | — | | | — | | | 5,363 | | | — | |
Corporate securities | 10,140 | | | 579 | | | (114) | | | (23) | | | (11) | | | 10,571 | | | (10) | |
| | | | | | | | | | | | | |
Residential mortgage-backed securities | 4,075 | | | 151 | | | (48) | | | (10) | | | — | | | 4,168 | | | (1) | |
Commercial mortgage-backed securities | 76 | | | 3 | | | (1) | | | (3) | | | — | | | 75 | | | — | |
Other securities | 1,891 | | | 31 | | | (14) | | | (6) | | | — | | | 1,902 | | | |