EX-99.1 4 d443196dex991.htm EX-99.1 EX-99.1

Exhibit 99.1

Consolidated Balance Sheets

     At December 31,  
(Millions)    2017     2016  

Assets:

    

Current assets:

    

Cash and cash equivalents

   $ 4,076     $ 17,996  

Investments

     2,280       3,046  

Premiums receivable, net

     2,240       2,356  

Other receivables, net

     2,831       2,224  

Reinsurance recoverables

     1,050       292  

Accrued investment income

     193       232  

Income taxes receivable

     365       44  

Other current assets

     2,488       2,259  
  

 

 

   

 

 

 

Total current assets

     15,523       28,449  
  

 

 

   

 

 

 

Long-term investments

     17,793       21,833  

Reinsurance recoverables

     3,323       727  

Goodwill

     10,571       10,637  

Other acquired intangible assets, net

     1,180       1,442  

Property and equipment, net

     586       587  

Deferred income taxes

     195       —    

Other long-term assets

     1,684       1,480  

Separate Accounts assets

     4,296       3,991  
  

 

 

   

 

 

 

Total assets

   $ 55,151     $ 69,146  
  

 

 

   

 

 

 

Liabilities and shareholders’ equity:

    

Current liabilities:

    

Health care costs payable

   $ 5,815     $ 6,558  

Future policy benefits

     604       645  

Unpaid claims

     850       801  

Unearned premiums

     654       556  

Policyholders’ funds

     2,918       2,772  

Current portion of long-term debt

     999       1,634  

Accrued expenses and other current liabilities

     4,997       5,728  
  

 

 

   

 

 

 

Total current liabilities

     16,837       18,694  
  

 

 

   

 

 

 

Future policy benefits

     5,763       5,929  

Unpaid claims

     1,922       1,703  

Policyholders’ funds

     739       812  

Long-term debt, less current portion

     8,160       19,027  

Deferred income taxes

     —         4  

Other long-term liabilities

     1,597       1,043  

Separate Accounts liabilities

     4,296       3,991  
  

 

 

   

 

 

 

Total liabilities

     39,314       51,203  
  

 

 

   

 

 

 

Commitments and contingencies (Note 17)

    

Shareholders’ equity:

    

Common stock ($.01 par value; 2.5 billion shares authorized and 326.8 million shares issued and outstanding in 2017; 2.5 billion shares authorized and 351.7 million shares issued and outstanding in 2016) and additional paid-in capital

     4,706       4,716  

Retained earnings

     12,118       14,717  

Accumulated other comprehensive loss

     (1,244     (1,552
  

 

 

   

 

 

 

Total Aetna shareholders’ equity

     15,580       17,881  
  

 

 

   

 

 

 

Non-controlling interests

     257       62  
  

 

 

   

 

 

 

Total equity

     15,837       17,943  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 55,151     $ 69,146  
  

 

 

   

 

 

 

Refer to accompanying Notes to Consolidated Financial Statements.

 

1


Consolidated Statements of Income

 

     For the Years Ended December 31,  
(Millions, except per common share data)    2017     2016     2015  

Revenue:

      

Health care premiums

   $ 52,022     $ 54,116     $ 51,618  

Other premiums

     1,872       2,182       2,171  

Fees and other revenue (1)

     5,930       5,861       5,696  

Net investment income

     950       910       917  

Net realized capital (losses) gains

     (239     86       (65
  

 

 

   

 

 

   

 

 

 

Total revenue

     60,535       63,155       60,337  
  

 

 

   

 

 

   

 

 

 

Benefits and expenses:

      

Health care costs (2)

     42,753       44,255       41,712  

Current and future benefits

     1,875       2,101       2,121  

Operating expenses:

      

Selling expenses

     1,598       1,678       1,611  

General and administrative expenses

     10,466       10,407       10,033  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     12,064       12,085       11,644  

Interest expense

     442       604       369  

Amortization of other acquired intangible assets

     272       247       255  

Loss on early extinguishment of long-term debt

     246       —         —    

Reduction of reserve for anticipated future losses on discontinued products

     (109     (128     —    
  

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     57,543       59,164       56,101  
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     2,992       3,991       4,236  

Income tax expense

     1,087       1,735       1,841  
  

 

 

   

 

 

   

 

 

 

Net income including non-controlling interests

     1,905       2,256       2,395  
  

 

 

   

 

 

   

 

 

 

Less: Net income (loss) attributable to non-controlling interests

     1       (15     5  
  

 

 

   

 

 

   

 

 

 

Net income attributable to Aetna

   $ 1,904     $ 2,271     $ 2,390  
  

 

 

   

 

 

   

 

 

 

Earnings per common share:

      

Basic

   $ 5.71     $ 6.46     $ 6.84  
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 5.68     $ 6.41     $ 6.78  
  

 

 

   

 

 

   

 

 

 

 

(1) Fees and other revenue include administrative services contract member co-payments and plan sponsor reimbursements related to our home delivery and specialty pharmacy operations of $130 million, $128 million and $112 million for 2017, 2016 and 2015, respectively (net of pharmaceutical and processing costs of $1.4 billion for 2017 and 1.3 billion for each of 2016 and 2015).
(2) Health care costs have been reduced by Insured member co-payments related to our home delivery and specialty pharmacy operations of $115 million, $115 million and $117 million for 2017, 2016 and 2015, respectively.

Refer to accompanying Notes to Consolidated Financial Statements.

 

2


Consolidated Statements of Comprehensive Income

 

     For the Years Ended December 31,  
(Millions)    2017     2016     2015  

Net income including non-controlling interests

   $ 1,905     $ 2,256     $ 2,395  

Other comprehensive income (loss), net of tax:

      

Previously impaired debt securities

     (11     (3     (16

All other securities

     29       (15     (256

Derivatives and foreign currency

     231       (161     (13

Pension and OPEB plans

     59       (43     66  
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     308       (222     (219
  

 

 

   

 

 

   

 

 

 

Comprehensive income including non-controlling interests

     2,213       2,034       2,176  
  

 

 

   

 

 

   

 

 

 

Less: Comprehensive income (loss) attributable to non-controlling interests

     1       (15     5  
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Aetna

   $ 2,212     $ 2,049     $ 2,171  
  

 

 

   

 

 

   

 

 

 

Refer to accompanying Notes to Consolidated Financial Statements, including Note 14 for further information about other comprehensive income (loss).

 

3


Consolidated Statements of Shareholders’ Equity

 

           Attributable to Aetna              
(Millions)    Number of
Common
Shares
Outstanding
    Common
Stock and
Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Loss
    Total Aetna
Shareholders’
Equity
    Non-Controlling
Interests
    Total
Equity
 

Balance at December 31, 2014

     349.8     $ 4,542     $ 11,052     $ (1,111   $ 14,483     $ 69     $ 14,552  

Net income

     —         —         2,390       —         2,390       5       2,395  

Other decreases in non-controlling interest

     —         —         —         —         —         (9     (9

Other comprehensive loss (Note 14)

     —         —         —         (219     (219     —         (219

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

     2.7       105       —         —         105       —         105  

Repurchases of common shares

     (3.0     —         (296     —         (296     —         (296

Dividends declared

     —         —         (349     —         (349     —         (349
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

     349.5       4,647       12,797       (1,330     16,114       65       16,179  

Net income (loss)

     —         —         2,271       —         2,271       (15     2,256  

Other increases in non-controlling interest

     —         —         —         —         —         12       12  

Other comprehensive loss (Note 14)

     —         —         —         (222     (222     —         (222

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

     2.2       69       —         —         69       —         69  

Dividends declared

     —         —         (351     —         (351     —         (351
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

     351.7       4,716       14,717       (1,552     17,881       62       17,943  

Net income

     —         —         1,904       —         1,904       1       1,905  

Other increases in non-controlling interest

     —         —         —         —         —         194       194  

Other comprehensive income (Note 14)

     —         —         —         308       308       —         308  

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

     2.1       (10     —         —         (10     —         (10

Repurchases of common shares

     (27.0     —         (3,845     —         (3,845     —         (3,845

Dividends declared

     —         —         (658     —         (658     —         (658
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

     326.8     $ 4,706     $ 12,118     $ (1,244   $ 15,580     $ 257     $ 15,837  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Refer to accompanying Notes to Consolidated Financial Statements.

 

4


Consolidated Statements of Cash Flows

 

     For the Years Ended December 31,  
(Millions)    2017     2016     2015  

Cash flows from operating activities:

      

Net income including non-controlling interests

   $ 1,905     $ 2,256     $ 2,395  

Adjustments to reconcile net income to net cash (used for) provided by operating activities:

      

Net realized capital losses (gains)

     239       (86     65  

Depreciation and amortization

     705       681       671  

Debt fair value amortization

     (17     (30     (30

Equity in earnings of affiliates, net

     (105     (6     (31

Stock-based compensation expense

     187       191       181  

Reduction of reserve for anticipated future losses on discontinued products

     (109     (128     —    

Amortization of net investment premium

     69       79       84  

Loss on early extinguishment of long-term debt

     246       —         —    

Gain on sale of businesses

     (88     —         —    

Changes in assets and liabilities:

      

Premiums due and other receivables

     (809     (153     (616

Income taxes

     (672     155       31  

Other assets and other liabilities

     (1,445     669       646  

Health care and insurance liabilities

     (624     91       470  

Distributions from partnership investments

     54       —         —    
  

 

 

   

 

 

   

 

 

 

Net cash (used for) provided by operating activities

     (464     3,719       3,866  
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Proceeds from sales and maturities of investments

     12,144       14,741       12,299  

Cost of investments

     (10,370     (14,852     (12,943

Additions to property, equipment and software

     (410     (270     (363

Proceeds from sale of businesses, net of cash transferred

     1,390       —         —    

Cash used for acquisitions, net of cash acquired

     (24     —         (20
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) investing activities

     2,730       (381     (1,027
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Issuance of long-term debt

     988       12,886       —    

Repayment of long-term debt

     (12,734     —         (229

Repayment of short-term debt

     —         —         (500

Deposits and interest credited to investment contracts net of (withdrawals)

     1       1       (35

Common shares issued under benefit plans, net

     (180     (139     (143

Stock-based compensation tax benefits

     —         —         53  

Settlements from repurchase agreements

     —         —         (202

Common shares repurchased

     (3,845     —         (296

Dividends paid to shareholders

     (583     (351     (349

Net payment on interest rate derivatives

     —         (274     (25

Contributions (distributions), non-controlling interests

     167       11       (9
  

 

 

   

 

 

   

 

 

 

Net cash (used for) provided by financing activities

     (16,186     12,134       (1,735
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (13,920     15,472       1,104  

Cash and cash equivalents, beginning of period

     17,996       2,524       1,420  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 4,076     $ 17,996     $ 2,524  
  

 

 

   

 

 

   

 

 

 

Supplemental cash flow information:

      

Interest paid

   $ 453     $ 541     $ 338  

Income taxes paid

     1,759       1,580       1,755  

Refer to accompanying Notes to Consolidated Financial Statements.

 

5


Notes to Consolidated Financial Statements

 

1. Organization

We conduct our operations in three business segments:

 

    Health Care consists of medical, pharmacy benefit management services, dental, behavioral health and vision plans offered on both an Insured basis (where we assume all or a majority of the risk for medical and dental care costs) and an employer-funded basis (where the plan sponsor under an administrative services contract (“ASC”) assumes all or a majority of this risk) and emerging business products and services that complement and enhance our medical products. We also offer Medicare and Medicaid products and services and other medical products, such as medical management and data analytics services, medical stop loss insurance, workers’ compensation administrative services and products that provide access to our provider networks in select geographies. We no longer sell individual Commercial products, and we exited the individual Public Exchanges in 2018.

 

    Group Insurance primarily includes group life insurance and group disability products. Group life insurance products are offered on an Insured basis. Group disability products are offered to employers on both an Insured and an ASC basis. Group Insurance also includes long-term care products that were offered primarily on an Insured basis. We no longer solicit or accept new long-term care customers. During the fourth quarter of 2017, we sold a substantial portion of our Group Insurance business to Hartford Life and Accident Insurance Company (“HLAIC”) (refer to Note 3 for additional information).

 

    Large Case Pensions manages a variety of retirement products (including pension and annuity products) primarily for tax-qualified pension plans. These products provide a variety of funding and benefit payment distribution options and other services. Large Case Pensions also includes certain discontinued products (refer to Note 19 for additional information).

Our three business segments are distinct businesses that offer different products and services. Our Chief Executive Officer evaluates financial performance and makes resource allocation decisions at these segment levels. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 2. We evaluate the performance of these business segments based on pre-tax adjusted earnings (income before income taxes attributable to Aetna, excluding net realized capital gains or losses, amortization of other acquired intangible assets and other items, if any, that neither relate to the ordinary course of our business nor reflect our underlying business performance).

Effective for the first quarter of 2018, we will realign our business segments to correspond with changes to our management structure and internal management reporting which reflect our evolving business strategy of helping our members live healthier lives. As a result of this realignment, our operations will now be conducted in the Health Care reportable segment. Health Care offers a broad range of traditional, voluntary and consumer-directed health insurance products and related services to large and small employers, public sector employers, and Medicaid and Medicare beneficiaries. Our Health Care products are offered on both an Insured basis and an employer-funded basis. Health Care also includes emerging business products and services that complement and enhance our medical products.

Effective for the first quarter of 2018, we will present the remainder of our financial results in the Corporate/Other category, which will consist of:

 

    Products for which we no longer solicit or accept new customers such as our large case pensions and long-term care products;

 

    Contracts we have divested through reinsurance or other contracts, such as our domestic group life insurance, group disability insurance and absence management businesses; and

 

    Corporate expenses not supporting business operations, including transaction and integration-related costs, income taxes, interest expense on our outstanding debt and the financing components of our pension and other postretirement employee benefit plans (“OPEB”) expense.

 

6


Refer to Note 18 for segment financial information.

 

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include the accounts of Aetna and the subsidiaries that we control. All significant intercompany balances have been eliminated in consolidation. The Company has evaluated subsequent events from the financial statement date through the date the financial statements were issued and determined there were no subsequent events to disclose other than as disclosed in Notes 1, 13, 16 and 18.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

Use of Estimates

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the amounts reported in these consolidated financial statements and notes. We consider the following accounting estimates critical in the preparation of the accompanying consolidated financial statements: health care costs payable, other insurance liabilities, recoverability of goodwill and other acquired intangible assets, measurement of defined benefit pension and other postretirement employee benefit plans, other-than-temporary impairment of debt securities, revenue recognition, allowance for estimated terminations and uncollectible accounts and accounting for certain provisions of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (as amended, collectively, the “ACA”). We use information available to us at the time estimates are made; however, these estimates could change materially if different information or assumptions were used. Additionally, these estimates may not ultimately reflect the actual amounts of the final transactions that occur.

Cash and Cash Equivalents

Cash and cash equivalents include cash on-hand and debt securities with an original maturity of three months or less when purchased. The carrying value of cash equivalents approximates fair value due to the short-term nature of these investments. Cash and cash equivalents at December 31, 2016 included approximately $13 billion of highly-rated money market fund investments related to the net proceeds received from the 2016 senior notes we issued in June 2016 to partially fund our then pending acquisition of Humana Inc. (the “Humana Transaction”). These money market funds had average maturities of 60 days or less and were redeemable daily at par value plus accrued dividends with specified yield rates.

Investments

Debt and Equity Securities

Debt and equity securities consist primarily of U.S. Treasury and agency securities, mortgage-backed securities, corporate and foreign bonds and other debt and equity securities. Debt securities are classified as either current or long-term investments based on their contractual maturities unless we intend to sell an investment within the next twelve months, in which case it is classified as current on our Consolidated Balance Sheets. We have classified our debt and equity securities as available for sale and carry them at fair value. Refer to Note 5 for additional information on how we estimate the fair value of these investments.

The cost for mortgage-backed and other asset-backed securities is adjusted for unamortized premiums and discounts, which are amortized using the interest method over the estimated remaining term of the securities, adjusted for anticipated prepayments.

We regularly review our debt and equity securities to determine whether a decline in fair value below the carrying value is other-than-temporary. When a debt or equity security is in an unrealized capital loss position, we monitor the duration and severity of the loss to determine if sufficient market recovery can occur within a reasonable period of time. If a decline in the fair value of a debt security is considered other-than-temporary, the cost basis or carrying value of the debt security is written down. The write-down is then bifurcated into its credit and non-credit related components. The amount of the credit-related

 

7


component is included in our operating results, and the amount of the non-credit related component is included in other comprehensive income, unless we intend to sell the debt security or it is more likely than not that we will be required to sell the debt security prior to its anticipated recovery of its amortized cost basis. We do not accrue interest on debt securities when management believes the collection of interest is unlikely. If we intend to sell an equity security, we will recognize the unrealized capital gain or loss in our operating results.

Mortgage Loans

We value our mortgage loan investments on our balance sheet at the unpaid principal balance, net of impairment reserves. A mortgage loan may be impaired when it is a problem loan (i.e., more than 60 days delinquent, in bankruptcy or in process of foreclosure), a potential problem loan (i.e., high probability of default) or a restructured loan. For impaired loans, a specific impairment reserve is established for the difference between the recorded investment in the loan and the estimated fair value of the collateral. We apply our loan impairment policy individually to all loans in our portfolio.

The impairment evaluation described above also considers characteristics and risk factors attributable to the aggregate portfolio. We establish an additional allowance for loan losses if it is probable that there will be a credit loss on a group of similar mortgage loans. We consider the following characteristics and risk factors when evaluating if a credit loss is probable on a group of similar mortgage loans: loan-to-value ratios, property type (e.g., office, retail, apartment, industrial), geographic location, vacancy rates and property condition. As a result of that evaluation, we determined that a credit loss was not probable and did not record any additional allowance for groups of similar mortgage loans in 2017, 2016 or 2015.

We record full or partial impairments of loans at the time an event occurs affecting the legal status of the loan, typically at the time of foreclosure or upon a loan modification giving rise to forgiveness of debt. Interest income on a potential problem loan or restructured loan is accrued to the extent we deem it collectible and the loan continues to perform under its original or restructured terms. Interest income on problem loans is recognized on a cash basis. Cash payments on loans in the process of foreclosure are treated as a return of principal. Mortgage loans with a maturity date or a committed prepayment date within twelve months are classified as current on our Consolidated Balance Sheets.

Other Investments

Other investments consist primarily of the following:

 

    Private equity and hedge fund limited partnerships, which are carried at fair value on our Consolidated Balance Sheets. The fair values of private equity limited partnerships are estimated based on the fair value of the underlying investment funds provided by the general partner or manager of the investments, the financial statements of which generally are audited. We typically do not have a controlling ownership in our private equity limited partnership investments, and therefore we apply the equity method of accounting for these investments. Hedge fund limited partnerships are carried at fair value which is estimated using the net asset value (“NAV”) per unit as reported by the administrator of the underlying investment fund as a practical expedient to fair value. We review our investments for impairment at least quarterly and monitor their performance throughout the year through discussions with the administrators, managers and/or general partners. If we become aware of an impairment of a limited partnership’s investments through our review or prior to receiving the limited partnership’s financial statements at the financial statement date, we will recognize an impairment by recording a reduction in the carrying value of the limited partnership with a corresponding charge to net investment income.

 

    Investment real estate, which is carried on our Consolidated Balance Sheets at depreciated cost, including capital additions, net of write-downs for other-than-temporary declines in fair value. Depreciation is calculated using the straight-line method based on the estimated useful life of each asset. If any of our real estate investments is considered held-for-sale, we carry it at the lower of its carrying value or fair value less estimated selling costs. We generally estimate fair value using a discounted future cash flow analysis in conjunction with comparable sales information. At the time of the sale, we record the difference between the sales price and the carrying value as a realized capital gain or loss.

 

8


    Privately-placed equity securities, which are carried at cost on our Consolidated Balance Sheets. We do not estimate the fair value of these securities if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. Additionally, as a member of the Federal Home Loan Bank of Boston (“FHLBB”), we are required to purchase and hold shares of the FHLBB. These shares are restricted and also carried at cost.

 

    Bank loans, which are carried on our Consolidated Balance Sheets at amortized cost, net of any allowance for impairments. If any of our bank loans are considered held-for-sale, we carry those loans at the lower of cost or fair value.

 

    Derivatives, which we make limited use of in order to manage interest rate, foreign exchange and price risk and credit exposure. The derivatives we use consist primarily of interest rate swaps, treasury rate locks, forward contracts, futures contracts, warrants, put options, and credit default swaps. Derivative assets are recorded in investments and derivative liabilities are recorded in accrued expenses and other current liabilities on our Consolidated Balance Sheets and reflected at fair value. When we enter into a derivative contract, if certain criteria are met, we may designate it as one of the following: a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment; a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability; or a foreign currency fair value or cash flow hedge.

Net Investment Income

Net investment income on investments supporting Health Care and Group Insurance liabilities and Large Case Pensions products (other than experience-rated and discontinued products) is reflected in our operating results.

Experience-rated products are products in the Large Case Pensions business where the contract holder, not us, assumes investment and other risks, subject to, among other things, minimum guarantees provided by us. The effect of investment performance on experience-rated products is allocated to contract holders’ accounts daily, based on the underlying investment experience and, therefore, does not impact our operating results (as long as our minimum guarantees are not triggered).

When we discontinued the sale of our fully-guaranteed Large Case Pensions products, we established a reserve for anticipated future losses from these discontinued products and segregated the related investments. Investment performance on this separate portfolio is ultimately credited/charged to the reserve and, generally, does not impact our operating results.

Net investment income supporting Large Case Pensions’ experience-rated and discontinued products is included in net investment income in our Consolidated Statements of Income and is credited to contract holders’ accounts or the reserve for anticipated future losses through a charge to current and future benefits.

Realized/Unrealized Capital Gains and Losses

Realized capital gains and losses on investments supporting Health Care and Group Insurance liabilities and Large Case Pensions products (other than experience-rated and discontinued products) are reflected in our operating results. Realized capital gains and losses are determined on a specific identification basis. We reflect purchases and sales of debt and equity securities and alternative investments on the trade date. We reflect purchases and sales of mortgage loans and investment real estate on the closing date.

Realized capital gains and losses on investments supporting Large Case Pensions’ experience-rated and discontinued products are not included in realized capital gains and losses in our Consolidated Statements of Income and instead are credited directly to contract holders’ accounts, in the case of experience-rated products, or allocated to the reserve for anticipated future losses, in the case of discontinued products. The contract holders’ accounts are reflected in policyholders’ funds, and the reserve for anticipated future losses is reflected in future policy benefits on our Consolidated Balance Sheets.

Unrealized capital gains and losses on investments supporting Health Care and Group Insurance liabilities and Large Case Pensions products (other than experience-rated and discontinued products) are reflected in shareholders’ equity, net of tax, as a component of accumulated other comprehensive loss.

 

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Unrealized capital gains and losses on investments supporting Large Case Pensions’ experience-rated products are credited directly to contract holders’ accounts, which are reflected in policyholders’ funds on our Consolidated Balance Sheets. Unrealized capital gains and losses on discontinued products are reflected in other long-term liabilities on our Consolidated Balance Sheets.

Refer to Note 19 for additional information on our discontinued products.

Premium Receivables

Premium receivables include the uncollected amounts from fully-insured groups, individuals and government programs and are reported net of an allowance for estimated terminations and uncollectible accounts of $381 million and $139 million at December 31, 2017 and 2016, respectively. We estimate the allowance for estimated terminations and uncollectible accounts using management’s best estimate of collectability, taking into consideration the age of the outstanding amount, historical collection patterns and other economic factors. For details on our Medicare Part D Prescription Drug Program Plans (“Medicare Part D”) receivables at December 31, 2017 and 2016, refer to the “Accounting for Medicare Part D” section below.

Our premium receivable balance at December 31, 2017 from the State of Illinois was approximately $350 million. The State of Illinois experienced budget difficulties which contributed to the state being delinquent in paying certain of our premiums and fees. Given our significant cash collections during the fourth quarter of 2017 of approximately $960 million, the State of Illinois budget and bond issuance, a federal judge’s ruling that prioritized Medicaid payments and the federal government’s match of a percentage of payments made by the state to managed care organizations under the state’s Medicaid program, we continue to believe the amounts due to us are collectible.

Other Receivables

Other receivables include uncollected amounts from self-funded groups, pharmacy rebates, other government receivables, proceeds due from brokers on investment trades, provider advances and other miscellaneous amounts due to us. These receivables are reported net of an allowance for uncollectible accounts of $74 million and $37 million at December 31, 2017 and 2016, respectively. We estimate the allowance for uncollectible accounts using management’s best estimate of collectability, taking into consideration the age of the outstanding amount, historical collection patterns and other economic factors. Pharmacy rebate receivables were $1.0 billion and $916 million at December 31, 2017 and 2016, respectively. For details on our Medicare Part D receivables at December 31, 2017 and 2016, refer to the “Accounting for Medicare Part D” section below.

Reinsurance Recoverables

We utilize reinsurance agreements primarily to reduce our required capital and to facilitate the acquisition or disposition of certain insurance contracts (including the Group Insurance sale (as defined in Note 3)). Ceded reinsurance agreements permit us to recover a portion of our losses from reinsurers, although they do not discharge our primary liability as the direct insurer of the risks reinsured. Failure of reinsurers to indemnify us could result in losses; however, we do not expect charges for unrecoverable reinsurance to have a material effect on our operating results or financial position. We evaluate the financial condition of our reinsurers and monitor concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of our reinsurers. At December 31, 2017, our reinsurance recoverables consisted primarily of amounts due from third parties that are rated consistent with companies that are considered to have the ability to meet their obligations.

Health Care Contract Acquisition Costs

Health care benefits products included in our Health Care segment are cancelable by either the customer or the member monthly upon written notice. Acquisition costs related to our prepaid health care and health indemnity contracts are generally expensed as incurred. At December 31, 2017 and 2016, the balance of our deferred acquisition costs was $521 million and $412 million, respectively, comprised primarily of commissions paid on our Medicare Supplement products. Deferred acquisition costs are recorded as other current assets or other long-term assets on our Consolidated Balance Sheets and are

 

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amortized over the estimated life of the contracts. The amortization of deferred acquisition costs is recorded in general and administrative expenses in our Consolidated Statements of Income.

Goodwill and Other Acquired Intangible Assets

When we complete an acquisition, we apply the acquisition method of accounting, which requires the recognition of goodwill (which represents the excess cost of the acquisition over the fair value of net assets acquired and identified intangible assets). We evaluate goodwill for impairment (at the reporting unit level) annually, or more frequently if circumstances indicate a possible impairment, by comparing an estimate of the fair value of the applicable reporting unit to its carrying value, including goodwill. If the carrying value exceeds fair value, we have historically compared the implied fair value of the applicable goodwill to its carrying amount to measure the amount of goodwill impairment, if any. Effective January 1, 2017, we adopted, on a prospective basis, new accounting guidance which simplifies the accounting for goodwill impairment. The new guidance eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. A goodwill impairment charge would be recognized if the carrying amount of a reporting unit exceeds the estimated fair value of the reporting unit. The fair value of each reporting unit substantially exceeded its carrying value in each of the three years ended December 31, 2017, 2016, or 2015, and no goodwill impairment loss was recognized in any of those years. In conjunction with the Group Insurance sale, which included a substantial portion of our Group Insurance business, the goodwill allocated to our Group Insurance segment of $113 million was included in the calculation of the total gain on the sale, with a corresponding reduction of the goodwill balance.

Our annual impairment tests were based on an evaluation of future discounted cash flows. These evaluations utilized the best information available to us at the time, including supportable assumptions and projections we believe are reasonable. Collectively, these evaluations were our best estimates of projected future cash flows. Our discounted cash flow evaluations used discount rates that correspond to a weighted-average cost of capital consistent with a market-participant view. The discount rates are consistent with those used for investment decisions and take into account the operating plans and strategies of our reporting units. Certain other key assumptions utilized, including changes in membership, revenue, health care costs, operating expenses, impacts of health care reform fees, assessments and taxes, and effective tax rates, are based on estimates consistent with those utilized in our annual planning process that we believe are reasonable. If we do not achieve our earnings objectives, the assumptions and estimates underlying these goodwill impairment evaluations could be adversely affected, and we may impair a portion of our goodwill, which would adversely affect our operating results in the period of impairment.

We report other acquired intangible assets at historical cost, net of accumulated amortization. Other acquired intangible assets primarily relate to provider networks, customer lists, value of business acquired (“VOBA”), technology and trademarks and are amortized over the useful-life based upon the pattern of future cash flows attributable to the asset. Other than VOBA and indefinite lived trademarks, other acquired intangible assets generally are amortized using the straight-line method. VOBA is amortized over the expected life of the acquired contracts in proportion to estimated premiums. Other intangible assets with indefinite lives are not amortized but are tested for impairment at least annually.

We regularly evaluate whether events or changes in circumstances indicate that the carrying value of other acquired intangible assets may not be recoverable. If we determine that the carrying value of an asset may not be recoverable, we group the asset with other assets and liabilities at the lowest level for which independent identifiable cash flows are available and estimate the future undiscounted cash flows expected to result from future use of the asset group and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying value of the asset group, we recognize an impairment loss for the amount by which the carrying value of the asset group exceeds its fair value. There were no material impairment losses on other acquired intangible assets recognized in any of the three years ended December 31, 2017, 2016 or 2015.

Property and Equipment

We report property and equipment at historical cost, net of accumulated depreciation. At December 31, 2017 and 2016, the historical cost of property and equipment was approximately $1.5 billion and $1.4 billion, respectively, and the related accumulated depreciation was $893 million and $851 million, respectively. We calculate depreciation primarily using the straight-line method over the estimated useful lives of the respective assets, which range from 10 to 40 years for buildings and 3 to 10 years for equipment. Depreciation expense was $118 million, $125 million and $131 million for the years ended

 

11


December 31, 2017, 2016 and 2015, respectively. If we determine the carrying value of our property and equipment is not recoverable, an impairment charge is recorded. There were no material impairment losses on property and equipment recognized in any of the three years ended December 31, 2017, 2016 or 2015.

Separate Accounts

Separate Accounts assets and liabilities in the Large Case Pensions segment represent funds maintained to meet specific objectives of contract holders who bear the investment risk. These assets and liabilities are carried at fair value. Net investment income and net realized capital gains and losses accrue directly to such contract holders. The assets of each account are legally segregated and are not subject to claims arising from our other businesses. Deposits, withdrawals, net investment income and net realized and net unrealized capital gains and losses on Separate Accounts assets are not reflected in our Consolidated Statements of Income or Cash Flows. Management fees charged to contract holders are included in fees and other revenue and recognized over the period earned.

Health Care Costs Payable

Health care costs payable consist principally of unpaid fee-for-service medical, dental and pharmacy claims, capitation costs, other amounts due to health care providers pursuant to risk-sharing arrangements related to the Health Care segment’s Insured Commercial, Medicare and Medicaid products and accruals for state assessments. Unpaid health care claims include our estimate of payments we will make for (i) services rendered to our members but not yet reported to us and (ii) claims which have been reported to us but not yet paid, each as of the financial statement date (collectively, “IBNR”) in our Health Care segment. Health care costs payable also include an estimate of the cost of services that will continue to be rendered after the financial statement date if we are obligated to pay for such services in accordance with contractual or regulatory requirements. Such estimates are developed using actuarial principles and assumptions which consider, among other things, historical and projected claim submission and processing patterns, assumed and historical medical cost trends, historical utilization of medical services, claim inventory levels, changes in membership and product mix, seasonality and other relevant factors. We reflect changes in these estimates in health care costs in our operating results in the period they are determined. Capitation costs represent contractual monthly fees paid to participating physicians and other medical providers for providing medical care, regardless of the volume of medical services provided to the member. Approximately 3% of our health care costs related to capitated arrangements in 2017 and approximately 4% of our health care costs related to capitated arrangements in both 2016 and 2015. Amounts due under risk-sharing arrangements are based on the terms of the underlying contracts with the providers and consider claims experience under the contracts through the financial statement date.

We develop our estimate of IBNR using actuarial principles and assumptions that consider numerous factors. Of those factors, we consider the analysis of historical and projected claim payment patterns (including claims submission and processing patterns) and the assumed health care cost trend rate (the year-over-year change in per member per month health care costs) to be the most critical assumptions. In developing our estimate of IBNR, we consistently apply these actuarial principles and assumptions each period, with consideration to the variability of related factors. There have been no significant changes to the methodologies or assumptions used to develop our estimate of IBNR in 2017.

We analyze historical claim payment patterns by comparing claim incurred dates (i.e., the date services were provided) to claim payment dates to estimate “completion factors.” We use completion factors predominantly to estimate the ultimate cost of claims incurred more than three months before the financial statement date. We estimate completion factors by aggregating claim data based on the month of service and month of claim payment and estimating the percentage of claims incurred for a given month that are complete by each month thereafter. For any given month, substantially all claims are paid within six months of the date of service, but it can take up to 48 months or longer after the date of service before all of the claims are completely resolved and paid. These historically-derived completion factors are then applied to claims paid through the financial statement date to estimate the ultimate claim cost for a given month’s incurred claim activity. The difference between the estimated ultimate claim cost and the claims paid through the financial statement date represents our estimate of claims remaining to be paid as of the financial statement date and is included in our health care costs payable. We use completion factors predominantly to estimate the ultimate cost of claims with claim incurred dates greater than three months prior to the financial statement date. The completion factors we use reflect judgments and possible adjustments based on data such as claim inventory levels, claim submission and processing patterns and, to a lesser extent, other factors such as changes in health care

 

12


cost trend rates, changes in membership and changes in product mix. If claims are submitted or processed on a faster (slower) pace than prior periods, the actual claims may be more (less) complete than originally estimated using our completion factors, which may result in reserves that are higher (lower) than the ultimate cost of claims.

Because claims incurred within three months before the financial statement date are less mature, we use a combination of historically-derived completion factors and the assumed health care cost trend rate to estimate the ultimate cost of claims incurred for these months. We apply our actuarial judgment and place a greater emphasis on the assumed health care cost trend rate for the most recent claim incurred dates as these months may be influenced by seasonal patterns and changes in membership and product mix.

Our health care cost trend rate is affected by changes in per member utilization of medical services as well as changes in the unit cost of such services. Many factors influence the health care cost trend rate, including our ability to manage health care costs through product design, negotiation of favorable provider contracts and medical management programs, as well as the mix of our business. The health status of our members, aging of the population and other demographic characteristics, advances in medical technology and other factors continue to contribute to rising per member utilization and unit costs. Changes in health care practices, inflation, new technologies, increases in the cost of prescription drugs (including specialty pharmacy drugs), direct-to-consumer marketing by pharmaceutical companies, clusters of high-cost cases, claim intensity, changes in the regulatory environment, health care provider or member fraud and numerous other factors also contribute to the cost of health care and our health care cost trend rate.

For each reporting period, we use an extensive degree of judgment in the process of estimating our health care costs payable. As a result, considerable variability and uncertainty is inherent in such estimates, particularly with respect to claims with claim incurred dates of three months or less before the financial statement date; and the adequacy of such estimates is highly sensitive to changes in assumed completion factors and the assumed health care cost trend rates. For each reporting period we recognize the actuarial best estimate of health care costs payable considering the potential volatility in assumed completion factors and health care cost trend rates, as well as other factors. We believe our estimate of health care costs payable is reasonable and adequate to cover our obligations at December 31, 2017; however, actual claim payments may differ from our estimates. A worsening (or improvement) of our health care cost trend rates or changes in completion factors from those that we assumed in estimating health care costs payable at December 31, 2017 would cause these estimates to change in the near term, and such a change could be material.

Each quarter, we re-examine previously established health care costs payable estimates based on actual claim payments for prior periods and other changes in facts and circumstances. Given the extensive degree of judgment in this estimate, it is possible that our estimates of health care costs payable could develop either favorably (that is, our actual health care costs for the period were less than we estimated) or unfavorably. The changes in our estimate of health care costs payable may relate to a prior quarter, prior year or earlier periods. For our roll forward of our health care costs payable, refer to Note 7. Our reserving practice is to consistently recognize the actuarial best estimate of our ultimate liability for health care costs payable.

Unpaid claims

Unpaid claims consist primarily of reserves associated with certain short-duration group disability and term life insurance contracts in the Group Insurance segment, including an estimate for IBNR in our Group Insurance segment as of the financial statement date. Reserves associated with certain short-duration group disability and term life insurance contracts are based upon our estimate of the present value of future benefits, which is based on assumed investment yields and assumptions regarding mortality, morbidity and recoveries from the U.S. Social Security Administration. We develop our estimate of IBNR using actuarial principles and assumptions which consider, among other things, contractual requirements, claim incidence rates, claim recovery rates, seasonality and other relevant factors. We discount certain claim liabilities related to group long-term disability and life insurance waiver of premium contracts. The discount rates generally reflect our expected investment returns for the investments supporting all incurral years of these liabilities. The discount rates for retrospectively-rated contracts are set at contractually specified levels. Our estimates of unpaid claims are subject to change due to changes in the underlying experience of the insurance contracts, changes in investment yields or other factors, and these changes are recorded in current and future benefits in our Consolidated Statements of Income in the period they are determined. Substantially all of our life and

 

13


disability insurance liabilities have been fully ceded to unrelated third parties through indemnity reinsurance agreements, however we remain directly obligated to the policyholders.

We estimate our reserve for claims IBNR for life products largely based on completion factors. The completion factors we use are based on our historical experience and reflect judgments and possible adjustments based on data such as claim inventory levels, claim payment patterns, changes in business volume and other factors. If claims are submitted or processed on a faster (slower) pace than historical periods, the actual claims may be more (less) complete than originally estimated using our completion factors, which may result in reserves that are higher (lower) than required to cover future life benefit payments. At December 31, 2017, we held $239 million in reserves for life claims incurred but not yet reported to us.

There have been no significant changes to the methodologies or assumptions used to develop our estimate of IBNR in 2017.

Future policy benefits

Future policy benefits consist primarily of reserves for limited payment pension and annuity contracts in the Large Case Pensions segment and long-duration group life and long-term care insurance contracts in the Group Insurance segment. Reserves for limited payment contracts are computed using actuarial principles that consider, among other things, assumptions reflecting anticipated mortality, retirement, expense and interest rate experience. Such assumptions generally vary by plan, year of issue and policy duration. Assumed interest rates on such contracts ranged from .8% to 11.3% in both 2017 and 2016. We periodically review mortality assumptions against both industry standards and our experience. Reserves for long-duration group life and long-term care contracts represent our estimate of the present value of future benefits to be paid to or on behalf of policyholders less the present value of future net premiums. Assumed interest rates on such contracts ranged from 2.5% to 6.0% in 2017. Assumed interest rates on such contracts ranged from 2.5% to 8.8% in 2016. Our estimate of the present value of future benefits under such contracts is based upon mortality, morbidity and interest rate assumptions.

Policyholders’ funds

Policyholders’ funds consist primarily of reserves for pension and annuity investment contracts in the Large Case Pensions segment and customer funds associated with group life and health contracts in the Health Care and Group Insurance segments. Reserves for such contracts are equal to cumulative deposits less withdrawals and charges plus credited interest thereon, net of experience-rated adjustments. In 2017, interest rates for pension and annuity investment contracts ranged from 3.5% to 15.4%, and interest rates for group life and health contracts ranged from 0% to 2.3%. In 2016, interest rates for pension and annuity investment contracts ranged from 3.5% to 15.9%, and interest rates for group life and health contracts ranged from 0% to 2.4%. Reserves for contracts subject to experience rating reflect our rights as well as the rights of policyholders and plan participants.

We also hold funds for health savings accounts (“HSAs”) on behalf of members associated with high deductible health plans. These amounts are held to pay for qualified health care expenses incurred by these members. The HSA balances were approximately $1.9 billion and $1.7 billion at December 31, 2017 and 2016, respectively, and are reflected in other current assets with a corresponding liability in policyholder funds.

We review health care and other insurance liabilities periodically. We reflect any necessary adjustments during the current period in operating results. While the ultimate amount of claims and related expenses are dependent on future developments, it is management’s opinion that the liabilities that have been established are adequate to cover such costs. The health care and other insurance liabilities that are expected to be paid within twelve months are classified as current on our Consolidated Balance Sheets.

 

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Premium Deficiency Reserves

We evaluate our insurance contracts to determine if it is probable that a loss will be incurred. We recognize a premium deficiency loss when it is probable that expected future claims, including maintenance costs (for example, direct costs such as claim processing costs), will exceed existing reserves plus anticipated future premiums and reinsurance recoveries. Anticipated investment income is considered in the calculation of premium deficiency losses for short-duration contracts. For purposes of determining premium deficiency losses, contracts are grouped consistent with our method of acquiring, servicing and measuring the profitability of such contracts. We established a premium deficiency reserve of $16 million at December 31, 2017 for the 2018 coverage year related to our Medicaid products. We did not have any material premium deficiency reserves for our Health Care or Group Insurance business at December 31, 2016.

Revenue Recognition

Premium Revenue

Health care premiums are recognized as income in the month in which the enrollee is entitled to receive health care services. Health care premiums are reported net of an allowance for estimated terminations and uncollectible amounts. Additionally, premium revenue subject to the ACA’s minimum Medical Loss Ratio (“MLR”) rebate requirements is recorded net of the estimated minimum MLR rebates for the current calendar year. Other premium revenue for group life, long-term care and disability products is recognized as income, net of allowances for termination and uncollectible accounts, over the term of the coverage. Other premium revenue for Large Case Pensions’ limited payment pension and annuity contracts is recognized as revenue in the period received. Premiums related to unexpired contractual coverage periods are reported as unearned premiums in our Consolidated Balance Sheets and recognized as revenue when earned.

Some of our contracts allow for premiums to be adjusted to reflect actual experience or the relative health status of members. Such adjustments are reasonably estimable at the outset of the contract, and adjustments to those estimates are made based on actual experience of the customer emerging under the contract and the terms of the underlying contract.

Administrative Service Contract (“ASC”) Fees

Fees and other revenue consists primarily of ASC fees which are received in exchange for performing certain claim processing and member services for health and disability members and are recognized as revenue over the period the service is provided. Fees and other revenue also includes fees related to our pharmacy benefit management and workers’ compensation administrative services products and services. Some of our contracts include guarantees with respect to certain functions, such as customer service response time, claim processing accuracy and claim processing turnaround time, as well as certain guarantees that a plan sponsor’s benefit claim experience will fall within a certain range. With any of these guarantees, we are financially at risk if the conditions of the arrangements are not met, although the maximum amount at risk is typically limited to a percentage of the fees otherwise payable to us by the customer involved. Each period we estimate our obligations under the terms of these guarantees and record it as an offset to our ASC fees.

In addition, fees and other revenue also include charges assessed against contract holders’ funds for contract fees, participant fees and asset charges related to pension and annuity products in the Large Case Pensions segment. Other amounts received on pension and annuity investment-type contracts are reflected as deposits and are not recorded as revenue. Some of our Large Case Pensions contract holders have the contractual right to purchase annuities with life contingencies using the funds they maintain on deposit with us. Since these products are considered an insurance contract, when the contract holder makes this election, we treat the accumulated investment balance as a single premium and reflect it as both premiums and current and future benefits in our Consolidated Statements of Income.

Accounting for Medicare Part D

We offer Medicare Part D prescription drug insurance coverage under contracts with the Centers for Medicare & Medicaid Services (“CMS”). Under these annual contracts, we receive monthly payments from CMS and members which include:

 

   

Premiums: CMS pays us a fixed monthly per member premium over the term of our annual contract. In addition, certain members pay us a fixed monthly premium over the term of our annual contract. For qualifying low-income Medicare beneficiaries, CMS pays us all or a portion of the member’s monthly premiums. The payments we receive

 

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monthly from CMS and members, which are determined from our annual bid, represent amounts we are paid for providing Medicare Part D prescription drug insurance coverage. We recognize premium revenue for providing this insurance coverage ratably over the term of our annual contract.

 

    Risk-Sharing Arrangement: Our risk-sharing arrangement with CMS provides a risk corridor whereby the amount we received in premiums from members and CMS, based on our annual bid, is compared to our actual drug costs incurred during the contract year. Based on the risk corridor provision and Medicare Part D actual experience, we record an estimated risk-sharing receivable or payable as an adjustment to premium revenue. A final reconciliation and settlement of this risk sharing arrangement is made with CMS based on actual experience after the end of each contract year.

 

    Catastrophic Reinsurance and Low-Income Cost Sharing Subsidies: CMS pays us a cost reimbursement estimate monthly to fund the CMS obligation to pay its portion of prescription drug costs which exceed the member’s out-of-pocket threshold. A final reconciliation and settlement is made with CMS based on actual experience after the end of each contract year. In addition, for qualifying low-income Medicare beneficiaries, CMS pays to us monthly, on the member’s behalf, all or a portion of a member’s cost sharing amounts (deductibles, coinsurance, etc.). We administer and pay the subsidized portion of the claims on behalf of CMS, and a final reconciliation and settlement of this cost sharing subsidy is made with CMS based on actual experience after the end of each contract year. These subsidies represent cost reimbursements under the Medicare Part D plans for which we are not at risk. Accordingly, the amounts received for these subsidies are not reflected as premium revenues, but rather are accounted for as receivables and liabilities.

 

    Coverage Gap Drug Discount: The ACA mandated a consumer discount on brand name prescription drugs for Medicare Part D participants in the coverage gap (the so-called “donut hole”). This discount is funded by CMS and pharmaceutical manufacturers while we administer the application of these funds. Accordingly, amounts received are not reflected as premium revenues, but rather are accounted for as deposits. We record a liability when amounts are received from CMS and a receivable when we bill the pharmaceutical manufacturers.

We expense the cost of Medicare Part D covered prescription drugs as incurred in medical costs in our Consolidated Statements of Income.

The Consolidated Balance Sheets include the following amounts associated with Medicare Part D at December 31, 2017 and 2016. CMS subsidies and discounts in the table below include the catastrophic reinsurance and low-income cost sharing subsidies funded by CMS for which we assume no risk as well as brand name prescription drug discounts for Medicare Part D participants in the coverage gap funded by CMS and pharmaceutical manufacturers.

 

     December 31, 2017      December 31, 2016  
(Millions)    Risk Share      CMS
Subsidies/Discounts
     Risk Share      CMS
Subsidies/Discounts
 

Premium receivables, net

   $ 148      $ —        $ 209      $ —    

Other receivables, net

     —          791        —          206  

Other long-term assets

     6        74        14        175  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     154        865        223        381  
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued expenses and other current liabilities

     (1      (20      —          (656

Other long-term liabilities

     (8      (39      (22      (33
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     (9      (59      (22      (689
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net assets (liabilities)

   $ 145      $ 806      $ 201      $ (308
  

 

 

    

 

 

    

 

 

    

 

 

 

Health Care Reform

Health Insurer Fee

Since January 1, 2014, the ACA imposes an annual premium-based health insurer fee (“HIF”) for each calendar year payable in September which is not deductible for tax purposes. We are required to estimate a liability for the HIF at the beginning of the calendar year in which the fee is payable with a corresponding deferred asset that is amortized ratably to general and

 

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administrative expense over the calendar year. We record the liability for the health insurer fee in accrued expenses and other current liabilities and record the deferred asset in other current assets in our consolidated financial statements. In December 2015, the Consolidated Appropriation Act was enacted, which included a one year suspension of the HIF for 2017. Accordingly, there was no expense related to the HIF in 2017. In 2016 and 2015, general and administrative expense includes $837 million and $857 million, respectively, related to our share of the HIF. In January 2018 the HIF was suspended for 2019.

Public Exchanges

Through December 31, 2017, we participated in certain public health insurance exchanges (“Public Exchanges”) established pursuant to the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (as amended, collectively, the “ACA”). Under regulations established by the U.S. Department of Health and Human Services (“HHS”), HHS pays us a portion of the premium (“Premium Subsidy”) and through September 30, 2017, paid a portion of the health care costs (“Cost Sharing Subsidy”) for low-income individual Public Exchange members. In addition, HHS administers the 3Rs risk management programs. The ACA’s temporary reinsurance and risk corridor programs expired at the end of 2016.

We recognize monthly premiums received from Public Exchange members and the Premium Subsidy as premium revenue ratably over the contract period. The Cost Sharing Subsidy offsets health care costs based on our estimate of the portion of claim costs incurred by our low income individual Public Exchange members that qualify for reimbursement by HHS. We record a liability or a receivable depending on whether qualifying health care costs incurred are less than or greater than the Cost Sharing Subsidy received to date.

Reinsurance

The ACA established a temporary reinsurance program that expired at the end of 2016. Under this program, all issuers of major medical commercial insurance products and self-insured plan sponsors were required to contribute funding in amounts set by HHS. Funds collected were utilized to reimburse issuers’ high claims costs incurred for qualified individual members. The expense related to this required funding was reflected in general and administrative expenses for all of our insurance products with the exception of products associated with qualified individual members; this expense for qualified individual members was reflected as a reduction of premium revenue.

There was no expense recorded in 2017 related to our estimated contribution for the funding of the ACA’s reinsurance program as the program expired at the end of 2016. In 2016 and 2015, our contribution to the funding of the ACA’s reinsurance program was $118 million and $210 million, respectively, which was recorded in general and administrative expenses. When annual claim costs incurred by our qualified individual members exceeded a specified attachment point, we were entitled to certain reimbursements from this program. We recorded a receivable and offset health care costs to reflect our estimate of these recoveries.

Risk Adjustment

The ACA established a permanent risk adjustment program to transfer funds from qualified individual and small group insurance plans with below average risk scores to plans with above average risk scores. Based on the risk of our qualified plan members relative to the average risk of members of other qualified plans in comparable markets, we estimate our ultimate risk adjustment receivable or payable for the current calendar year and reflect the pro-rata year-to-date impact as an adjustment to our premium revenue.

Risk Corridor

The ACA established a temporary risk sharing program that expired at the end of 2016 for qualified individual and small group insurance plans. Under this program we made (or received) a payment to (or from) HHS based on the ratio of allowable costs to target costs (as defined by the ACA). We recorded a risk corridor receivable or payable as an adjustment to premium revenue on a pro-rata year-to-date basis based on our estimate of the ultimate risk sharing amount for the current calendar year. At December 31, 2017 and 2016, we did not record any ACA risk corridor receivables related to the 2016 or 2015 program years or any amount in excess of HHS’s announced pro-rated funding amount for the 2014 program year because payments from HHS are uncertain.

 

17


We expect to perform an annual final reconciliation and settlement with HHS of the 3Rs in each subsequent year. The final reconciliation and settlement with HHS of the 2014 and 2015 Cost Sharing Subsidies occurred in 2016 and 2017, respectively. The final reconciliation and settlement of the 2016 Cost Sharing Subsidy is scheduled to occur in 2018.

Refer to Note 8 for additional information related to the 3Rs.

Selling Expenses

Selling expenses include broker commissions, the variable component of our internal sales force compensation and premium taxes.

Stock-Based Compensation

We record compensation expense for stock-based awards over their vesting periods primarily based on the estimated fair value at the grant date. For stock appreciation rights (“SARs”), the fair value is estimated using the Black-Scholes option-pricing model. For restricted stock units (“RSUs”) and performance stock units (“PSUs”), the fair value is equal to the market price of the Company’s common stock on the date of grant. For market stock units (“MSUs”) and performance stock appreciation rights (“PSARs”), the fair value is estimated using Monte Carlo simulations. Stock-based compensation expense is recorded in general and administrative expenses in our Consolidated Statements of Income. Refer to Note 12 for additional information related to our stock-based employee incentive plans.

Income Taxes

We are taxed at the statutory corporate income tax rates after adjusting income reported for financial statement purposes for certain items. We recognize deferred income tax assets and liabilities for the differences between the financial and income tax reporting basis of assets and liabilities based on enacted tax rates and laws. Valuation allowances are provided when it is considered more likely than not that deferred tax assets will not be realized. Deferred income tax expense or benefit primarily reflects the net change in deferred income tax assets and liabilities during the year.

Our current income tax provision reflects the tax results of revenues and expenses currently taxable or deductible. Penalties and interest on our tax positions are classified as a component of our income tax provision.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “TCJA”) was enacted. Among other things, the TCJA reduced the federal corporate income tax rate to 21 percent effective January 1, 2018. Accordingly, we remeasured our deferred tax assets and liabilities as of the enactment date to reflect the lower tax rate and recognized an incremental tax expense of $99 million related to the reduction in our net deferred tax assets during the year ended December 31, 2017. The accounting for certain income tax effects of the TCJA was considered provisional at December 31, 2017, including the assessment of the mandatory repatriation of foreign earnings, the minimum tax on global intangible low-taxed income and the assertion of permanent reinvestment of foreign earnings. Accordingly, the items were recorded at a reasonable estimate at December 31, 2017. Measurement period adjustments will be recorded, as necessary, as adjustments to income tax expense from continuing operations.

Measurement of Defined Benefit Pension and Other Postretirement Employee Benefit (“OPEB”) Plans

We sponsor defined benefit pension plans (“pension plans”) and OPEB plans for our employees and retirees. We recognize the funded status of our pension plans and OPEB plans on our Consolidated Balance Sheets based on our year-end measurements of plan assets and benefit obligations. Prepaid pension and OPEB benefits represent prepaid costs related to our pension plans and are reported with other current and long-term assets. Liabilities associated with pension plans and OPEB plans are reported within current and other long-term liabilities based on the amount by which the actuarial present value of benefits payable in the next twelve months included in the benefit obligation exceeds the fair value of plan assets.

Earnings Per Share

 

18


We calculate basic earnings per share based on the weighted average number of common shares outstanding for the period. Diluted earnings per common share is calculated based on the weighted average number of common shares outstanding plus the dilutive effect of outstanding SARs, MSUs, PSUs, RSUs and PSARs using the treasury stock method. Refer to Notes 12 and 15 for additional information.

New Accounting Standards

Accounting for Financial Instruments - Hedge Accounting

During the third quarter of 2017, we elected to early adopt new accounting guidance which simplifies the application of hedge accounting. The new guidance expands our ability to hedge non-financial and financial risk components, eliminates the requirement to separately measure and report hedge ineffectiveness, requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item and simplifies certain documentation and assessment requirements. The adoption of this new guidance did not have a material impact on our financial position or operating results.

Simplifying the Test for Goodwill Impairment

Effective January 1, 2017, we adopted, on a prospective basis, new accounting guidance which simplifies the accounting for goodwill impairment. The new guidance eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. A goodwill impairment charge would be recognized if the carrying amount of a reporting unit exceeds the estimated fair value of the reporting unit. The adoption of this new guidance did not have a material impact on our financial position or operating results.

Classification of Certain Cash Receipts and Cash Payments in the Consolidated Statements of Cash Flows

Effective January 1, 2017, we adopted, on a retrospective basis, new accounting guidance which clarifies the classification of certain cash receipts and cash payments in our Consolidated Statements of Cash Flows. As a result, we classified $54 million of cash distributions received from our partnership investments as cash inflows from operating activities for the year ended December 31, 2017, that previously would have been classified as cash inflows from investing activities. There were no material reclassifications in our Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015 as a result of the adoption of this new guidance.

Future Application of Accounting Standards

Revenue from Contracts with Customers

Effective January 1, 2018, we adopted new accounting guidance related to revenue recognition from contracts with customers. While industry-specific guidance related to contracts with customers within the scope of Accounting Standards Codification (“ASC”) 944 Financial Services - Insurance remains unchanged, most other industry-specific revenue recognition requirements have been removed. The new guidance requires that an entity recognize revenue for the transfer of goods or services to a customer at an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The new guidance also requires additional disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. We adopted the new guidance using the modified retrospective approach. The new guidance only impacted contracts with customers outside of the scope of ASC Topic 944. We expect an increase to revenue and expenses within an expected range of approximately $1.5 billion to $2.0 billion for 2018 related to modifications to principal versus agent guidance for our home delivery and specialty pharmacy operations. We do not anticipate any material changes in the timing of our recognition of revenue or net income.

Recognition and Measurement of Financial Assets and Financial Liabilities

Effective January 1, 2018, we adopted new accounting guidance related to the recognition and measurement of financial assets and financial liabilities. Under the new guidance, all equity investments in unconsolidated entities will be measured at fair value with changes in fair value recognized in net income. We may elect to report equity investments without a readily determinable fair value at cost less impairment, plus or minus subsequent adjustments for observable price changes. The new guidance also revises certain disclosures regarding financial assets and liabilities. The adoption of this new guidance did not have a material impact on our financial position or operating results.

 

19


Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

Effective January 1, 2018, we adopted, on a retrospective basis, new accounting guidance related to the presentation of net periodic pension costs and net periodic postretirement benefit costs. Under the new guidance, the service cost component is required to be reported in the same income statement line item as other employee compensation costs for services rendered during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component and outside of a subtotal of income from operations. The net periodic benefit costs for the Company’s pension and other postretirement employee benefit plans do not contain a service cost component as these defined benefit plans have been frozen for an extended period of time. The adoption of this new guidance did not have a material impact on our financial position or operating results.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

New accounting guidance was issued related to the reclassification of certain tax effects from accumulated other comprehensive income to retained earnings. The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA. The new guidance is effective January 1, 2019, with early adoption permitted. We are still evaluating whether we will adopt the new guidance as well as the impact of the adoption of this new guidance on our financial position and operating results.

Leases

Effective January 1, 2019, we will adopt new accounting guidance related to the recognition, measurement and disclosure requirements for leases. Under the new guidance, lessees will be required to recognize a right-of-use asset and corresponding lease liability on their Consolidated Balance Sheets for all leases other than those that meet the definition of a short-term lease. The new guidance also revises certain disclosure requirements regarding leases. While we are still evaluating the impact of adoption of this new guidance, we anticipate that we will be required to record an asset and corresponding liability related to our operating leases (as described in Note 17) on our Consolidated Balance Sheets. The adoption of this new guidance is not expected to have a material impact on our operating results.

Accounting for Interest Associated with the Purchase of Callable Debt Securities

Effective January 1, 2019, we will adopt new accounting guidance related to the amortization of purchased callable debt securities held at a premium. Under the new guidance, premiums on callable debt securities are amortized to the earliest call date rather than to the contractual maturity date. Callable debt securities held at a discount will continue to be amortized to the contractual maturity date. We are still evaluating the impact of the adoption of this new guidance on our financial position and operating results.

Measurement of Credit Losses on Financial Instruments

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

 

3. Acquisition, Divestiture, Terminated Acquisition and Terminated Divestiture

Proposed Acquisition by CVS Health

On December 3, 2017, we entered into a definitive agreement (the “CVS Merger Agreement”) under which CVS Health Corporation (“CVS Health”) will acquire all of our outstanding shares for a combination of cash and stock. Under terms of the agreement, our shareholders will receive $145 in cash and 0.8378 of a CVS Health common share for each of our common shares. The proposed transaction (the “CVS Health Transaction”) is subject to customary closing conditions, including the approval and adoption of the CVS Merger Agreement by our shareholders, the approval of the issuance of CVS Health shares in the transaction by CVS Health stockholders, expiration of the federal Hart-Scott-Rodino anti-trust waiting period and approvals of certain state departments of insurance and other regulators. On February 1, 2018, Aetna and CVS Health each

 

20


received a request for additional information (also known as a “second request”) from the U.S. Department of Justice (the “DOJ”) in connection with the DOJ’s review of the transactions contemplated by the CVS Merger Agreement. The CVS Health Transaction is expected to close in the second half of 2018.

Divestiture of Group Life Insurance, Group Disability Insurance, and Absence Management Businesses

On November 1, 2017, we completed the sale of a substantial portion of our Group Insurance segment consisting of our domestic group life insurance, group disability insurance and absence management businesses (the “Group Insurance sale”) to HLAIC for cash consideration of $1.45 billion. The transaction was accomplished through an indemnity reinsurance arrangement, under which HLAIC contractually assumed certain of our policyholder liabilities and obligations, although we remain directly obligated to policyholders. Assets related to and supporting the reinsured life and disability insurance policies were transferred to a trust established by HLAIC for our benefit, and we recorded a reinsurance receivable from HLAIC. The sale is expected to result in an after-tax gain of approximately $710 million ($1.1 billion pre-tax), a significant portion of which has been deferred and will be amortized into earnings: (i) over the remaining contract period (estimated to be approximately 3 years) in proportion to the amount of insurance protection provided for the prospective reinsurance portion of the gain; and (ii) as we recover amounts due from HLAIC over a period estimated to be approximately 30 years for the retrospective reinsurance portion of the gain. The deferred gain liability was recorded in accrued expenses and other current liabilities and in other long-term liabilities on our Consolidated Balance Sheets, and the gain recognition is being recorded in fees and other revenue in our Consolidated Statements of Income.

Revenues for the businesses sold were $1.9 billion, $2.3 billion and $2.3 billion for the for the years ended December 31, 2017, 2016, and 2015, respectively. Income before income taxes for the businesses being sold were $104 million, $127 million and $187 million for the years ended December 31, 2017, 2016, and 2015, respectively.

Terminated Acquisition of Humana

On July 2, 2015, we entered into a definitive agreement (the “Humana Merger Agreement”) to acquire Humana Inc. (“Humana”). On July 21, 2016, the DOJ and certain state attorneys general filed a civil complaint in the U.S. District Court for the District of Columbia (the “District Court”) against us and Humana charging that our acquisition of Humana (the “Humana Transaction”) would violate Section 7 of the Clayton Antitrust Act, and seeking a permanent injunction to prevent Aetna from acquiring Humana. On January 23, 2017, the District Court granted the DOJ’s request to enjoin the Humana Transaction.

On February 14, 2017, Aetna and Humana entered into a mutual termination agreement (the “Termination Agreement”) pursuant to which the parties thereto (collectively the “Parties”) agreed to terminate the Humana Merger Agreement, including all schedules and exhibits thereto, and all ancillary agreements contemplated thereby, entered pursuant thereto or entered in connection therewith (other than certain confidentiality agreements) (collectively with the Humana Merger Agreement, the “Transaction Documents”), effective immediately as of February 14, 2017 (the “Termination Date”). Under the Termination Agreement, Aetna agreed to pay Humana the Regulatory Termination Fee (as defined in the Humana Merger Agreement) of $1.0 billion in cash in full satisfaction of any amounts required to be paid by Aetna under the Humana Merger Agreement. The Parties also agreed to release each other from any and all liability, claims, rights, actions, causes of action, suits, liens, obligations, accounts, debts, demands, agreements, promises, liabilities, controversies, costs, charges, damages, expenses and fees, however arising, in connection with, arising out of or related to the Transaction Documents, the transactions contemplated therein or thereby or certain related matters. We paid Humana the Regulatory Termination Fee on February 16, 2017 and recorded the expense in general and administrative expenses. We funded that payment with the proceeds of the 2016 senior notes (as defined below).

In June 2016, we issued $13.0 billion of senior notes to partially fund the Humana Transaction (collectively, the “2016 senior notes”). In accordance with the terms of the 2016 senior notes, on February 14, 2017, we issued a notice of redemption for $10.2 billion aggregate principal amount of certain of the 2016 senior notes (collectively, the “Special Mandatory Redemption Notes”) at a redemption price equal to 101% of the aggregate principal amount of those notes plus accrued and unpaid interest. We redeemed the Special Mandatory Redemption Notes on March 16, 2017, and we funded the redemption with the proceeds of the 2016 senior notes. As a result of the redemption of the Special Mandatory Redemption Notes, we recognized certain costs in our net income during the year ended December 31, 2017. Refer to Note 9 for additional information.

 

21


Terminated Divestiture to Molina

In order to address the DOJ’s perceived competitive concerns regarding Medicare Advantage relating to the Humana Transaction, on August 2, 2016, we entered into a definitive agreement (the “Aetna APA”) to sell for cash to Molina Healthcare, Inc. (“Molina”) certain of our Medicare Advantage assets. On February 14, 2017, Aetna and Molina entered into a Termination Agreement (the “APA Termination Agreement”) pursuant to which Aetna terminated the Aetna APA, including all schedules and exhibits thereto, and all ancillary agreements contemplated thereby or entered pursuant thereto. Under the APA Termination Agreement, Aetna agreed to pay Molina in cash (a) a termination fee of $53 million and (b) approximately 70% of Molina’s transaction costs. We paid Molina the termination fee on February 16, 2017 and the applicable transaction costs of $7 million on February 27, 2017 and recorded the expense in general and administrative expenses. The payments were funded with the proceeds of the 2016 senior notes.

 

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4. Investments

Total investments at December 31, 2017 and 2016 were as follows:

 

     2017      2016  
(Millions)    Current      Long-term      Total      Current      Long-term      Total  

Debt and equity securities available for sale

   $ 2,114      $ 14,906      $ 17,020      $ 2,876      $ 18,866      $ 21,742  

Mortgage loans

     166        1,330        1,496        170        1,341        1,511  

Other investments

     —          1,557        1,557        —          1,626        1,626  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 2,280      $ 17,793      $ 20,073      $ 3,046      $ 21,833      $ 24,879  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2017 and 2016, we held investments of $616 million and $657 million, respectively, related to the 2012 conversion of an existing group annuity contract from a participating to a non-participating contract. These investments are included in the total investments of our Large Case Pensions segment supporting non-experience-rated products. Although these investments are not accounted for as Separate Accounts assets, they are legally segregated and are not subject to claims that arise out of our business and only support our future policy benefits obligations under that group annuity contract. Refer to Note 2 for additional information.

Debt and Equity Securities

Debt and equity securities available for sale at December 31, 2017 and 2016 were as follows:

 

(Millions)    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

December 31, 2017

           

Debt securities:

           

U.S. government securities

   $ 1,319      $ 44      $ (1    $ 1,362  

States, municipalities and political subdivisions

     3,287        116        (12      3,391  

U.S. corporate securities

     6,886        388        (22      7,252  

Foreign securities

     2,498        187        (7      2,678  

Residential mortgage-backed securities

     570        5        (4      571  

Commercial mortgage-backed securities

     641        3        (9      635  

Other asset-backed securities

     1,031        8        (4      1,035  

Redeemable preferred securities

     22        4        —          26  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     16,254        755        (59      16,950  

Equity securities

     60        12        (2      70  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt and equity securities (1) (2)

   $ 16,314      $ 767      $ (61    $ 17,020  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

           

Debt securities:

           

U.S. government securities

   $ 1,643      $ 51      $ —        $ 1,694  

States, municipalities and political subdivisions

     5,047        152        (61      5,138  

U.S. corporate securities

     8,145        385        (55      8,475  

Foreign securities

     2,958        163        (33      3,088  

Residential mortgage-backed securities

     793        11        (9      795  

Commercial mortgage-backed securities

     1,382        5        (39      1,348  

Other asset-backed securities

     1,077        7        (9      1,075  

Redeemable preferred securities

     22        5        —          27  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     21,067        779        (206      21,640  

Equity securities

     84        20        (2      102  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt and equity securities (1) (2)

   $ 21,151      $ 799      $ (208    $ 21,742  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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(1) At both December 31, 2017 and 2016, we held securities for which we previously recognized an immaterial amount of non-credit related impairments in accumulated other comprehensive loss. These securities each had an immaterial amount of net unrealized capital gains at both December 31, 2017 and 2016.
(2) Investment risks associated with our experience-rated and discontinued products generally do not impact our operating results (refer to Note 19 for additional information on our accounting for discontinued products). At December 31, 2017, debt and equity securities with a fair value of approximately $2.6 billion, gross unrealized capital gains of $202 million and gross unrealized capital losses of $9 million and, at December 31, 2016, debt and equity securities with a fair value of approximately $2.9 billion, gross unrealized capital gains of $195 million and gross unrealized capital losses of $35 million were included in total debt and equity securities, but support our experience-rated and discontinued products. Changes in net unrealized capital gains (losses) on these securities are not reflected in accumulated other comprehensive income.

The fair value of debt securities at December 31, 2017 is shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called or prepaid, or we intend to sell a security prior to maturity.

 

(Millions)    Amortized
Cost
     Fair
Value
 

Due to mature:

     

Less than one year

   $ 1,048      $ 1,055  

One year through five years

     5,559        5,665  

After five years through ten years

     3,503        3,614  

Greater than ten years

     3,902        4,375  

Residential mortgage-backed securities

     570        571  

Commercial mortgage-backed securities

     641        635  

Other asset-backed securities

     1,031        1,035  
  

 

 

    

 

 

 

Total

   $ 16,254      $ 16,950  
  

 

 

    

 

 

 

Mortgage-Backed and Other Asset-Backed Securities

All of our residential mortgage-backed securities at December 31, 2017 were issued by the Government National Mortgage Association, the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation and carry agency guarantees and explicit or implicit guarantees by the U.S. Government. At December 31, 2017, our residential mortgage-backed securities had an average credit quality rating of AAA and a weighted average duration of 4.5 years.

Our commercial mortgage-backed securities have underlying loans that are dispersed throughout the United States. Significant market observable inputs used to value these securities include loss severity and probability of default. At December 31, 2017, these securities had an average credit quality rating of AAA and a weighted average duration of 6.8 years.

Our other asset-backed securities have a variety of underlying collateral (e.g., automobile loans, credit card receivables, home equity loans and commercial loans). Significant market observable inputs used to value these securities include the unemployment rate, loss severity and probability of default. At December 31, 2017, these securities had an average credit quality rating of AA- and a weighted average duration of 1.0 years.

 

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Summarized below are the debt and equity securities we held at December 31, 2017 and 2016 that were in an unrealized capital loss position, aggregated by the length of time the investments have been in that position:

 

     Less than 12 months      Greater than 12 months      Total (1)  
(Millions, except number of securities)    Number of
Securities
     Fair
Value
     Unrealized
Losses
     Number of
Securities
     Fair
Value
     Unrealized
Losses
     Number of
Securities
     Fair
Value
     Unrealized
Losses
 

December 31, 2017

                          

Debt securities:

                          

U.S. government securities

     77      $ 200      $ 1        14      $ 22      $ —          91      $ 222      $ 1  

States, municipalities and political subdivisions

     318        616        4        111        308        8        429        924        12  

U.S. corporate securities

     989        1,469        6        284        494        16        1,273        1,963        22  

Foreign securities

     262        419        3        91        194        4        353        613        7  

Residential mortgage-backed securities

     111        179        1        98        134        3        209        313        4  

Commercial mortgage-backed securities

     38        135        1        79        241        8        117        376        9  

Other asset-backed securities

     150        304        2        79        151        2        229        455        4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     1,945        3,322        18        756        1,544        41        2,701        4,866        59  

Equity securities

     2        2        —          7        7        2        9        9        2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total debt and equity securities (1)

     1,947      $ 3,324      $ 18        763      $ 1,551      $ 43        2,710      $ 4,875      $ 61  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

                          

Debt securities:

                          

U.S. government securities

     26      $ 39      $ —          1      $ 1      $ —          27      $ 40      $ —    

States, municipalities and political subdivisions

     865        2,228        58        37        75        3        902        2,303        61  

U.S. corporate securities

     1,428        2,277        44        114        101        11        1,542        2,378        55  

Foreign securities

     649        970        27        62        76        6        711        1,046        33  

Residential mortgage-backed securities

     188        455        8        104        17        1        292        472        9  

Commercial mortgage-backed securities

     285        1,038        39        3        3        —          288        1,041        39  

Other asset-backed securities

     226        403        4        208        177        5        434        580        9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     3,667        7,410        180        529        450        26        4,196        7,860        206  

Equity securities

     2        3        —          8        3        2        10        6        2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total debt and equity securities (1)

     3,669      $ 7,413      $ 180        537      $ 453      $ 28        4,206      $ 7,866      $ 208  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) At December 31, 2017 and 2016, debt and equity securities in an unrealized capital loss position of $9 million and $35 million, respectively, and with related fair value of $517 million and $890 million, respectively, related to experience-rated and discontinued products.

We reviewed the securities in the tables above and concluded that they are performing assets generating investment income to support the needs of our business. In performing this review, we considered factors such as the quality of the investment security based on research performed by our internal credit analysts and external rating agencies and the prospects of realizing the carrying value of the security based on the investment’s current prospects for recovery. At December 31, 2017, we did not intend to sell these securities, and we did not believe it was more likely than not that we would be required to sell these securities prior to anticipated recovery of their amortized cost basis.

 

25


The maturity dates for debt securities in an unrealized capital loss position at December 31, 2017 were as follows:

 

     Supporting discontinued
and experience-rated products
     Supporting remaining
products
     Total  
(Millions)    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

Due to mature:

                 

Less than one year

   $ 2      $ —        $ 415      $ 1      $ 417      $ 1  

One year through five years

     119        —          1,890        18        2,009        18  

After five years through ten years

     170        3        675        10        845        13  

Greater than ten years

     97        3        354        7        451        10  

Residential mortgage-backed securities

     12        —          301        4        313        4  

Commercial mortgage-backed securities

     109        2        267        7        376        9  

Other asset-backed securities

     6        —          449        4        455        4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 515      $ 8      $ 4,351      $ 51      $ 4,866      $ 59  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage Loans

Our mortgage loans are collateralized by commercial real estate. During 2017 and 2016 we had the following activity in our mortgage loan portfolio:

 

(Millions)    2017      2016  

New mortgage loans

   $ 279      $ 190  

Mortgage loans fully-repaid

     248        173  

Mortgage loans foreclosed

     —          8  
  

 

 

    

 

 

 

We assess our mortgage loans on a regular basis for credit impairments, and annually assign a credit quality indicator to each loan. Our credit quality indicator is internally developed and categorizes our portfolio on a scale from 1 to 7. These indicators are based upon several factors, including current loan-to-value ratios, property condition, market trends, creditworthiness of the borrower and deal structure. The vast majority of our mortgage loans fall into categories 2 to 4.

 

    Category 1 - Represents loans of superior quality

 

    Categories 2 to 4 - Represents loans where credit risk is minimal to acceptable; however, these loans may display some susceptibility to economic changes.

 

    Categories 5 and 6 - Represents loans where credit risk is not substantial, but these loans warrant management’s close attention.

 

    Category 7 - Represents loans where collections are potentially at risk; if necessary, an impairment is recorded.

Based upon our most recent assessments at December 31, 2017 and 2016, our mortgage loans were given the following credit quality indicators:

 

(In Millions, except credit ratings indicator)    2017      2016  

1

   $ 40      $ 45  

2 to 4

     1,447        1,449  

5 and 6

     9        17  

7

     —          —    
  

 

 

    

 

 

 

Total

   $ 1,496      $ 1,511  
  

 

 

    

 

 

 

 

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At December 31, 2017 scheduled mortgage loan principal repayments were as follows:

 

(Millions)       

2018

   $ 166  

2019

     124  

2020

     141  

2021

     273  

2022

     244  

Thereafter

     548  

Net Investment Income

Sources of net investment income for 2017, 2016 and 2015 were as follows:

 

(Millions)    2017      2016      2015  

Debt securities

   $ 727      $ 772      $ 794  

Mortgage loans

     86        95        91  

Other investments

     185        82        78  
  

 

 

    

 

 

    

 

 

 

Gross investment income

     998        949        963  

Investment expenses

     (48      (39      (46
  

 

 

    

 

 

    

 

 

 

Net investment income (1)

   $ 950      $ 910      $ 917  
  

 

 

    

 

 

    

 

 

 

 

(1) Net investment income includes $233 million, $208 million and $248 million for 2017, 2016 and 2015, respectively, related to investments supporting our experience-rated and discontinued products.

Realized Capital Gains/Losses

Net realized capital (losses) gains for the three years ended December 31, 2017, 2016 and 2015, excluding amounts related to experience-rated contract holders and discontinued products, were as follows:

 

(Millions)    2017      2016      2015  

Other-than-temporary impairment (“OTTI”) losses on debt securities recognized in earnings

   $ (8    $ (30    $ (64

Other net realized capital (losses) gains

     (231      116        (1
  

 

 

    

 

 

    

 

 

 

Net realized capital (losses) gains

   $ (239    $ 86      $ (65
  

 

 

    

 

 

    

 

 

 

The net realized capital losses in 2017 were primarily attributable to the recognition into earnings of the entire unamortized effective portion of the related hedge losses upon the mandatory redemption of $10.2 billion aggregate principal amount of the Special Mandatory Redemption Notes and the redemption of $750 million aggregate principal amount of senior notes due 2020, partially offset by gains from the sale of debt securities and gains from other investments. The net realized capital gains in 2016 were primarily attributable to gains from the sales of debt securities and other investments, partially offset by yield-related OTTI on debt securities. The net realized capital losses in 2015 were primarily attributable to yield-related OTTI on U.S. corporate debt securities.

Yield-related impairments are recognized in other comprehensive income unless we have the intention to sell the security in an unrealized capital loss position, in which case the yield-related OTTI is recognized in earnings. In 2017, 2016 and 2015, we recognized yield-related OTTI losses of $6 million, $24 million and $63 million, respectively, related to our debt securities. We had no other individually material realized capital losses on debt or equity securities that impacted our operating results during 2017, 2016 or 2015.

Excluding amounts related to experience-rated and discontinued products, proceeds from the sale of available for sale debt and equity securities and the related gross realized capital gains and losses for 2017, 2016 and 2015 were as follows (1):

 

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(Millions)    2017      2016      2015  

Proceeds on sales

   $ 5,753      $ 6,725      $ 4,987  

Gross realized capital gains

     114        155        83  

Gross realized capital losses

     47        61        76  
  

 

 

    

 

 

    

 

 

 

 

(1) The proceeds on sales and gross realized capital gains and losses exclude the impact of the sales of short-term debt securities which primarily relate to our investments in mutual funds. These investments were excluded from the disclosed amounts because they represent an immaterial amount of aggregate gross realized capital gains or losses and have a high volume of sales activity.

Variable Interest Entities

We have investments in certain hedge fund and private equity investments and real estate partnerships that are considered Variable Interest Entities (“VIE’s”). We do not have a future obligation to fund losses or debts on behalf of these investments; however, we may voluntarily contribute funds. In evaluating whether we are the primary beneficiary of a VIE, we considered several factors, including whether we (a) have the power to direct the activities that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses and the right to receive benefits that could potentially be significant to the VIE.

Variable Interest Entities - Primary Beneficiary

During the fourth quarter of 2017, we redeemed the entire minority shareholder interest related to our majority owned hedge fund investment where we were the investment manager and had the power to direct the activities that most significantly impact the VIE’s economic performance, including determining the hedge fund’s investment strategy. Prior to the fourth quarter of 2017, we were the primary beneficiary and consolidated the investment in our operating results. As of December 31, 2017, we will continue to consolidate the hedge fund in our operating results; however, the investment is no longer considered a VIE as the hedge fund is a wholly-owned subsidiary.

Substantially all of the assets of the VIE hedge fund were comprised of hedge fund investments reported as long-term investments on our Consolidated Balance Sheets. The VIE hedge fund had no material liabilities at December 31, 2016. The total amount of the VIE hedge fund’s assets included in long-term investments on our Consolidated Balance Sheets at December 31, 2016 was $472 million.

Variable Interest Entities - Other Variable Interest Holder

Our involvement with VIEs where we are not determined to be the primary beneficiary consists of the following:

 

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

 

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

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

 

28


The total amount of other variable interest holder VIE assets included in long-term investments on our Consolidated Balance Sheets at December 31, 2017 and 2016 were as follows:

 

(Millions)    December 31,
2017
     December 31,
2016
 

Hedge fund investments

   $ 351      $ 384  

Private equity investments

     453        454  

Real estate partnerships

     247        278  
  

 

 

    

 

 

 

Total

   $ 1,051      $ 1,116  
  

 

 

    

 

 

 

The carrying value of the total assets and liabilities of our other variable interest holder VIE investments at December 31, 2017 and 2016 were as follows:

 

(Millions)    December 31,
2017
     December 31,
2016
 

Assets:

     

Hedge fund investments

   $ 54,789      $ 32,926  

Private equity investments

     27,342        25,368  

Real estate partnerships

     6,451        6,743  
  

 

 

    

 

 

 

Total

   $ 88,582      $ 65,037  
  

 

 

    

 

 

 

Liabilities:

     

Hedge fund investments

   $ 12,073      $ 2,819  

Private equity investments

     2,461        2,354  

Real estate partnerships

     4,691        4,938  
  

 

 

    

 

 

 

Total

   $ 19,225      $ 10,111  
  

 

 

    

 

 

 

 

5. Fair Value

The preparation of our consolidated financial statements in accordance with GAAP requires certain of our assets and liabilities to be reflected at their fair value, and others on another basis, such as an adjusted historical cost basis. In this note, we provide details on the fair value of financial assets and liabilities and how we determine those fair values. We present this information for those financial instruments that are measured at fair value for which the change in fair value impacts net income attributable to Aetna or other comprehensive income separately from other financial assets and liabilities.

Financial Instruments Measured at Fair Value in our Consolidated Balance Sheets

Certain of our financial instruments are measured at fair value in our Consolidated Balance Sheets. The fair values of these instruments are based on valuations that include inputs that can be classified within one of three levels of a hierarchy established by GAAP. The following are the levels of the hierarchy and a brief description of the type of valuation information (“inputs”) that qualifies a financial asset or liability for each level:

 

    Level 1 Unadjusted quoted prices for identical assets or liabilities in active markets.

 

    Level 2 Inputs other than Level 1 that are based on observable market data. These include: quoted prices for similar assets in active markets, quoted prices for identical assets in inactive markets, inputs that are observable that are not prices (such as interest rates and credit risks) and inputs that are derived from or corroborated by observable markets.

 

    Level 3 Developed from unobservable data, reflecting our own assumptions.

Financial assets and liabilities are classified based upon the lowest level of input that is significant to the valuation. When quoted prices in active markets for identical assets and liabilities are available, we use these quoted market prices to determine the fair value of financial assets and liabilities and classify these assets and liabilities in Level 1. In other cases where a quoted

 

29


market price for identical assets and liabilities in an active market is either not available or not observable, we estimate fair value using valuation methodologies based on available and observable market information or by using a matrix pricing model. These financial assets and liabilities would then be classified in Level 2. If quoted market prices are not available, we determine fair value using broker quotes or an internal analysis of each investment’s financial performance and cash flow projections. Thus, financial assets and liabilities may be classified in Level 3 even though there may be some significant inputs that may be observable.

The following is a description of the valuation methodologies used for our financial assets and liabilities that are measured at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Debt Securities – Where quoted prices are available in an active market, our debt securities are classified in Level 1 of the fair value hierarchy. Our Level 1 debt securities consist primarily of U.S. Treasury securities.

The fair values of our Level 2 debt securities are obtained using models, such as matrix pricing, which use quoted market prices of debt securities with similar characteristics, or discounted cash flows to estimate fair value. We review these prices to ensure they are based on observable market inputs that include, but are not limited to, quoted prices for similar assets in active markets, quoted prices for identical assets in inactive markets and inputs that are observable but not prices (for example, interest rates and credit risks). We also review the methodologies and the assumptions used to calculate prices from these observable inputs. On a quarterly basis, we select a sample of our Level 2 debt securities’ prices and compare them to prices provided by a secondary source. Variances over a specified threshold are identified and reviewed to confirm the price provided by the primary source represents an appropriate estimate of fair value. In addition, our internal investment team consistently compares the prices obtained for select Level 2 debt securities to the team’s own independent estimates of fair value for those securities. We obtained one price for each of our Level 2 debt securities and did not adjust any of these prices at December 31, 2017 or 2016.

We also value certain debt securities using Level 3 inputs. For Level 3 debt securities, fair values are determined by outside brokers or, in the case of certain private placement securities, are priced internally. Outside brokers determine the value of these debt securities through a combination of their knowledge of the current pricing environment and market flows. We obtained one non-binding broker quote for each of these Level 3 debt securities and did not adjust any of these quotes at December 31, 2017 or 2016. The total fair value of our broker quoted debt securities was $67 million and $80 million at December 31, 2017 and 2016, respectively. Examples of these broker quoted Level 3 debt securities include certain U.S. and foreign corporate securities and certain of our commercial mortgage-backed securities as well as other asset-backed securities. For some of our private placement securities, our internal staff determines the value of these debt securities by analyzing spreads of corporate and sector indices as well as interest spreads of comparable public bonds. Examples of these private placement Level 3 debt securities include certain U.S. and foreign securities and certain tax-exempt municipal securities.

Equity Securities – We currently have two classifications of equity securities: those that are publicly traded and those that are privately placed. Our publicly-traded equity securities are classified in Level 1 because quoted prices are available for these securities in an active market. For privately placed equity securities, there is no active market; therefore, we classify these securities in Level 3 because we price these securities through an internal analysis of each investment’s financial statements and cash flow projections. Significant unobservable inputs consist of earnings and revenue multiples, discount for lack of marketability and comparability adjustments. An increase or decrease in any of these unobservable inputs would result in a change in the fair value measurement, which may be significant.

Derivatives – Where quoted prices are available in an active market, our derivatives are classified in Level 1. Certain of our derivative instruments are valued using models that primarily use market observable inputs and therefore are classified in Level 2 because they are traded in markets where quoted market prices are not readily available.

 

30


Financial assets and liabilities measured at fair value on a recurring basis in our Consolidated Balance Sheets at December 31, 2017 and 2016 were as follows:

 

(Millions)    Level 1      Level 2      Level 3      Total  

December 31, 2017

           

Assets:

           

Debt securities:

           

U.S. government securities

   $ 1,313      $ 49      $ —        $ 1,362  

States, municipalities and political subdivisions

     —          3,390        1        3,391  

U.S. corporate securities

     —          7,167        85        7,252  

Foreign securities

     —          2,675        3        2,678  

Residential mortgage-backed securities

     —          571        —          571  

Commercial mortgage-backed securities

     —          635        —          635  

Other asset-backed securities

     —          1,035        —          1,035  

Redeemable preferred securities

     —          19        7        26  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     1,313        15,541        96        16,950  

Equity securities

     43        —          27        70  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,356      $ 15,541      $ 123      $ 17,020  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

           

Assets:

           

Debt securities:

           

U.S. government securities

   $ 1,514      $ 180      $ —        $ 1,694  

States, municipalities and political subdivisions

     —          5,137        1        5,138  

U.S. corporate securities

     —          8,395        80        8,475  

Foreign securities

     —          3,067        21        3,088  

Residential mortgage-backed securities

     —          795        —          795  

Commercial mortgage-backed securities

     —          1,348        —          1,348  

Other asset-backed securities

     —          1,075        —          1,075  

Redeemable preferred securities

     —          26        1        27  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     1,514        20,023        103        21,640  

Equity securities

     59        —          43        102  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,573      $ 20,023      $ 146      $ 21,742  
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no transfers between Levels 1 and 2 during the years ended December 31, 2017 and 2016.

 

31


The changes in the balances of Level 3 financial assets during 2017 were as follows:

 

(Millions)    Foreign
securities
    U.S.
corporate
securities
    Equity
securities
    Other     Total  

Beginning balance

   $ 21     $ 80     $ 43     $ 2     $ 146  

Net realized and unrealized capital gains (losses):

          

Included in earnings

     —         4       42       —         46  

Included in other comprehensive income

     —         —         (38     —         (38

Purchases

     —         18       9       42       69  

Sales

     —         —         (29     —         (29

Settlements

     —         (17     —         —         (17

Transfers out of Level 3, net

     (18     —         —         (36     (54
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 3     $ 85     $ 27     $ 8     $ 123  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The changes in the balances of Level 3 financial assets during 2016 were as follows:

 

(Millions)    Foreign
securities
    U.S.
corporate
securities
    Equity
securities
     Other     Total  

Beginning balance

   $ 25     $ 64     $ 19      $ 6     $ 114  

Net realized and unrealized capital (losses) gains:

           

Included in earnings

     —         (15     —          —         (15

Included in other comprehensive income

     —         (4     11        (3     4  

Other (1)

     —         —         3        —         3  

Purchases

     16       41       10        33       100  

Sales

     (8     (3     —          (5     (16

Settlements

     (2     (3     —          —         (5

Transfers out of Level 3, net

     (10     —         —          (29     (39
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance

   $ 21     $ 80     $ 43      $ 2     $ 146  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Reflects realized and unrealized capital gains and losses on investments supporting our experience-rated and discontinued products, which do not impact our operating results.

The total gross transfers into (out of) Level 3 during the years ended December 31, 2017 and 2016 were as follows:

 

(Millions)    2017      2016  

Gross transfers into Level 3

   $     —        $     —    

Gross transfers out of Level 3

     (54      (39
  

 

 

    

 

 

 

Net transfers out of Level 3

   $ (54    $ (39
  

 

 

    

 

 

 

Gross transfers out of Level 3 during 2017 primarily related to commercial mortgage-backed securities, other asset-backed securities and foreign debt securities for which observable market data was subsequently received. Gross transfers out of Level 3 during 2016 primarily related to commercial mortgage-backed securities for which observable market data was subsequently received.

 

32


Financial Instruments Not Measured at Fair Value in our Consolidated Balance Sheets

The following is a description of the valuation methodologies used for estimating the fair value of our financial assets and liabilities that are carried on our Consolidated Balance Sheets at adjusted cost or contract value.

Mortgage loans: Fair values are estimated by discounting expected mortgage loan cash flows at market rates that reflect the rates at which similar loans would be made to similar borrowers. These rates reflect our assessment of the creditworthiness of the borrower and the remaining duration of the loans. The fair value estimates of mortgage loans of lower credit quality, including problem and restructured loans, are based on the estimated fair value of the underlying collateral.

Bank loans: Where fair value is determined by quoted market prices of bank loans with similar characteristics, our bank loans are classified in Level 2. For bank loans classified in Level 3, fair value is determined by outside brokers using their internal analyses through a combination of their knowledge of the current pricing environment and market flows.

Equity securities: Certain of our equity securities are carried at cost. The fair values of our cost-method investments are not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment.

Investment contract liabilities:

 

    With a fixed maturity: Fair value is estimated by discounting cash flows at interest rates currently being offered by, or available to, us for similar contracts.

 

    Without a fixed maturity: Fair value is estimated as the amount payable to the contract holder upon demand. However, we have the right under such contracts to delay payment of withdrawals that may ultimately result in paying an amount different than that determined to be payable on demand.

Long-term debt: Fair values are based on quoted market prices for the same or similar issued debt or, if no quoted market prices are available, on the current rates estimated to be available to us for debt of similar terms and remaining maturities.

 

33


The carrying value and estimated fair value classified by level of fair value hierarchy for our financial instruments carried on our Consolidated Balance Sheets at adjusted cost or contract value at December 31, 2017 and 2016 were as follows:

 

     Carrying
Value
     Estimated Fair Value  
(Millions)       Level 1      Level 2      Level 3      Total  

December 31, 2017

              

Assets:

              

Mortgage loans

   $ 1,496      $ —        $ —        $ 1,524      $ 1,524  

Bank loans

     7        —          —          7        7  

Equity securities (1)

     45        N/A        N/A        N/A        N/A  

Liabilities:

              

Investment contract liabilities:

              

With a fixed maturity

     7        —          —          7        7  

Without a fixed maturity

     363        —          —          354        354  

Long-term debt

     9,159        —          9,815        —          9,815  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Carrying
Value
     Estimated Fair Value  
(Millions)       Level 1      Level 2      Level 3      Total  

December 31, 2016

              

Assets:

              

Mortgage loans

   $ 1,511      $ —        $ —        $ 1,540      $ 1,540  

Bank loans

     8        —          —          8        8  

Equity securities (1)

     35        N/A        N/A        N/A        N/A  

Liabilities:

              

Investment contract liabilities:

              

With a fixed maturity

     8        —          —          8        8  

Without a fixed maturity

     378        —          —          364        364  

Long-term debt

     20,661        —          21,468        —          21,468  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) It was not practical to estimate the fair value of these cost-method investments as it represents shares of unlisted companies.

Separate Accounts Measured at Fair Value in our Consolidated Balance Sheets

Separate Accounts assets in our Large Case Pensions segment represent funds maintained to meet specific objectives of contract holders. Since contract holders bear the investment risk of these assets, a corresponding Separate Accounts liability has been established equal to the assets. These assets and liabilities are carried at fair value. Net investment income and capital gains and losses accrue directly to such contract holders. The assets of each account are legally segregated and are not subject to claims arising from our other businesses. Deposits, withdrawals, net investment income and realized and unrealized capital gains and losses on Separate Accounts assets are not reflected in our Consolidated Statements of Income, Shareholders’ Equity or Cash Flows.

Separate Accounts assets include debt and equity securities and derivative instruments. The valuation methodologies used for these assets are similar to the methodologies described above in this Note 5. Separate Accounts assets also include investments in common/collective trusts that are carried at fair value. Common/collective trusts invest in other investment funds otherwise known as the underlying funds. The Separate Accounts’ interests in the common/collective trust funds are based on the fair values of the investments of the underlying funds and therefore are classified in Level 2. The assets in the underlying funds primarily consist of equity securities. Investments in common/collective trust funds are valued at their respective net asset value per share/unit on the valuation date.

 

34


Separate Accounts financial assets at December 31, 2017 and 2016 were as follows:

 

     2017      2016  
(Millions)    Level 1      Level 2      Level 3      Total      Level 1      Level 2      Level 3      Total  

Debt securities

   $ 1,085      $ 2,611      $ 2      $ 3,698      $ 766      $ 2,378      $ —        $ 3,144  

Equity securities

     —          6        —          6        166        6        —          172  

Common/collective trusts

     —          448        —          448        —          582        —          582  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total (1)

   $ 1,085      $ 3,065      $ 2      $ 4,152      $ 932      $ 2,966      $ —        $ 3,898  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excludes $144 million and $93 million of cash and cash equivalents and other receivables at December 31, 2017 and 2016, respectively.

During 2017 and 2016, we had an immaterial amount of Level 3 Separate Accounts financial assets and an immaterial amount of gross transfers of Separate Accounts financial assets into or out of Level 3. During 2017 and 2016, there were no transfers of Separate Accounts financial assets between Levels 1 and 2.

Offsetting Financial Assets and Liabilities

Certain financial assets and liabilities are offset in our Consolidated Balance Sheets or are subject to master netting arrangements or similar agreements with the applicable counterparty. Financial assets, including derivative assets, subject to offsetting and enforceable master netting arrangements were $10 million and $17 million at December 31, 2017 and December 31, 2016, respectively.

There were no financial liabilities, including derivative liabilities, subject to offsetting and enforceable master netting arrangements at December 31, 2017 or December 31, 2016.

 

6. Goodwill and Other Acquired Intangible Assets

The change in the carrying amount of goodwill for our reportable segments for the years ended December 31, 2017 and 2016 was as follows:

 

(Millions)    Health Care      Group Insurance      Total Company  

Balance at January 1, 2016

   $ 10,524      $ 113      $ 10,637  

Acquisitions

     —          —          —    

Dispositions

     —          —          —    

Subsequent adjustments

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2016

     10,524        113        10,637  

Acquisitions

     47        —          47  

Dispositions

     —          (113      (113

Subsequent adjustments

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2017

   $ 10,571      $ —        $ 10,571  
  

 

 

    

 

 

    

 

 

 

No goodwill is allocated to the Large Case Pensions segment. The increase in goodwill allocated to our Health Care segment in 2017 was due to goodwill associated with an immaterial acquisition. The decrease in goodwill allocated to our Group Insurance segment in 2017 was due to the Group Insurance sale.

 

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Other acquired intangible assets at December 31, 2017 and 2016 consisted of the following:

 

(Millions)    Cost      Accumulated
Amortization
     Net
Balance
     Amortization
Period
(Years)
        

2017

              

Provider networks

   $ 1,254      $ 756      $ 498        12-25        (1)  

Customer lists

     1,172        610        562        3-20        (1)  

Value of business acquired

     149        102        47        20     

Technology

     176        160        16        5     

Other

     14        5        9        10-15     

Definite-lived trademarks

     170        144        26        5-20     

Indefinite-lived trademarks

     22        —          22        
  

 

 

    

 

 

    

 

 

       

Total other acquired intangible assets

   $ 2,957      $ 1,777      $ 1,180        
  

 

 

    

 

 

    

 

 

       

2016

              

Provider networks

   $ 1,254      $ 694      $ 560        12-25        (1)  

Customer lists

     1,166        485        681        3-14        (1)  

Value of business acquired

     149        92        57        20     

Technology

     176        123        53        4-10     

Other

     10        4        6        10-15     

Definite-lived trademarks

     170        107        63        5-20     

Indefinite-lived trademarks

     22        —          22        
  

 

 

    

 

 

    

 

 

       

Total other acquired intangible assets

   $ 2,947      $ 1,505      $ 1,442        
  

 

 

    

 

 

    

 

 

       

 

(1) The amortization period for our provider networks and customer lists includes an assumption of renewal or extension of these arrangements. At both December 31, 2017 and 2016, the periods prior to the next renewal or extension for our provider networks primarily ranged from 1 to 3 years, and the period prior to the next renewal or extension for our customer lists was 1 year. Any costs related to the renewal or extension of these contracts are expensed as incurred.

We estimate annual pre-tax amortization for other acquired intangible assets over the next five years to be as follows:

 

(Millions)       

2018

   $ 187  

2019

     181  

2020

     169  

2021

     156  

2022

     140  

 

7. Health Care and Other Insurance Liabilities

Our insurance liabilities below are disaggregated by reportable segment. Health care costs payable relate to our Health Care segment and unpaid claims relate to our Group Insurance segment. On November 1, 2017, we sold a substantial portion of our Group Insurance segment consisting of our domestic group life insurance, group disability insurance and absence management businesses to HLAIC. The transaction was accomplished through an indemnity reinsurance arrangement and accordingly, substantially all of our life and disability insurance reserves were fully ceded at December 31, 2017. As a result, we did not include disclosures related to the development of our unpaid claims insurance liabilities.

Health Care Costs Payable

The following is information about incurred and cumulative paid Health Care claims development as of December 31, 2017, net of reinsurance, and the total IBNR liabilities plus expected development on reported claims included within the net incurred claims amounts. Refer to Note 2 for information on how we estimate our IBNR reserve and health care costs payable as well as changes to those methodologies, if any. Our estimate of IBNR liabilities is primarily based on trend and completion factors. Claim frequency is not used in the calculation of our liability. In addition, it is impracticable to disclose claim frequency

 

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information for health care claims due to our inability to gather consistent claim frequency information across our multiple claims processing systems. Any claim frequency count disclosure would not be comparable across our different claim processing systems and would not be consistent from period to period based on the volume of claims processed through each system. As a result, we have not included health care claim count frequency in the disclosures included below.

The information about incurred and paid Health Care claims development for the year ended December 31, 2016 is presented as required unaudited supplemental information.

 

(Millions)    Incurred Health Care Claims,
Net of Reinsurance

For the Years Ended December 31,
 
Date of Service    2016      2017  
     (Unaudited)         

2016

   $ 44,110      $ 43,434  

2017

        42,498  
     

 

 

 

Total

      $ 85,932  
     

 

 

 

 

(Millions)    Cumulative Paid Health Care Claims,
Net of Reinsurance
For the Years Ended December 31,
 
Date of Service    2016      2017  
     (Unaudited)         

2016

   $ 37,888      $ 43,273  

2017

        37,022  
     

 

 

 

Total

      $ 80,295  
     

 

 

 

All outstanding liabilities for health care costs payable prior to 2016, net of reinsurance

        54  
     

 

 

 

Total outstanding liabilities for health care costs payable, net of reinsurance

      $ 5,691  
  

 

 

 

At December 31, 2017, total Health Care liabilities for IBNR plus expected development on reported claims totaled approximately $5.0 billion. Substantially all of the total Health Care liabilities for IBNR plus expected development on reported claims at December 31, 2017 related to the current year.

The reconciliation of the December 31, 2017 Health Care net incurred and paid claims development tables to the health care costs payable liability in our Consolidated Balance Sheet is as follows:

 

(Millions)    December 31, 2017  

Short-duration health care costs payable, net of reinsurance

   $ 5,691  

Reinsurance recoverables

     6  

Premium deficiency reserve

     16  

Insurance lines other than short duration

     102  
  

 

 

 

Total health care costs payable

   $ 5,815  
  

 

 

 

 

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The following table shows the components of the change in health care costs payable during 2017, 2016 and 2015:

 

(Millions)    2017      2016      2015  

Health care costs payable, beginning of the period

   $ 6,558      $ 6,306      $ 5,621  

Less: Reinsurance recoverables

     5        4        6  
  

 

 

    

 

 

    

 

 

 

Health care costs payable, beginning of the period, net

     6,553        6,302        5,615  
  

 

 

    

 

 

    

 

 

 

Add: Components of incurred health care costs

        

Current year

     43,551        45,019        42,553  

Prior years

     (814      (764      (841
  

 

 

    

 

 

    

 

 

 

Total incurred health care costs

     42,737        44,255        41,712  
  

 

 

    

 

 

    

 

 

 

Less: Claims paid

        

Current year

     37,974        38,700        36,389  

Prior years

     5,523        5,304        4,636  
  

 

 

    

 

 

    

 

 

 

Total claims paid

     43,497        44,004        41,025  
  

 

 

    

 

 

    

 

 

 

Health care costs payable, end of period, net

     5,793        6,553        6,302  

Add: Premium deficiency reserve

     16        —          —    

Add: Reinsurance recoverables

     6        5        4  
  

 

 

    

 

 

    

 

 

 

Health care costs payable, end of period

   $ 5,815      $ 6,558      $ 6,306  
  

 

 

    

 

 

    

 

 

 

Our estimates of prior years’ health care costs payable decreased by $814 million, $764 million and $841 million in 2017, 2016 and 2015, respectively, because claims were settled for amounts less than originally estimated (i.e., the amount of claims incurred was lower than we originally estimated), primarily due to lower health care cost trends as well as the actual claim submission time being faster than we originally assumed (i.e., our completion factors were higher than we originally assumed) in estimating our health care costs payable at the end of the prior year. This development does not directly correspond to an increase in our current year operating results as these reductions were offset by estimated current period health care costs when we established our estimate of the current year health care costs payable.

 

8. The ACA’s Reinsurance, Risk Adjustment and Risk Corridor Programs (the “3Rs”)

Through December 31, 2017, we participated in certain public health insurance exchanges (“Public Exchanges”) established pursuant to the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (as amended, collectively, the “ACA”). Under regulations established by the U.S. Department of Health and Human Services (“HHS”), HHS pays us a portion of the premium (“Premium Subsidy”) and through September 30, 2017, paid a portion of the health care costs (“Cost Sharing Subsidy”) for low-income individual Public Exchange members. In addition, HHS administers the 3Rs risk management programs. The ACA’s temporary reinsurance and risk corridor programs expired at the end of 2016.

Our net receivable (payable) related to the 3Rs risk management programs at December 31, 2017 and 2016 was as follows:

 

     At December 31, 2017      At December 31, 2016  
(Millions)    Reinsurance      Risk
Adjustment
    Risk
Corridor
     Reinsurance      Risk
Adjustment
    Risk
Corridor
 

Current

   $ 37      $ (41   $ —        $ 202      $ (690   $ (10

Long-term

   $ —        $ 2     $ —        $ —        $ —       $ —    
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total net receivable (payable)

   $ 37      $ (39   $ —        $ 202      $ (690   $ (10
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

At December 31, 2017, we estimate that we are entitled to receive a total of $314 million from HHS under the three-year ACA risk corridor program for the 2014 through 2016 program years. In November 2016, HHS announced that all 2015 ACA risk corridor collections will be used to pay a portion of the balances on the 2014 ACA risk corridor payments. At December 31,

 

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2017 and 2016, we did not record any ACA risk corridor receivables related to the 2016 or 2015 program years or any amount in excess of HHS’s announced pro-rated funding amount for the 2014 program year because payments from HHS are uncertain.

We expect to perform an annual final reconciliation and settlement with HHS of the 3Rs in each subsequent year. The final reconciliation and settlement with HHS of the 2014 and 2015 Cost Sharing Subsidies occurred in 2016 and 2017, respectively. The final reconciliation and settlement of the 2016 Cost Sharing Subsidy is scheduled to occur in 2018.

 

9. Debt

Long-term debt

The carrying value of our long-term debt at December 31, 2017 and 2016 was as follows:

 

(Millions)    2017      2016  

Senior notes, 5.95% due March 2017 (1)

   $ —        $ 386  

Senior notes, 1.75% due May 2017 (1)

     —          250  

Senior notes, 1.5% due November 2017 (1)

     —          499  

Senior notes, floating rate due December 2017 (1)

     —          499  

Senior notes, 1.7% due June 2018 (1)

     999        997  

Senior notes, 2.2% due March 2019

     374        374  

Senior notes, 1.9% due June 2019

     —          1,642  

Senior notes, 3.95% due September 2020

     —          745  

Senior notes, 2.4% due June 2021

     —          1,839  

Senior notes, 5.45% due June 2021

     647        661  

Senior notes, 4.125% due June 2021

     496        495  

Senior notes, 2.75% due November 2022

     988        986  

Senior notes, 2.8% due June 2023

     1,292        1,290  

Senior notes, 3.5% due November 2024

     743        742  

Senior notes, 3.2% due June 2026

     —          2,771  

Senior notes, 4.25% due June 2036

     —          1,480  

Senior notes, 6.625% due June 2036

     766        765  

Senior notes, 6.75% due December 2037

     527        527  

Senior notes, 4.5% due May 2042

     479        478  

Senior notes, 4.125% due November 2042

     489        489  

Senior notes, 4.75% due March 2044

     371        371  

Senior notes, 4.375% due June 2046

     —          2,375  

Senior notes, 3.875% due August 2047

     988        —    
  

 

 

    

 

 

 

Total long-term debt

     9,159        20,661  

Less current portion of long-term debt

     999        1,634  
  

 

 

    

 

 

 

Total long-term debt, less current portion and credit facility issuance costs

   $ 8,160      $ 19,027  
  

 

 

    

 

 

 

 

(1) At December 31, 2017, our 1.7% senior notes due June 2018 are classified as current in our Consolidated Balance Sheet. At December 31, 2016, our 5.95% senior notes due March 2017, 1.75% senior notes due May 2017, 1.5% senior notes due November 2017 and floating rate senior notes due December 2017 were each classified as current in our Consolidated Balance Sheet.

 

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At December 31, 2017 the amount of future maturities of our long-term debt are as follows:

 

(Millions)       

2018

   $ 999  

2019

     374  

2020

     —    

2021

     1,143  

2022

     988  

Thereafter

     5,655  

2017 Senior Notes

In August 2017, we issued $1.0 billion of 3.875% senior notes due 2047. We used the net proceeds of this offering to repay a portion of our 1.5% senior notes due in November 2017, repay a portion of our floating rate senior notes due in December 2017 and for general corporate purposes.

2016 Senior Notes

In June 2016, in connection with the Humana Transaction, we issued the 2016 senior notes, which consisted of: $500 million of floating rate senior notes due December 2017, $1.0 billion of 1.7% senior notes due June 2018, approximately $1.7 billion of 1.9% senior notes due June 2019, approximately $1.9 billion of 2.4% senior notes due June 2021, $1.3 billion of 2.8% senior notes due June 2023, $2.8 billion of 3.2% senior notes due June 2026, $1.5 billion of 4.25% senior notes due June 2036 and $2.4 billion of 4.375% senior notes due June 2046.

Early Extinguishment of Long-Term Debt

Special Mandatory Redemption Notes

As a result of the termination of the Humana Merger Agreement, we redeemed the entire $10.2 billion aggregate principal amount of the Special Mandatory Redemption Notes, which were due in 2019, 2021, 2026, 2036 and 2046, at a redemption price equal to 101% of the aggregate principal amount of those notes plus accrued and unpaid interest. We redeemed those notes on March 16, 2017, and we funded the redemption with the proceeds of the 2016 senior notes. As a result of the redemption, we recorded a loss on early extinguishment of long-term debt of $125 million ($192 million pretax) in the year ended December 31, 2017.

Prior to issuing the 2016 senior notes, during 2015 and 2016 we entered into various interest rate swaps and treasury rate locks that were designated as cash flow hedges against interest rate exposure related to the forecasted future issuance of fixed-rate debt to be primarily used to finance a portion of the purchase price of the Humana Transaction. In addition, we redesignated existing interest rate swaps with an aggregate notional value of $500 million as cash flow hedges against interest rate exposure related to the forecasted future issuance of fixed rate debt.

Prior to issuing the 2016 senior notes in June 2016, we terminated all outstanding hedges and paid an aggregate of $348 million to the hedge counter parties upon termination. The aggregate effective portion of the hedge loss of $342 million pretax was recorded in accumulated other comprehensive loss, net of tax. Upon the redemption of the Special Mandatory Redemption Notes, the entire remaining unamortized effective portion of the hedge loss of $323 million pretax recorded in accumulated other comprehensive loss was recognized as a realized capital loss in the year ended December 31, 2017.

2020 Notes

 

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On February 27, 2017, we announced the redemption for cash of the entire $750 million aggregate principal amount outstanding of our 3.95% senior notes due September 1, 2020 (the “2020 Notes”). We redeemed the 2020 Notes on March 29, 2017 at a redemption price that included a make-whole premium, plus accrued and unpaid interest. We funded the redemption from available cash and short-term debt. As a result of the redemption, we recorded a loss on early extinguishment of long-term debt of $35 million ($54 million pretax) in the year ended December 31, 2017. Upon redemption of the 2020 Notes, the entire remaining unamortized effective portion of the hedge loss of $13 million pretax related to the issuance of the 2020 Notes recorded in accumulated other comprehensive loss was recognized as a realized capital loss in the year ended December 31, 2017.

Refer to Note 14 for additional information regarding hedge losses reclassified from accumulated other comprehensive loss to net income during the year ended December 31, 2017.

Revolving Credit Facility

On March 27, 2012, we entered into an unsecured $1.5 billion five-year revolving credit agreement (the “Credit Agreement”) with several financial institutions. On September 24, 2012, in connection with the acquisition of Coventry, we entered into a First Amendment (the “First Amendment”) to the Credit Agreement and also entered into an Incremental Commitment Agreement (the “Incremental Commitment Agreement”). On March 2, 2015, we entered into a Second Amendment to the Credit Agreement (the “Second Amendment”). On July 30, 2015, in connection with the Humana Transaction, we entered into a Third Amendment to the Credit Agreement (the “Third Amendment”). On March 17, 2017, we entered into a Fourth Amendment to the Credit Agreement (the “Fourth Amendment,” and together with the First Amendment, the Incremental Commitment Agreement, the Second Amendment, the Third Amendment and the Credit Agreement, resulting in the “Facility”). The Facility is an unsecured $2.0 billion revolving credit agreement. The Third Amendment modified the calculation of total debt for purposes of determining compliance prior to the closing date of the Humana Transaction (the “Closing Date”) with certain covenants to exclude debt incurred by us to finance the Humana Transaction, the other financing transactions related to the Humana Transaction and/or the payment of fees and expenses incurred in connection therewith so long as either (A) the net proceeds of such debt were set aside to finance the Humana Transaction, the other financing transactions related to the Humana Transaction and/or the payment of fees and expenses incurred in connection therewith or (B) such debt was subject to mandatory redemption in the event that the Humana Merger Agreement was terminated or expired. Among other things, the Fourth Amendment extended the maturity date of the existing Credit Agreement to March 27, 2021, eliminated the availability of swingline loans, provided us with additional time on each business day to provide notice of borrowings and added customary provisions to reflect European Union “bail-in” directive legislation.

In addition, upon our agreement with one or more financial institutions, we may expand the commitments under the Facility by an additional $500 million. The Facility also provides for the issuance of up to $200 million of letters of credit at our request, which count as usage of the available commitments under the Facility. In each of 2013, 2014, 2015 and 2017, we extended the maturity date of the Facility by one year. The maturity date of the Facility is March 27, 2021.

Various interest rate options are available under the Facility. Any revolving borrowings mature on the termination date of the Facility. We pay facility fees on the Facility ranging from .050% to .150% per annum, depending upon our long-term senior unsecured debt rating. The facility fee was .100% at December 31, 2017. The Facility contains a financial covenant that requires us to maintain a ratio of total debt to consolidated capitalization as of the end of each fiscal quarter at or below 50%. For this purpose, consolidated capitalization equals the sum of total shareholders’ equity, excluding any overfunded or underfunded status of our pension and OPEB plans and any net unrealized capital gains and losses, and total debt (as defined in the Facility). We met this requirement at December 31, 2017. There were no amounts outstanding under the Facility at any time during the year ended December 31, 2017 or 2016.

Term Loan Agreement

On July 30, 2015, in connection with the Humana Transaction, we entered into a senior three-year $3.2 billion term loan credit agreement (the “Term Loan Agreement”) with a group of seventeen lenders. The lenders’ commitments under the Term Loan Agreement terminated on February 14, 2017, as a result of the termination of the Humana Merger Agreement.

 

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Federal Home Loan Bank of Boston

We are a member of the Federal Home Loan Bank of Boston (the “FHLBB”), and as a member we have the ability to obtain cash advances, subject to certain minimum collateral requirements. Our maximum borrowing capacity available from the FHLBB at December 31, 2017 was approximately $700 million. At both December 31, 2017 and 2016, we did not have any outstanding borrowings from the FHLBB.

 

10. Pension and Other Postretirement Plans

Defined Benefit Retirement Plans

We sponsor various defined benefit plans, including two pension plans, and OPEB plans that provide certain health care and life insurance benefits for retired employees, including those of our former parent company.

During 2017, 2016 and 2015 we did not make any contribution to the Aetna Pension Plan. Effective December 31, 2010, our employees no longer earn future pension service credits in the Aetna Pension Plan (i.e., the Plan was “frozen” effective December 31, 2010), although the Aetna Pension Plan will continue to operate and account balances will continue to earn annual interest credits.

We also sponsor a non-qualified supplemental pension plan (the “Non-qualified Pension Plan”) that, prior to January 1, 2007, had been used to provide benefits for wages above the Internal Revenue Code wage limits applicable to tax qualified pension plans (such as the Aetna Pension Plan). Effective January 1, 2007, no new benefits accrue under the Non-qualified Pension Plan, but interest will continue to be credited on outstanding supplemental cash balance accounts; and the plan may continue to be used to credit special pension arrangements.

In addition, we currently provide certain medical and life insurance benefits for retired employees, including those of our former parent company. We provide subsidized health care benefits to certain eligible employees who terminated employment prior to December 31, 2006. There is a cap on our portion of the cost of providing medical and dental benefits to our retirees. Through December 31, 2015, all current and future retirees and employees who terminated employment at age 45 or later with at least five years of service were eligible to participate in our group health plans at their own cost. Effective January 1, 2016, only current and future retirees and employees who terminate employment at age 55 or later are eligible for such participation.

The information set forth in the following tables is based upon current actuarial reports using the annual measurement dates (December 31, for each year presented) for our pension and OPEB plans.

The following table shows the changes in the benefit obligations during 2017 and 2016 for our pension and OPEB plans:

 

     Pension Plans      OPEB Plans  
(Millions)    2017      2016      2017      2016  

Benefit obligation, beginning of year

   $ 6,032      $ 5,946      $ 248      $ 257  

Interest cost

     203        260        8        11  

Actuarial loss

     394        161        11        —    

Benefits paid

     (411      (335      (18      (20
  

 

 

    

 

 

    

 

 

    

 

 

 

Benefit obligation, end of year

   $ 6,218      $ 6,032      $ 249      $ 248  
  

 

 

    

 

 

    

 

 

    

 

 

 

The pension plans’ benefit obligation increased in 2017 driven by interest cost recognized in 2017 and an increase in actuarial losses arising as a result of a lower discount rate as further described below; substantially offset by benefits paid in 2017.

The Aetna Pension Plan comprises 96% of the pension plans’ total benefit obligation at December 31, 2017. The discount rates used to determine the benefit obligation of our pension and OPEB plans were calculated using a yield curve as of our annual measurement date. Each yield curve consisted of a series of individual discount rates, with each discount rate corresponding to a single point in time, based on high-quality bonds. Projected benefit payments are discounted to the measurement date using the corresponding rate from the yield curve. The weighted average discount rate for our pension plans was 3.68% and 4.22% for

 

42


2017 and 2016, respectively. The discount rate for our OPEB plans was 3.63% and 4.12% for 2017 and 2016, respectively. The discount rates differ for our pension and OPEB plans due to the duration of the projected benefit payments for each plan.

Effective as of the beginning of 2017, we refined the approach used to estimate the interest cost component of net periodic benefit cost for pension and OPEB plans that utilize a yield curve approach. Historically, we estimated the interest cost using a single weighted average discount rate derived from the yield curve used to measure the projected benefit obligation. We have now elected to measure interest cost by applying the specific spot rates along that yield curve to the relevant projected cash flows for each component. We believe the new approach provides a more precise estimate of such interest cost. We have accounted for this refinement as a change in accounting estimate and, accordingly, have accounted for it on a prospective basis beginning in 2017. The reduction in net periodic benefit cost associated with this refinement for the year ended December 31, 2017 was $26 million ($41 million pre-tax). For our pension benefits, the 2017 weighted-average discount rate for interest costs under the refined approach adopted as of the beginning of 2017 was 3.51%. Under the prior methodology, the 2017 weighted-average discount rate would have been 4.22%.

Additionally, based on the mortality experience of our pension and OPEB plans, in 2017 we utilized the RP-2014 Mortality Table with a generation projection of future mortality improvements using Scale MP-2017. In 2016, we utilized the RP-2014 Mortality Table with a generation projection of future mortality improvements using Scale MP-2016. In 2015 we utilized the RP-2014 Mortality Table with a generation projection of future mortality improvements using Scale MP-2015.

The following table reconciles the beginning and ending balances of the fair value of plan assets during 2017 and 2016 for our pension and OPEB plans:

 

     Pension Plans      OPEB Plans  
(Millions)    2017      2016      2017      2016  

Fair value of plan assets, beginning of year

   $ 5,914      $ 5,802      $ 52      $ 55  

Actual return on plan assets

     808        426        2        1  

Employer contributions

     20        21        14        16  

Benefits paid

     (411      (335      (18      (20
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair value of plan assets, end of year

   $ 6,331      $ 5,914      $ 50      $ 52  
  

 

 

    

 

 

    

 

 

    

 

 

 

The difference between the fair value of plan assets and the plan’s benefit obligation is referred to as the plan’s funded status. This funded status is an accounting-based calculation and is not indicative of our mandatory funding requirements.

The funded status of our pension and OPEB plans at the measurement date for 2017 and 2016 was as follows:

 

     Pension Plans      OPEB Plans  
(Millions)    2017      2016      2017      2016  

Benefit obligation

   $ (6,218    $ (6,032    $ (249    $ (248

Fair value of plan assets

     6,331        5,914        50        52  
  

 

 

    

 

 

    

 

 

    

 

 

 

Funded status

   $ 113      $ (118    $ (199    $ (196
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2017, the fair value of plan assets of the Aetna Pension Plan was in excess of the benefit obligations, while the Non-qualified Pension Plan had benefit obligations in excess of the fair value of plan assets. Below is the funded status of each of our Pension Plans:

 

     Aetna Pension Plan      Non-qualified Pension Plan  
(Millions)    2017      2016      2017      2016  

Benefit obligation

   $ (5,995    $ (5,807    $ (223    $ (225

Fair value of plan assets

     6,331        5,914        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Funded status

   $ 336      $ 107      $ (223    $ (225
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The amounts in accumulated other comprehensive loss that have not yet been recognized in net periodic benefit cost as of December 31, 2017 and 2016 were as follows:

 

     Pension Plans      OPEB Plans  
(Millions)    2017      2016      2017      2016  

Unrecognized prior service credit

   $ —        $ —        $ (15    $ (19

Unrecognized net actuarial losses

     2,361        2,460        75        66  
  

 

 

    

 

 

    

 

 

    

 

 

 

Amount recognized in accumulated other comprehensive loss

   $ (2,361    $ (2,460    $ (60    $ (47
  

 

 

    

 

 

    

 

 

    

 

 

 

The assets (liabilities) recognized on our Consolidated Balance Sheets at December 31, 2017 and 2016 for our pension and OPEB plans were consisted of the following:

 

     Pension Plans      OPEB Plans  
(Millions)    2017      2016      2017      2016  

Accrued benefit assets reflected in other long-term assets

   $ 336      $ 107      $ —        $ —    

Accrued benefit liabilities reflected in other current liabilities

     (20      (20      (12      (13

Accrued benefit liabilities reflected in other long-term liabilities

     (203      (205      (187      (183
  

 

 

    

 

 

    

 

 

    

 

 

 

Net amount of assets (liabilities) recognized at December 31,

   $ 113      $ (118    $ (199    $ (196
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2017, we had approximately $2.4 billion and $75 million of net actuarial losses for our pension and OPEB plans, respectively, and $15 million of prior service credits for our OPEB plans and an immaterial amount of prior service credits for our pension plan, that have not been recognized as components of net periodic benefit costs. We expect to recognize $63 million and $3 million in amortization of net actuarial losses for our pension and OPEB plans, respectively, and $4 million in amortization of prior service credits for our OPEB plans in 2018. Our amortization of prior service credits for our pension plans in 2018 is not expected to be material.

Components of the net periodic benefit (income) cost of our defined benefit pension plans and OPEB plans for the years ended December 31, 2017, 2016 and 2015 were as follows:

 

     Pension Plans     OPEB Plans  
(Millions)    2017     2016     2015     2017     2016     2015  

Amortization of prior service credit

   $ —       $ —       $ (1   $ (4   $ (4   $ (4

Interest cost

     203       260       261       8       11       11  

Expected return on plan assets

     (380     (389     (419     (2     (3     (3

Recognized net actuarial losses

     65       61       62       3       3       3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic (income) benefit cost

   $ (112   $ (68   $ (97   $ 5     $ 7     $ 7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The weighted average assumptions used to determine net periodic benefit (income) cost in 2017, 2016 and 2015 for the pension and OPEB plans were as follows:

 

     Pension Plans     OPEB Plans  
     2017     2016     2015     2017     2016     2015  

Discount rate

     4.22     4.50     4.12     4.12     4.39     4.02

Expected long-term return on plan assets

     6.70     6.90     7.00     4.75     4.75     5.30

We assume different health care cost trend rates for medical costs and prescription drug costs in estimating the expected costs of our OPEB plans. The assumed medical cost trend rate for 2018 is 5.4%, decreasing gradually to 4.5% by 2026. The assumed prescription drug cost trend rate for 2018 is 9.4%, decreasing gradually to 4.5% by 2026. These assumptions reflect our historical as well as expected future trends for retirees. In addition, the trend assumptions reflect factors specific to our retiree medical plan, such as plan design, cost-sharing provisions, benefits covered and the presence of subsidy caps. A one-percentage

 

44


point increase in both the assumed medical cost and assumed prescription drug cost trend rates would result in an immaterial pretax increase in the aggregate of the service and interest cost components of OPEB costs and a $8 million increase in the OPEB benefit obligation. A one-percentage point decrease in both the assumed medical cost and assumed prescription drug cost trend rates would result in an immaterial pretax decrease in the aggregate of the service and interest cost components of OPEB costs and an $8 million decrease in the OPEB benefit obligation.

Our current funding strategy for the Aetna Pension Plan is to fund an amount at least equal to the minimum funding requirement as determined under applicable regulatory requirements with consideration of factors such as the maximum tax deductibility of such amounts. Minimum funding requirements for the Aetna Pension Plan were met in 2017 and 2016, and we were not required to make cash contributions for either of those years. We do not have any required contribution to the Aetna Pension Plan in 2018. Employer contributions related to the supplemental pension and OPEB plans represent payments to retirees for current benefits. We have no plans to return any pension or OPEB plan assets to the Company in 2018. Our non-qualified supplemental pension plan and OPEB plans do not have minimum funding requirements.

Expected benefit payments, which reflect future employee service, as appropriate, of the pension and OPEB plans to be paid for each of the next five years and in the aggregate for the next five years thereafter at December 31, 2017 were as follows:

 

(Millions)    Pension Plans      OPEB Plans  

2018

   $ 374      $ 17  

2019

     364        17  

2020

     367        17  

2021

     371        17  

2022

     374        17  

2023-2027

     1,867        79  

Assets of the Aetna Pension Plan

The assets of the Aetna Pension Plan (“Pension Assets”) primarily include debt and equity securities held in separate accounts, as well as common/collective trusts and real estate investments. The valuation methodologies used to price these debt and equity securities and common/collective trusts are similar to the methodologies described in Note 5. Pension Assets also include investments in other assets that are carried at fair value. The following is a description of the valuation methodology used to price real estate investments and these additional investments, including the general classification pursuant to the valuation hierarchy.

Real Estate - Real estate investments are valued by independent third party appraisers. The appraisals comply with the Uniform Standards of Professional Appraisal Practice, which includes, among other things, the income, cost, and sales comparison approaches to estimating property value. Therefore, these investments are classified in Level 3.

Private equity limited partnerships - Private equity limited partnerships are carried at fair value which is estimated based on the fair value of the underlying investment funds provided by the general partner or manager of the investments, the financial statements of which generally are audited. We typically do not have a controlling ownership in our private equity limited partnership investments, and therefore we apply the equity method of accounting for these investments. Accordingly, these investments have been excluded from the fair value table below.

Hedge fund limited partnerships - Hedge fund limited partnerships are carried at fair value which is estimated using the net asset value (“NAV”) per unit as reported by the administrator of the underlying investment fund as a practical expedient to fair value. Therefore, these investments have been excluded from the fair value table below.

 

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Pension Assets with changes in fair value measured on a recurring basis at December 31, 2017 were as follows:

 

(Millions)    Level 1      Level 2      Level 3      Total  

Debt securities:

           

U.S. government securities

   $ 644      $ 38      $ —        $ 682  

States, municipalities and political subdivisions

     —          150        —          150  

U.S. corporate securities

     —          1,506        —          1,506  

Foreign securities

     —          165        —          165  

Residential mortgage-backed securities

     —          322        —          322  

Commercial mortgage-backed securities

     —          57        1        58  

Other asset-backed securities

     —          130        —          130  

Redeemable preferred securities

     —          8        —          8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     644        2,376        1        3,021  
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities:

           

U.S. Domestic

     939        4        —          943  

International

     556        —          —          556  

Domestic real estate

     26        —          —          26  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,521        4        —          1,525  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other investments:

           

Real estate

     —          —          479        479  

Common/collective trusts (1)

     —          478        —          478  

Derivatives

     —          1        —          1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other investments

     —          479        479        958  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total pension investments (2)

   $ 2,165      $ 2,859      $ 480      $ 5,504  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The assets in the underlying funds of common/collective trusts consist of $294 million of equity securities and $184 million of debt securities.
(2)  Excludes $119 million of cash and cash equivalents and other payables, $530 million of private equity limited partnership investments and $178 million of hedge fund limited partnership investments.

 

46


Pension Assets with changes in fair value measured on a recurring basis at December 31, 2016 were as follows:

 

(Millions)    Level 1      Level 2      Level 3      Total  

Debt securities:

           

U.S. government securities

   $ 460      $ 122      $ —        $ 582  

States, municipalities and political subdivisions

     —          128        —          128  

U.S. corporate securities

     —          1,291        —          1,291  

Foreign securities

     —          103        —          103  

Residential mortgage-backed securities

     —          163        —          163  

Commercial mortgage-backed securities

     —          57        —          57  

Other asset-backed securities

     —          60        —          60  

Redeemable preferred securities

     —          6        —          6  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     460        1,930        —          2,390  
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities:

           

U.S. Domestic

     1,305        5        —          1,310  

International

     611        —          —          611  

Domestic real estate

     34        —          —          34  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,950        5        —          1,955  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other investments:

           

Real estate

     —          —          478        478  

Common/collective trusts (1)

     —          465        —          465  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other investments

     —          465        478        943  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total pension investments (2)

   $ 2,410      $ 2,400      $ 478      $ 5,288  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The assets in the underlying funds of common/collective trusts consist of $307 million of equity securities and $158 million of debt securities.
(2) Excludes $180 million of cash and cash equivalents and other payables, $255 million of private equity limited partnership investments and $191 million of hedge fund limited partnership investments.

The changes in the balances of Level 3 Pension Assets during 2017 and 2016 were as follows:

 

     2017  
(Millions)    Real Estate      Other      Total  

Beginning balance

   $ 478      $ —        $ 478  

Actual return on plan assets

     23        —          23  

Purchases, sales and settlements

     (22      —          (22

Transfers into Level 3

     —          1        1  
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 479      $ 1      $ 480  
  

 

 

    

 

 

    

 

 

 

 

     2016  
(Millions)    Real Estate      Other      Total  

Beginning balance

   $ 497      $ 3      $ 500  

Actual return on plan assets

     42        —          42  

Purchases, sales and settlements

     (61      (1      (62

Transfers out of Level 3

     —          (2      (2
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 478      $  —        $ 478  
  

 

 

    

 

 

    

 

 

 

The Aetna Pension Plan invests in a diversified mix of assets intended to maximize long-term returns while recognizing the need for adequate liquidity to meet ongoing benefit and administrative obligations. The risk of unexpected investment and actuarial outcomes is regularly evaluated. This evaluation is performed through forecasting and assessing ranges of investment outcomes over short- and long-term horizons, and by assessing the Aetna Pension Plan’s liability characteristics, our financial position and our future potential obligations from both the pension and general corporate perspectives. Complementary investment styles and

 

47


techniques are utilized by multiple professional investment firms to further improve portfolio and operational risk characteristics. Public and private equity investments are used primarily to increase overall plan returns. Real estate investments are viewed favorably for their diversification benefits and above-average dividend generation. Fixed income investments provide diversification benefits and liability hedging attributes that are desirable, especially in falling interest rate environments.

At December 31, 2017, target investment allocations for the Aetna Pension Plan were: 33% in equity securities, 54% in debt securities, 6% in real estate, 4% in private equity limited partnerships and 3% in hedge funds. Actual asset allocations may differ from target allocations due to tactical decisions to overweight or underweight certain assets or as a result of normal fluctuations in asset values. Asset allocations are consistent with stated investment policies and, as a general rule, periodically rebalanced back to target asset allocations. Asset allocations and investment performance are formally reviewed periodically throughout the year by the Plan’s Benefit Finance Committee. Forecasting of asset and liability growth is performed at least annually.

We have several benefit plans for retired employees currently supported by the OPEB plan assets. OPEB plan assets are directly and indirectly invested in a diversified mix of traditional asset classes, primarily high-quality fixed income securities.

The actual and target asset allocations of the OPEB plans used at December 31, 2017 and 2016 presented as a percentage of total plan assets, were as follows:

 

(Millions)    2017     Target
Allocation
    2016     Target
Allocation
 

Equity securities

     13     10-15     11     5-15

Debt securities

     81     75-85     82     80-90

Real estate/other

     6     5-10     7     0-10

Our expected return on plan assets assumption is based on many factors, including forecasted capital market real returns over a long-term horizon, forecasted inflation rates, historical compounded asset returns and patterns and correlations on those returns. Expectations for modest increases in interest rates, normal inflation trends and average capital market real returns led us to an expected return on pension plan assets assumption of 6.70% for 2017, 6.90% for 2016 and 7.00% for 2015, and an expected return on OPEB plan assets assumption of 4.75% for both 2017 and 2016 and 5.30% for 2015. We regularly review actual asset allocations and periodically rebalance our investments to the mid-point of our targeted allocation ranges when we consider it appropriate.

401(k) Plan

Our employees are eligible to participate in a defined contribution retirement savings plan under which designated contributions may be invested in our common stock or certain other investments (the “Aetna 401(k) Plan”). Our 401(k) contribution to the Aetna 401(k) Plan provides for a match of 100% of up to 6% of the eligible pay contributed by the employee. During 2017, 2016 and 2015, we made $196 million, $197 million and $198 million, respectively, in aggregate of matching contributions to our 401(k) plans. The matching contributions are made in cash and invested according to each participant’s investment elections. The plan trustee held 6 million shares of our common stock for plan participants at December 31, 2017. At December 31, 2017, 34 million shares of our common stock were reserved for issuance under the Aetna 401(k) Plan.

 

48


11. Income Taxes

The components of our income tax provision in 2017, 2016 and 2015 were:

 

(Millions)    2017      2016      2015  

Current income taxes:

        

Federal

   $ 1,369      $ 1,662      $ 1,797  

State

     73        129        112  
  

 

 

    

 

 

    

 

 

 

Total current income taxes

     1,442        1,791        1,909  
  

 

 

    

 

 

    

 

 

 

Deferred income tax benefits:

        

Federal

     (328      (55      (59

State

     (27      (1      (9
  

 

 

    

 

 

    

 

 

 

Total deferred income tax benefits

     (355      (56      (68
  

 

 

    

 

 

    

 

 

 

Total income taxes

   $ 1,087      $ 1,735      $ 1,841  
  

 

 

    

 

 

    

 

 

 

Income taxes were different from the amount computed by applying the statutory federal income tax rate to income before income taxes as follows:

 

     2017     2016     2015  
(Millions)    Amount      Percent     Amount     Percent     Amount     Percent  

Amount at statutory rate

   $ 1,047        35.0   $ 1,397       35.0   $ 1,483       35.0

Health insurer fee

     —              293       7.3     300       7.1

State income taxes

     21        .7     83       2.1     63       1.5

Other, net

     19        .6     (38     (.9 )%      (5     (.1 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income taxes

   $ 1,087        36.3   $ 1,735       43.5   $ 1,841       43.5
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The significant components of our net deferred tax liabilities at December 31, 2017 and 2016 were as follows:

 

(Millions)    2017      2016  

Deferred tax assets:

     

Insurance reserves

   $ 187      $ 231  

Reserve for anticipated future losses on discontinued products

     135        225  

Employee and postretirement benefits

     75        196  

Net operating losses

     184        147  

Severance and facilities

     32        135  

Investments, net

     58        80  

Debt fair value adjustments

     10        23  

Deferred revenue

     231        21  

Other

     116        117  
  

 

 

    

 

 

 

Gross deferred tax assets

     1,028        1,175  

Less: Valuation allowance

     154        118  
  

 

 

    

 

 

 

Deferred tax assets, net of valuation allowance

     874        1,057  
  

 

 

    

 

 

 

Deferred tax liabilities:

     

Goodwill and other acquired intangible assets

     451        814  

Cumulative depreciation and amortization

     101        185  

Unrealized gains on investment securities

     105        42  

Other

     22        20  
  

 

 

    

 

 

 

Total gross deferred tax liabilities

     679        1,061  
  

 

 

    

 

 

 

Net deferred tax assets (liabilities)

   $ 195      $ (4
  

 

 

    

 

 

 

Valuation allowances are provided when we estimate that it is more likely than not that deferred tax assets will not be realized. A valuation allowance has been established primarily related to state net operating losses. We base our estimates of the future realization of deferred tax assets primarily on historic taxable income and existing deferred tax liabilities.

 

49


We participate in the Compliance Assurance Process (the “CAP”) with the Internal Revenue Service (the “IRS”). Under the CAP, the IRS undertakes audit procedures during the tax year and as the return is prepared for filing. The IRS has concluded its CAP audit of our 2016 tax return as well as all the prior years. We expect the IRS will conclude its CAP audit of our 2017 tax return in 2018.

We are also subject to audits by various state taxing authorities for tax years from 2000 through 2016. We believe we carry appropriate reserves for any exposure to state tax issues.

At both December 31, 2017 and December 31, 2016 we did not have material uncertain tax positions reflected in our Consolidated Balance Sheets.

On December 22, 2017, the TCJA was enacted. Refer to Note 2 for additional information related to the TCJA.

 

12. Stock-based Employee Incentive Plans

Our stock-based employee compensation plans (collectively, the “Plans”) provide for awards of stock options, SARs, PSARs, RSUs, MSUs, PSUs, deferred contingent common stock and the ability for employees to purchase common stock at a discount. At December 31, 2017, 27 million common shares were available for issuance under the Plans. Executive, middle management and non-management employees may be granted stock options, SARs, PSARs, RSUs, MSUs and PSUs, each of which are described below:

Stock Options, SARs and PSARs

We have not granted stock options since 2005, and no stock options were outstanding as of December 31, 2017. SARs granted will be settled in our common stock, net of taxes, based on the appreciation of our stock price on the exercise date over the market price on the date of grant. SARs generally become 100% vested three years after the grant is made, with one-third vesting each year. Vested SARs may be exercised at any time during the ten years after grant, except in certain circumstances, generally related to employment termination or retirement. At the end of the ten year period, any unexercised SARs expire.

The SARs granted to certain employees during 2017 and 2016 and described above had an estimated grant date fair value per SAR of $32.30 and $34.33, respectively. The grant date fair value was calculated using a modified Black-Scholes option pricing model using the following assumptions:

 

     2017     2016  

Expected term (in years)

     7.21       7.11  

Volatility

     26.52     32.9

Risk-free interest rate

     2.22     1.52

Dividend yield

     1.71     0.91

Initial price

   $ 125.27     $ 103.45  

The expected term is based on historical equity award activity. Volatility is based on a weighted average of the historical volatility of our stock price and implied volatility from traded options on our stock. The risk-free interest rate is based on a U.S. Treasury rate with a life equal to the expected life of the SARs grant. This rate was calculated by interpolating between the 7-year and 10-year U.S. Treasury rates for both the 2017 and 2016 SARs grants. The dividend yield is based on our expected dividends for the upcoming 12 months subsequent to the grant date.

PSARs represent the opportunity to vest in SARs. For the PSARs granted in 2013 (“2013 PSARs”), the number of vested PSARs (which could range in specified increments from zero to 700,000 SARs) was dependent on Aetna’s total shareholder return over a three year performance period relative to a defined peer group of companies. The 2013 PSARs were subject to a three-year vesting period that ended on August 5, 2016, and vested at 500,000 SARs.

 

50


We estimated the grant date fair value of the 2013 PSARs using a Monte Carlo simulation. The 2013 PSARs had a grant date per PSAR fair value of $18.64. That grant date fair value was calculated using the following assumptions:

 

Expected settlement period (in years)

     6.12  

Volatility

     40.4

Risk-free interest rate

     .6

Dividend yield

     1.25

Initial price

   $ 64.25  

The stock option, SAR and PSAR transactions during 2017, 2016 and 2015 were as follows:

 

(Millions, except exercise price and remaining life)    Number of Stock
Options, SARs
and PSARs
    Weighted
Average

Exercise Price
     Weighted
Average
Remaining

Contractual Life
     Aggregate
Intrinsic
Value
 

2015

          

Outstanding, beginning of year

     8.1     $ 49.37        4.2      $ 318  

Granted

     2.0       101.41        —          —    

Exercised

     (2.5     43.90        —          155  

Expired or forfeited

     (.2     91.25        —          —    
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding, end of year (1)

     7.4     $ 64.11        5.3      $ 325  
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable, end of year

     4.1     $ 45.88        2.6      $ 252  
  

 

 

   

 

 

    

 

 

    

 

 

 

2016

          

Outstanding, beginning of year

     7.4     $ 64.11        5.3      $ 325  

Granted

     2.4       104.47        —          —    

Exercised

     (1.4     52.99        —          85  

Expired or forfeited

     (.4     83.25        —          —    
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding, end of year

     8.0     $ 77.20        5.9      $ 373  
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable, end of year

     4.3     $ 57.26        3.6      $ 287  
  

 

 

   

 

 

    

 

 

    

 

 

 

2017

          

Outstanding, beginning of year

     8.0     $ 77.20        5.9      $ 373  

Granted

     2.2       125.82        —          —    

Exercised

     (2.4     65.42        —          185  

Expired or forfeited

     (.2     108.24        —          —    
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding, end of year

     7.6     $ 94.03        6.6      $ 398  
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable, end of year

     3.6     $ 71.06        4.6      $ 397  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

(1)  PSARs are included in this table in 2015 at the maximum amount that could potentially vest.

 

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The following is a summary of information regarding SARs outstanding at December 31, 2017 (millions, except remaining contractual life and exercise price):

 

     Outstanding      Exercisable  

Range of

Exercise Prices

   Number
Outstanding
     Weighted
Average
Remaining
Contractual
Life (Years)
     Weighted
Average
Exercise
Price
     Aggregate
Intrinsic
Value
     Number
Exercisable
     Weighted
Average
Exercise
Price
     Aggregate
Intrinsic
Value
 

20.00-30.00 (1)

     —          1.4      $ 25.50      $ 3        —        $ 25.50      $ 3  

30.00-40.00

     .8        1.1        32.11        125        .8        32.11        125  

40.00-50.00 (1)

     —          .3        45.84        1        —          45.84        1  

50.00-60.00

     .4        .1        50.70        55        .4        50.70        55  

60.00-70.00

     .5        5.6        64.25        58        .5        64.25        58  

70.00-80.00

     .5        6.1        72.42        49        .5        72.42        49  

80.00-90.00 (1)

     —          4.4        80.27        —          —          80.27        —    

100.00-110.00

     2.9        7.6        102.51        227        1.3        102.11        99  

110.00-120.00

     .2        8.3        115.16        16        .1        115.36        7  

120.00-130.00

     2.0        9.1        125.24        112        —          124.41        1  

130.00-140.00 (1)

     —          9.2        132.80        —          —          —          —    

140.00-150.00

     .1        9.4        145.10        2        —          —          —    

160.00-170.00 (1)

     —          9.7        163.21        —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

$20.00-$170.00 (2)

     7.4        6.6      $ 94.03      $ 648        3.6      $ 71.06      $ 398  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  The number of outstanding and exercisable SARs with exercise prices between $20 and $30, $40 and $50, $80 and $90, $130 and $140 and $160 and $170 rounded to zero.
(2)  The number of outstanding SARs with exercise prices between $90 and $100 and $150 and $160 rounded to zero.

During 2017, 2016 and 2015, the following activity occurred under the Plans:

 

(Millions)    2017      2016      2015  

Cash received from stock option exercises

     $ —        $  —        $ 7  

Intrinsic value of stock options/SARs exercised and stock units vested

     499        384        413  

Tax benefits realized for the tax deductions from stock options and SARs exercised and