10-Q 1 unh201433110-q.htm 10-Q UNH 2014.3.31 10-Q

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________ 
Form 10-Q
__________________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2014
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission file number: 1-10864
__________________________________________________________ 
    
UnitedHealth Group Incorporated
(Exact name of registrant as specified in its charter)
 __________________________________________________________ 
Minnesota
 
41-1321939
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
UnitedHealth Group Center
9900 Bren Road East
Minnetonka, Minnesota
 
55343
(Address of principal executive offices)
 
(Zip Code)
(952) 936-1300
(Registrant’s telephone number, including area code)
__________________________________________________________  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
x
 
Accelerated filer
o
 
Non-accelerated filer
o
 
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No x
As of April 30, 2014, there were 979,860,669 shares of the registrant’s Common Stock, $.01 par value per share, issued and outstanding.
 
 
 
 
 



UNITEDHEALTH GROUP
Table of Contents
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 







PART I
ITEM 1.    FINANCIAL STATEMENTS

UnitedHealth Group
Condensed Consolidated Balance Sheets
(Unaudited)
(in millions, except per share data)
 
March 31,
2014
 
December 31,
2013
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
7,514

 
$
7,276

Short-term investments
 
1,869

 
1,937

Accounts receivable, net
 
4,202

 
3,052

Other current receivables, net
 
3,624

 
3,998

Assets under management
 
2,780

 
2,757

Deferred income taxes
 
319

 
430

Prepaid expenses and other current assets
 
2,056

 
930

Total current assets
 
22,364

 
20,380

Long-term investments
 
19,377

 
19,605

Property, equipment and capitalized software, net
 
4,065

 
4,010

Goodwill
 
32,150

 
31,604

Other intangible assets, net
 
3,867

 
3,844

Other assets
 
2,799

 
2,439

Total assets
 
$
84,622

 
$
81,882

Liabilities and shareholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Medical costs payable
 
$
12,230

 
$
11,575

Accounts payable and accrued liabilities
 
9,160

 
7,458

Other policy liabilities
 
5,247

 
5,279

Commercial paper and current maturities of long-term debt
 
2,241

 
1,969

Unearned revenues
 
1,838

 
1,600

Total current liabilities
 
30,716

 
27,881

Long-term debt, less current maturities
 
14,524

 
14,891

Future policy benefits
 
2,472

 
2,465

Deferred income taxes
 
1,831

 
1,796

Other liabilities
 
1,262

 
1,525

Total liabilities
 
50,805

 
48,558

Commitments and contingencies (Note 8)
 
 
 


Redeemable noncontrolling interests
 
1,268

 
1,175

Shareholders’ equity:
 
 
 
 
Preferred stock, $0.001 par value - 10 shares authorized; no shares issued or outstanding
 

 

Common stock, $0.01 par value - 3,000 shares authorized;
984 and 988 issued and outstanding
 
10

 
10

Retained earnings
 
33,112

 
33,047

Accumulated other comprehensive loss
 
(573
)
 
(908
)
Total shareholders’ equity
 
32,549

 
32,149

Total liabilities and shareholders’ equity
 
$
84,622

 
$
81,882

See Notes to the Condensed Consolidated Financial Statements
UnitedHealth Group
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three Months Ended March 31,
(in millions, except per share data)
 
2014
 
2013
Revenues:
 
 
 
 
Premiums
 
$
28,115

 
$
27,274

Services
 
2,404

 
2,112

Products
 
998

 
751

Investment and other income
 
191

 
203

Total revenues
 
31,708

 
30,340

Operating costs:
 
 
 
 
Medical costs
 
23,208

 
22,569

Operating costs
 
5,194

 
4,614

Cost of products sold
 
892

 
682

Depreciation and amortization
 
360

 
336

Total operating costs
 
29,654

 
28,201

Earnings from operations
 
2,054

 
2,139

Interest expense
 
(160
)
 
(178
)
Earnings before income taxes
 
1,894

 
1,961

Provision for income taxes
 
(795
)
 
(721
)
Net earnings
 
1,099

 
1,240

Earnings attributable to noncontrolling interests
 

 
(48
)
Net earnings attributable to UnitedHealth Group common shareholders
 
$
1,099

 
$
1,192

Earnings per share attributable to UnitedHealth Group common shareholders:
 
 
 
 
Basic
 
$
1.12

 
$
1.17

Diluted
 
$
1.10

 
$
1.16

Basic weighted-average number of common shares outstanding
 
983

 
1,016

Dilutive effect of common share equivalents
 
13

 
13

Diluted weighted-average number of common shares outstanding
 
996

 
1,029

Anti-dilutive shares excluded from the calculation of dilutive effect of common share equivalents
 
9

 
16

Cash dividends declared per common share
 
$
0.2800

 
$
0.2125


See Notes to the Condensed Consolidated Financial Statements

1



UnitedHealth Group
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

 
 
Three Months Ended March 31,
(in millions)
 
2014
 
2013
Net earnings
 
$
1,099

 
$
1,240

Other comprehensive income (loss):
 
 
 
 
Gross unrealized holding gains (losses) on investment securities during the period
 
166

 
(48
)
Income tax effect
 
(61
)
 
16

Total unrealized gains (losses), net of tax
 
105

 
(32
)
Gross reclassification adjustment for net realized gains included in net earnings
 
(46
)
 
(57
)
Income tax effect
 
17

 
21

Total reclassification adjustment, net of tax
 
(29
)
 
(36
)
Total foreign currency translation gains
 
259

 
18

Other comprehensive income (loss)
 
335

 
(50
)
Comprehensive income
 
1,434

 
1,190

Comprehensive income attributable to noncontrolling interests
 

 
(48
)
Comprehensive income attributable to UnitedHealth Group common shareholders
 
$
1,434

 
$
1,142


See Notes to the Condensed Consolidated Financial Statements
UnitedHealth Group
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
 
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Shareholders’
Equity
(in millions)
 
Shares
 
Amount
 
 
 
Net Unrealized Gains (Losses) on Investments
 
Foreign Currency Translation (Losses) Gains
 
Balance at January 1, 2014
 
988

 
$
10

 
$

 
$
33,047

 
$
54

 
$
(962
)
 
$
32,149

Net earnings attributable to UnitedHealth Group common shareholders
 
 
 
 
 
 
 
1,099

 
 
 
 
 
1,099

Other comprehensive income
 
 
 
 
 
 
 
 
 
76

 
259

 
335

Issuances of common shares, and related tax effects
 
8

 

 
(6
)
 
 
 
 
 
 
 
(6
)
Share-based compensation, and related tax benefits
 
 
 
 
 
159

 
 
 
 
 
 
 
159

Common share repurchases
 
(12
)
 

 
(153
)
 
(758
)
 
 
 
 
 
(911
)
Cash dividends paid on common shares
 
 
 
 
 
 
 
(276
)
 
 
 
 
 
(276
)
Balance at March 31, 2014
 
984

 
$
10

 
$

 
$
33,112

 
$
130

 
$
(703
)
 
$
32,549

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2013
 
1,019

 
$
10

 
$
66

 
$
30,664

 
$
516

 
$
(78
)
 
$
31,178

Net earnings attributable to UnitedHealth Group common shareholders
 
 
 
 
 
 
 
1,192

 
 
 
 
 
1,192

Other comprehensive (loss) income
 
 
 
 
 
 
 
 
 
(68
)
 
18

 
(50
)
Issuances of common shares, and related tax effects
 
4

 

 
84

 
 
 
 
 
 
 
84

Share-based compensation, and related tax benefits
 
 
 
 
 
112

 
 
 
 
 
 
 
112

Common share repurchases
 
(10
)
 

 
(262
)
 
(281
)
 
 
 
 
 
(543
)
Cash dividends paid on common shares
 
 
 
 
 
 
 
(216
)
 
 
 
 
 
(216
)
Balance at March 31, 2013
 
1,013

 
$
10

 
$

 
$
31,359

 
$
448

 
$
(60
)
 
$
31,757



See Notes to the Condensed Consolidated Financial Statements

2


UnitedHealth Group
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Three Months Ended March 31,
(in millions)
 
2014
 
2013
Operating activities
 
 
 
 
Net earnings
 
$
1,099

 
$
1,240

Noncash items:
 
 
 
 
Depreciation and amortization
 
360

 
336

Deferred income taxes
 
99

 
131

Share-based compensation
 
105

 
99

Other, net
 
(65
)
 
(41
)
Net change in other operating items, net of effects from acquisitions and changes in AARP balances:
 
 
 
 
Accounts receivable
 
(990
)
 
(463
)
Other assets
 
(1,281
)
 
(556
)
Medical costs payable
 
387

 
673

Accounts payable and other liabilities
 
1,665

 
(237
)
Other policy liabilities
 
(203
)
 

Unearned revenues
 
232

 
(129
)
Cash flows from operating activities
 
1,408

 
1,053

Investing activities
 
 
 
 
Purchases of investments
 
(2,914
)
 
(2,824
)
Sales of investments
 
2,235

 
1,282

Maturities of investments
 
825

 
1,195

Cash paid for acquisitions, net of cash assumed
 
(345
)
 
(279
)
Purchases of property, equipment and capitalized software
 
(353
)
 
(323
)
Other, net
 
(51
)
 
45

Cash flows used for investing activities
 
(603
)
 
(904
)
Financing activities
 
 
 
 
Common stock repurchases
 
(911
)
 
(543
)
Cash dividends paid
 
(276
)
 
(216
)
Proceeds from common stock issuances
 
216

 
116

Repayments of long-term debt
 
(172
)
 
(1,077
)
Proceeds from commercial paper, net
 
9

 
130

Proceeds from issuance of long-term debt
 

 
2,235

Customer funds administered
 
818

 
962

Other, net
 
(257
)
 
(104
)
Cash flows (used for) from financing activities
 
(573
)
 
1,503

Effect of exchange rate changes on cash and cash equivalents
 
6

 
(20
)
Increase in cash and cash equivalents
 
238

 
1,632

Cash and cash equivalents, beginning of period
 
7,276

 
8,406

Cash and cash equivalents, end of period
 
$
7,514

 
$
10,038


See Notes to the Condensed Consolidated Financial Statements

3


UnitedHealth Group
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1.Basis of Presentation
Basis of Presentation
UnitedHealth Group Incorporated (individually and together with its subsidiaries, “UnitedHealth Group” and “the Company”) is a diversified health and well-being company dedicated to helping people live healthier lives and making health care work better. The Company offers a broad spectrum of products and services through two distinct platforms: UnitedHealthcare, which provides health care coverage and benefits services; and Optum, which provides information and technology-enabled health services.
The Company has prepared the Condensed Consolidated Financial Statements according to U.S. Generally Accepted Accounting Principles (GAAP) and has included the accounts of UnitedHealth Group and its subsidiaries. The year-end condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. In accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC), the Company has omitted certain footnote disclosures that would substantially duplicate the disclosures contained in its annual audited Consolidated Financial Statements. Therefore, these Condensed Consolidated Financial Statements should be read together with the Consolidated Financial Statements and the Notes included in Part II, Item 8, “Financial Statements” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the SEC (2013 10-K). The accompanying Condensed Consolidated Financial Statements include all normal recurring adjustments necessary to present the interim financial statements fairly.
On January 1, 2014, the Company realigned certain of its businesses to respond to changes in the markets it serves and the opportunities that are emerging as the health system evolves. The Company’s Optum business platform took responsibility for certain technology operations and business processing activities with the intention of pursuing additional third-party commercial opportunities in addition to continuing to serve UnitedHealthcare. These activities, which were historically a corporate function, are now included in OptumInsight’s results of operations. The Company’s reportable segments remain the same and prior period segment financial information has been recast to conform to the 2014 presentation. See Note 9 for segment financial information.
Use of Estimates
These Condensed Consolidated Financial Statements include certain amounts based on the Company’s best estimates and judgments. The Company’s most significant estimates relate to medical costs payable, revenues, valuation and impairment analysis of goodwill and other intangible assets, estimates of other policy liabilities and other current receivables, valuations of certain investments, and estimates and judgments related to income taxes and contingent liabilities. Certain of these estimates require the application of complex assumptions and judgments, often because they involve matters that are inherently uncertain and will likely change in subsequent periods. The impact of any changes in estimates is included in earnings in the period in which the estimate is adjusted.
Accounting Policies
Industry Tax. The Patient Protection and Affordable Care Act and a reconciliation measure, the Health Care and Education Reconciliation Act of 2010 (together, Health Reform Legislation or ACA) include an annual, nondeductible insurance industry tax (Industry Tax) to be levied proportionally across the insurance industry for risk-based products beginning on January 1, 2014.
The Company estimates its liability for the Industry Tax based on a ratio of the Company’s net premiums written compared to the U.S. health insurance industry total net premiums, both for the previous calendar year. The Company records in full the estimated liability for the Industry Tax at the beginning of the calendar year with a corresponding deferred cost that is amortized to operating costs on the Condensed Consolidated Statements of Operations using a straight-line method of allocation over the calendar year. The liability is recorded in accounts payable and accrued liabilities and the corresponding deferred cost is recorded in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. The Industry Tax liability was $1.3 billion and as of March 31, 2014 the unamortized asset was $1.0 billion. The Company has experienced a higher effective income tax rate in 2014 as compared to 2013 due to the nondeductible nature of the Industry Tax.
Premium Stabilization Programs. Beginning in 2014, Health Reform Legislation includes three programs designed to stabilize health insurance markets (Premium Stabilization Programs): a permanent risk adjustment program; a temporary risk corridors program; and a transitional reinsurance program.


4


The risk-adjustment provisions of Health Reform Legislation are permanent regulations and apply to market reform compliant individual and small group plans in the commercial markets. Under the program, each covered member is assigned a risk score based upon demographic information and applicable diagnostic codes from the current year paid claims, in order to determine an average risk score for each plan in a particular state and market risk pool. Generally, a plan with an average risk score that is less than the state’s average risk score will pay into a pool, while a plan with an average risk score that is greater than the state’s average risk score will receive money from the pool.
The risk corridors provisions of Health Reform Legislation will be in place for three years and are intended to limit the gains and losses of individual and small group qualified health plans operating in the exchanges. Plans are required to calculate the U.S. Department of Health and Human Services (HHS) risk corridor ratio of allowable costs (defined as medical claims plus quality improvement costs adjusted for the impact of reinsurance recoveries and the risk adjustment program) to the defined target amount (defined as actual premiums less defined allowable administrative costs inclusive of taxes and profits). Qualified health plans with ratios below 97% are required to make payments to HHS, while plans with ratios greater than 103% will receive funds from HHS.
The transitional reinsurance program is a temporary three year program that is funded on a per capita basis from all commercial lines of business including insured and self-funded arrangements. Only issuers of market reform compliant individual plans are eligible for reinsurance recoveries from the risk pools.
None of the Premium Stabilization Programs are expected to have a material impact on the Condensed Consolidated Financial Statements.
All other accounting policies disclosed in Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2013 10-K remain unchanged.
2.Investments
A summary of short-term and long-term investments by major security type is as follows:
(in millions)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
March 31, 2014
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
1,851

 
$
4

 
$
(14
)
 
$
1,841

State and municipal obligations
 
6,623

 
162

 
(30
)
 
6,755

Corporate obligations
 
7,109

 
134

 
(33
)
 
7,210

U.S. agency mortgage-backed securities
 
2,261

 
20

 
(42
)
 
2,239

Non-U.S. agency mortgage-backed securities
 
818

 
13

 
(5
)
 
826

Total debt securities - available-for-sale
 
18,662

 
333

 
(124
)
 
18,871

Equity securities - available-for-sale
 
1,835

 
18

 
(15
)
 
1,838

Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
182

 
2

 

 
184

State and municipal obligations
 
28

 

 

 
28

Corporate obligations
 
327

 

 

 
327

Total debt securities - held-to-maturity
 
537

 
2

 

 
539

Total investments
 
$
21,034

 
$
353

 
$
(139
)
 
$
21,248

December 31, 2013
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
2,211

 
$
5

 
$
(21
)
 
$
2,195

State and municipal obligations
 
6,902

 
147

 
(72
)
 
6,977

Corporate obligations
 
7,265

 
130

 
(60
)
 
7,335

U.S. agency mortgage-backed securities
 
2,256

 
23

 
(61
)
 
2,218

Non-U.S. agency mortgage-backed securities
 
697

 
12

 
(7
)
 
702

Total debt securities - available-for-sale
 
19,331

 
317

 
(221
)
 
19,427

Equity securities - available-for-sale
 
1,576

 
9

 
(13
)
 
1,572

Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
181

 
1

 

 
182

State and municipal obligations
 
28

 

 

 
28

Corporate obligations
 
334

 

 

 
334

Total debt securities - held-to-maturity
 
543

 
1

 

 
544

Total investments
 
$
21,450

 
$
327

 
$
(234
)
 
$
21,543


The fair values of the Company’s mortgage-backed securities by credit rating (when multiple credit ratings are available for an individual security, the average of the available ratings is used) and origination date as of March 31, 2014 were as follows:
(in millions)
 
AAA
 
AA
 
Non-Investment
Grade
 
Total Fair
Value
2014
 
$
100

 
$

 
$

 
$
100

2013
 
157

 

 

 
157

2012
 
109

 

 

 
109

2011
 
18

 

 

 
18

2010
 
25

 

 

 
25

2009
 
7

 

 

 
7

Pre - 2009
 
395

 
2

 
13

 
410

U.S. agency mortgage-backed securities
 
2,237

 
2

 

 
2,239

Total
 
$
3,048

 
$
4

 
$
13

 
$
3,065

The Company includes any securities backed by Alt-A or subprime mortgages and any commercial mortgage loans in default in the non-investment grade column in the table above.
The amortized cost and fair value of available-for-sale debt securities as of March 31, 2014, by contractual maturity, were as follows:
(in millions)
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
2,007

 
$
2,019

Due after one year through five years
 
6,944

 
7,052

Due after five years through ten years
 
4,900

 
4,962

Due after ten years
 
1,732

 
1,773

U.S. agency mortgage-backed securities
 
2,261

 
2,239

Non-U.S. agency mortgage-backed securities
 
818

 
826

Total debt securities - available-for-sale
 
$
18,662

 
$
18,871

The amortized cost and fair value of held-to-maturity debt securities as of March 31, 2014, by contractual maturity, were as follows:
(in millions)
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
81

 
$
81

Due after one year through five years
 
235

 
235

Due after five years through ten years
 
132

 
134

Due after ten years
 
89

 
89

Total debt securities - held-to-maturity
 
$
537

 
$
539

The fair value of available-for-sale investments with gross unrealized losses by major security type and length of time that individual securities have been in a continuous unrealized loss position were as follows:
 
 
Less Than 12 Months
 
12 Months or Greater
 
 Total
(in millions)
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
796

 
$
(13
)
 
$
11

 
$
(1
)
 
$
807

 
$
(14
)
State and municipal obligations
 
1,564

 
(24
)
 
128

 
(6
)
 
1,692

 
(30
)
Corporate obligations
 
2,174

 
(26
)
 
116

 
(7
)
 
2,290

 
(33
)
U.S. agency mortgage-backed securities
 
1,146

 
(33
)
 
108

 
(9
)
 
1,254

 
(42
)
Non-U.S. agency mortgage-backed securities
 
289

 
(4
)
 
31

 
(1
)
 
320

 
(5
)
Total debt securities - available-for-sale
 
$
5,969

 
$
(100
)
 
$
394

 
$
(24
)
 
$
6,363

 
$
(124
)
Equity securities - available-for-sale
 
$
167

 
$
(15
)
 
$

 
$

 
$
167

 
$
(15
)
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
1,055

 
$
(19
)
 
$
17

 
$
(2
)
 
$
1,072

 
$
(21
)
State and municipal obligations
 
2,491

 
(62
)
 
128

 
(10
)
 
2,619

 
(72
)
Corporate obligations
 
2,573

 
(51
)
 
103

 
(9
)
 
2,676

 
(60
)
U.S. agency mortgage-backed securities
 
1,393

 
(51
)
 
105

 
(10
)
 
1,498

 
(61
)
Non-U.S. agency mortgage-backed securities
 
289

 
(6
)
 
26

 
(1
)
 
315

 
(7
)
Total debt securities - available-for-sale
 
$
7,801

 
$
(189
)
 
$
379

 
$
(32
)
 
$
8,180

 
$
(221
)
Equity securities - available-for-sale
 
$
180

 
$
(13
)
 
$

 
$

 
$
180

 
$
(13
)
The unrealized losses from all securities as of March 31, 2014 were generated from approximately 5,200 positions out of a total of 20,700 positions. The Company believes that it will collect the principal and interest due on its debt securities that have an amortized cost in excess of fair value. The unrealized losses were primarily caused by interest rate increases and not by unfavorable changes in the credit quality associated with these securities. At each reporting period, the Company evaluates securities for impairment when the fair value of the investment is less than its amortized cost. The Company evaluated the underlying credit quality and credit ratings of the issuers, noting neither a significant deterioration since purchase nor other factors leading to an other-than-temporary impairment (OTTI). Therefore, the Company believes these losses to be temporary. As of March 31, 2014, the Company did not have the intent to sell any of the securities in an unrealized loss position.
The Company’s investments in equity securities consist of investments in Brazilian real denominated fixed-income funds, employee savings plan related investments, private equity funds, and dividend paying stocks. The Company evaluated its investments in equity securities for severity and duration of unrealized loss, overall market volatility and other market factors.
Net realized gains reclassified out of accumulated other comprehensive income were from the following sources:
 
 
Three Months Ended March 31,
(in millions)
 
2014
 
2013
Total OTTI
 
$
(3
)
 
$
(3
)
Portion of loss recognized in other comprehensive income
 

 

Net OTTI recognized in earnings
 
(3
)
 
(3
)
Gross realized losses from sales
 
(10
)
 
(1
)
Gross realized gains from sales
 
59

 
61

Net realized gains (included in investment and other income on the Condensed Consolidated Statements of Operations)
 
46

 
57

Income tax effect (included in provision for income taxes on the Condensed Consolidated Statements of Operations)
 
(17
)
 
(21
)
Realized gains, net of taxes
 
$
29

 
$
36


5


3.
Fair Value
Certain assets and liabilities are measured at fair value in the Condensed Consolidated Financial Statements or have fair values disclosed in the Notes to the Condensed Consolidated Financial Statements. These assets and liabilities are classified into one of three levels of a hierarchy defined by GAAP. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement is categorized in its entirety based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
The fair value hierarchy is summarized as follows:
Level 1 — Quoted prices (unadjusted) for identical assets/liabilities in active markets.
Level 2 — Other observable inputs, either directly or indirectly, including:
Quoted prices for similar assets/liabilities in active markets;
Quoted prices for identical or similar assets/liabilities in nonactive markets (e.g., few transactions, limited information, noncurrent prices, high variability over time);
Inputs other than quoted prices that are observable for the asset/liability (e.g., interest rates, yield curves, implied volatilities, credit spreads); and
Inputs that are corroborated by other observable market data.
Level 3 — Unobservable inputs that cannot be corroborated by observable market data.
Transfers between levels, if any, are recorded as of the beginning of the reporting period in which the transfer occurs; there were no transfers between Levels 1, 2 or 3 of any financial assets or liabilities during 2014 or 2013.
Nonfinancial assets and liabilities or financial assets and liabilities that are measured at fair value on a nonrecurring basis are subject to fair value adjustments only in certain circumstances, such as when the Company records an impairment. There were no significant fair value adjustments for these assets and liabilities recorded during the three months ended March 31, 2014 or 2013.
The following methods and assumptions were used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument included in the tables below:
Cash and Cash Equivalents. The carrying value of cash and cash equivalents approximates fair value as maturities are less than three months. Fair values of cash equivalent instruments that do not trade on a regular basis in active markets are classified as Level 2.
Debt and Equity Securities. Fair values of debt and equity securities are based on quoted market prices, where available. The Company obtains one price for each security primarily from a third-party pricing service (pricing service), which generally uses quoted or other observable inputs for the determination of fair value. The pricing service normally derives the security prices through recently reported trades for identical or similar securities, and, if necessary, makes adjustments through the reporting date based upon available observable market information. For securities not actively traded, the pricing service may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include, but are not limited to, benchmark yields, credit spreads, default rates, prepayment speeds and nonbinding broker quotes. As the Company is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Company compares the prices received from the pricing service to prices reported by a secondary pricing source, such as its custodian, its investment consultant and third-party investment advisors. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verification procedures and reviews of fair value methodology documentation provided by independent pricing services have not historically resulted in adjustment in the prices obtained from the pricing service.
Fair values of debt securities that do not trade on a regular basis in active markets but are priced using other observable inputs are classified as Level 2.
Fair value estimates for Level 1 and Level 2 equity securities are based on quoted market prices for actively traded equity securities and/or other market data for the same or comparable instruments and transactions in establishing the prices.
The fair values of Level 3 investments in venture capital portfolios are estimated using a market valuation technique that relies heavily on management assumptions and qualitative observations. Under the market approach, the fair values of the Company’s various venture capital investments are computed using limited quantitative and qualitative observations of activity for similar companies in the current market. The Company’s market modeling utilizes, as applicable, transactions for comparable

6


companies in similar industries that also have similar revenue and growth characteristics and preferences in their capital structure. Key significant unobservable inputs in the market technique include implied earnings before interest, taxes, depreciation and amortization (EBITDA) multiples and revenue multiples. Additionally, the fair values of certain of the Company’s venture capital securities are based off of recent transactions in inactive markets for identical or similar securities. Significant changes in any of these inputs could result in significantly lower or higher fair value measurements.
Throughout the procedures discussed above in relation to the Company’s processes for validating third-party pricing information, the Company validates the understanding of assumptions and inputs used in security pricing and determines the proper classification in the hierarchy based on that understanding.
AARP Program-related Investments. The Company provides health insurance products and services to members of AARP under a Supplemental Health Insurance Program (AARP Program). AARP Program-related investments consist of debt securities and other investments held to fund costs associated with the AARP Program and are priced and classified using the same methodologies as the Company’s investments in debt and equity securities.
Interest Rate Swaps. Fair values of the Company’s swaps are estimated using the terms of the swaps and publicly available information including market yield curves. Because the swaps are unique and not actively traded but are valued using other observable inputs, the fair values are classified as Level 2.
Long-term Debt. The fair value of the Company’s long-term debt is estimated and classified using the same methodologies as the Company’s investments in debt securities.
AARP Program-related Other Liabilities. AARP Program-related other liabilities consist of liabilities that represent the amount of net investment gains and losses related to AARP Program-related investments that accrue to the benefit of the AARP policyholders.

7


The following table presents a summary of fair value measurements by level and carrying values for items measured at fair value on a recurring basis in the Condensed Consolidated Balance Sheets excluding AARP Program-related assets and liabilities, which are presented in a separate table below:
(in millions)
 
Quoted Prices
in Active
Markets
(Level 1)
 
Other
Observable
Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
Fair and Carrying
Value
March 31, 2014
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
7,511

 
$
3

 
$

 
$
7,514

Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
1,531

 
310

 

 
1,841

State and municipal obligations
 

 
6,755

 

 
6,755

Corporate obligations
 
29

 
7,141

 
40

 
7,210

U.S. agency mortgage-backed securities
 

 
2,239

 

 
2,239

Non-U.S. agency mortgage-backed securities
 

 
820

 
6

 
826

Total debt securities - available-for-sale
 
1,560

 
17,265

 
46

 
18,871

Equity securities - available-for-sale
 
1,513

 
12

 
313

 
1,838

Total assets at fair value

$
10,584

 
$
17,280

 
$
359

 
$
28,223

Percentage of total assets at fair value
 
38
%
 
61
%
 
1
%
 
100
%
Interest rate swap liabilities
 
$

 
$
97

 
$

 
$
97

December 31, 2013
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
7,005

 
$
271

 
$

 
$
7,276

Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
1,750

 
445

 

 
2,195

State and municipal obligations
 

 
6,977

 

 
6,977

Corporate obligations
 
25

 
7,274

 
36

 
7,335

U.S. agency mortgage-backed securities
 

 
2,218

 

 
2,218

Non-U.S. agency mortgage-backed securities
 

 
696

 
6

 
702

Total debt securities - available-for-sale
 
1,775

 
17,610

 
42

 
19,427

Equity securities - available-for-sale
 
1,291

 
12

 
269

 
1,572

Total assets at fair value
 
$
10,071

 
$
17,893

 
$
311

 
$
28,275

Percentage of total assets at fair value
 
36
%
 
63
%
 
1
%
 
100
%
Interest rate swap liabilities
 
$

 
$
163

 
$

 
$
163


8


The following table presents a summary of fair value measurements by level and carrying values for certain financial instruments not measured at fair value on a recurring basis in the Condensed Consolidated Balance Sheets:
(in millions)
 
Quoted Prices
in Active
Markets
(Level 1)
 
Other
Observable
Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
Fair
Value
 
Total Carrying Value
March 31, 2014
 
 
 
 
 
 
 
 
 
 
Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
184

 
$

 
$

 
$
184

 
$
182

State and municipal obligations
 

 

 
28

 
28

 
28

Corporate obligations
 
49

 
9

 
269

 
327

 
327

Total debt securities - held-to-maturity
 
$
233

 
$
9

 
$
297

 
$
539

 
$
537

Long-term debt and other financing obligations
 
$

 
$
16,910

 
$

 
$
16,910

 
$
15,641

December 31, 2013
 
 
 
 
 
 
 
 
 
 
Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
182

 
$

 
$

 
$
182

 
$
181

State and municipal obligations
 

 

 
28

 
28

 
28

Corporate obligations
 
47

 
9

 
278

 
334

 
334

Total debt securities - held-to-maturity
 
$
229

 
$
9

 
$
306

 
$
544

 
$
543

Long-term debt and other financing obligations
 
$

 
$
16,602

 
$

 
$
16,602

 
$
15,745

The carrying amounts reported on the Condensed Consolidated Balance Sheets for other financial assets and liabilities approximate fair value because of their short-term nature. These assets and liabilities are not listed in the table above.
A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs is as follows:
 
 
March 31, 2014
 
March 31, 2013
(in millions)
 
Debt
Securities
 
Equity
Securities
 
Total
 
Debt
Securities
 
Equity
Securities
 
Total
Balance at beginning of period
 
$
42

 
$
269

 
$
311

 
$
17

 
$
224

 
$
241

Purchases
 
3

 
44

 
47

 
15

 
31

 
46

Sales
 

 
(4
)
 
(4
)
 

 
(21
)
 
(21
)
Net unrealized gains (losses) in accumulated other comprehensive income
 
1

 
4

 
5

 

 
(2
)
 
(2
)
Net realized gains in investment and other income
 

 

 

 

 
7

 
7

Balance at end of period
 
$
46

 
$
313

 
$
359

 
$
32

 
$
239

 
$
271

The following table presents quantitative information regarding unobservable inputs that were significant to the valuation of assets measured at fair value on a recurring basis using Level 3 inputs:
 
 
 
 
 
 
 
 
Range
(in millions)
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Low
 
High
March 31, 2014
 
 
 
 
 
 
 
 
 
 
Equity securities - available-for-sale
 
 
 
 
 
 
 
 
 
 
Venture capital portfolios
 
$
273

 
Market approach - comparable companies
 
Revenue multiple
 
1.0
 
6.0
 
 
 
 
 
 
EBITDA multiple
 
8.0
 
9.0
 
 
40

 
Market approach - recent transactions
 
Inactive market transactions
 
N/A
 
N/A
Total equity securities
     available-for-sale
 
$
313

 
 
 
 
 
 
 
 
Also included in the Company’s assets measured at fair value on a recurring basis using Level 3 inputs were $46 million of available-for-sale debt securities at March 31, 2014, which were not significant.

9


The Company elected to measure the entirety of the AARP Program assets under management at fair value pursuant to the fair value option. See Note 2 of Notes to the Consolidated Financial Statements in Item II, Part 8, “Financial Statements” in the Company’s 2013 10-K for further detail on the AARP Program. The following table presents fair value information about the AARP Program-related financial assets and liabilities:
(in millions)
 
Quoted Prices
in Active
Markets
(Level 1)
 
Other
Observable
Inputs
(Level 2)
 
Total
Fair and Carrying
Value
March 31, 2014
 
 
 
 
 
 
Cash and cash equivalents
 
$
240

 
$

 
$
240

Debt securities:
 
 
 
 
 
 
U.S. government and agency obligations
 
459

 
296

 
755

State and municipal obligations
 

 
67

 
67

Corporate obligations
 

 
1,097

 
1,097

U.S. agency mortgage-backed securities
 

 
394

 
394

Non-U.S. agency mortgage-backed securities
 

 
145

 
145

Total debt securities
 
459

 
1,999

 
2,458

Other investments
 

 
82

 
82

Total assets at fair value
 
$
699

 
$
2,081

 
$
2,780

Other liabilities
 
$
4

 
$
16

 
$
20

December 31, 2013
 
 
 
 
 
 
Cash and cash equivalents
 
$
265

 
$

 
$
265

Debt securities:
 
 
 
 
 
 
U.S. government and agency obligations
 
426

 
301

 
727

State and municipal obligations
 

 
63

 
63

Corporate obligations
 

 
1,145

 
1,145

U.S. agency mortgage-backed securities
 

 
414

 
414

Non-U.S. agency mortgage-backed securities
 

 
139

 
139

Total debt securities
 
426

 
2,062

 
2,488

Equity securities - available-for-sale
 

 
4

 
4

Total assets at fair value
 
$
691

 
$
2,066

 
$
2,757

Other liabilities
 
$
3

 
$
11

 
$
14

4.
Medicare Part D Pharmacy Benefits
Medicare Part D Pharmacy Benefits
The Condensed Consolidated Balance Sheets include the following amounts associated with the Medicare Part D program:
 
 
March 31, 2014
 
December 31, 2013
(in millions)
 
Subsidies
 
Drug Discount
 
Risk-Share
 
Subsidies
 
Drug Discount
 
Risk-Share
Other current receivables
 
$
529

 
$
184

 
$

 
$
881

 
$
425

 
$

Other policy liabilities
 

 
84

 
103

 

 
152

 
214

The Catastrophic Reinsurance and Low-Income Member Cost Sharing Subsidies (Subsidies) and drug discounts represent cost reimbursements under the Medicare Part D program. The Company is fully reimbursed by the Centers for Medicare & Medicaid Services (CMS) for costs incurred for these contract elements and, accordingly, there is no insurance risk to the Company. Amounts received for these contract elements are not reflected as premium revenues, but rather are accounted for as a reduction of receivables and/or increase in deposit liabilities. CMS provides prospective payments for the drug discounts, which the Company records as liabilities when received. The drug discounts are ultimately funded by the pharmaceutical manufacturers. The Company bills them for claims under the program and records those bills as receivables. Related cash flows are presented as customer funds administered within financing activities on the Condensed Consolidated Statements of Cash Flows.

10


Premiums from CMS are subject to risk-sharing provisions based on a comparison of the Company’s annual bid estimates of prescription drug costs and the actual costs incurred. Variances may result in CMS making additional payments to the Company or require the Company to remit funds to CMS subsequent to the end of the year. The Company records risk-share adjustments to premium revenue and to other current receivables or other policy liabilities on the Condensed Consolidated Balance Sheets. See Note 2 of Notes to the Consolidated Financial Statements in Item II, Part 8, “Financial Statements” in the Company’s 2013 10-K for further detail on Medicare Part D.
5.
Medical Cost Reserve Development
Favorable medical cost reserve development was $220 million and $280 million for the three months ended March 31, 2014 and 2013, respectively. In 2014, favorable development was driven by a number of individual factors that were not material. Lower than expected health system utilization levels were a significant driver in 2013.
6.     Commercial Paper and Long-Term Debt
Commercial paper and senior unsecured long-term debt consisted of the following:
 
 
March 31, 2014
 
December 31, 2013
(in millions, except percentages)
 
Par
Value
 
Carrying
Value
 
Fair
Value
 
Par
Value
 
Carrying
Value
 
Fair
Value
Commercial paper
 
$
1,124

 
$
1,124

 
$
1,124

 
$
1,115

 
$
1,115

 
$
1,115

4.750% notes due February 2014
 

 

 

 
172

 
173

 
173

5.000% notes due August 2014
 
389

 
395

 
396

 
389

 
397

 
400

Floating-rate notes due August 2014
 
250

 
250

 
250

 
250

 
250

 
250

4.875% notes due March 2015 (a)
 
416

 
429

 
433

 
416

 
431

 
436

0.850% notes due October 2015 (a)
 
625

 
624

 
628

 
625

 
624

 
628

5.375% notes due March 2016 (a)
 
601

 
637

 
654

 
601

 
641

 
657

1.875% notes due November 2016
 
400

 
398

 
409

 
400

 
398

 
408

5.360% notes due November 2016
 
95

 
95

 
106

 
95

 
95

 
107

6.000% notes due June 2017
 
441

 
476

 
502

 
441

 
479

 
506

1.400% notes due October 2017 (a)
 
625

 
613

 
623

 
625

 
613

 
617

6.000% notes due November 2017
 
156

 
167

 
178

 
156

 
168

 
178

6.000% notes due February 2018
 
1,100

 
1,115

 
1,266

 
1,100

 
1,116

 
1,271

1.625% notes due March 2019 (a)
 
500

 
491

 
486

 
500

 
489

 
481

3.875% notes due October 2020 (a)
 
450

 
441

 
476

 
450

 
435

 
474

4.700% notes due February 2021
 
400

 
415

 
441

 
400

 
416

 
436

3.375% notes due November 2021 (a)
 
500

 
480

 
507

 
500

 
472

 
494

2.875% notes due March 2022 (a)
 
1,100

 
1,001

 
1,069

 
1,100

 
981

 
1,046

0.000% notes due November 2022
 
15

 
10

 
11

 
15

 
9

 
10

2.750% notes due February 2023 (a)
 
625

 
577

 
588

 
625

 
563

 
572

2.875% notes due March 2023 (a)
 
750

 
745

 
711

 
750

 
729

 
698

5.800% notes due March 2036
 
850

 
845

 
989

 
850

 
845

 
935

6.500% notes due June 2037
 
500

 
495

 
628

 
500

 
495

 
593

6.625% notes due November 2037
 
650

 
646

 
837

 
650

 
645

 
786

6.875% notes due February 2038
 
1,100

 
1,085

 
1,447

 
1,100

 
1,084

 
1,370

5.700% notes due October 2040
 
300

 
298

 
350

 
300

 
298

 
329

5.950% notes due February 2041
 
350

 
348

 
419

 
350

 
348

 
397

4.625% notes due November 2041
 
600

 
593

 
603

 
600

 
593

 
567

4.375% notes due March 2042
 
502

 
486

 
488

 
502

 
486

 
459

3.950% notes due October 2042
 
625

 
611

 
566

 
625

 
611

 
530

4.250% notes due March 2043
 
750

 
740

 
714

 
750

 
740

 
673

Total commercial paper and long-term debt
 
$
16,789

 
$
16,630

 
$
17,899