10-Q 1 unh201533110-q.htm 10-Q UNH 2015.3.31 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, 2015
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, 2015, there were 951,904,261 shares of the registrant’s Common Stock, $.01 par value per share, issued and outstanding.
 
 
 
 
 




UNITEDHEALTH GROUP
Table of Contents
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8.
 
 
 
 
 














PART I
ITEM 1.    FINANCIAL STATEMENTS
UnitedHealth Group
Condensed Consolidated Balance Sheets
(Unaudited)
(in millions, except per share data)
 
March 31,
2015
 
December 31,
2014
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
8,650

 
$
7,495

Short-term investments
 
1,780

 
1,741

Accounts receivable, net
 
5,040

 
4,252

Other current receivables, net
 
5,346

 
5,498

Assets under management
 
2,921

 
2,962

Deferred income taxes
 
405

 
556

Prepaid expenses and other current assets
 
2,632

 
1,052

Total current assets
 
26,774

 
23,556

Long-term investments
 
19,416

 
18,827

Property, equipment and capitalized software, net
 
4,245

 
4,418

Goodwill
 
32,782

 
32,940

Other intangible assets, net
 
3,441

 
3,669

Other assets
 
3,061

 
2,972

Total assets
 
$
89,719

 
$
86,382

Liabilities and shareholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Medical costs payable
 
$
13,537

 
$
12,040

Accounts payable and accrued liabilities
 
10,518

 
9,247

Other policy liabilities
 
6,392

 
5,965

Commercial paper and current maturities of long-term debt
 
2,797

 
1,399

Unearned revenues
 
1,734

 
1,972

Total current liabilities
 
34,978

 
30,623

Long-term debt, less current maturities
 
15,577

 
16,007

Future policy benefits
 
2,483

 
2,488

Deferred income taxes
 
2,056

 
2,065

Other liabilities
 
1,295

 
1,357

Total liabilities
 
56,389

 
52,540

Commitments and contingencies (Note 9)
 
 
 


Redeemable noncontrolling interests
 
1,452

 
1,388

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;
952 and 954 issued and outstanding
 
10

 
10

Retained earnings
 
34,153

 
33,836

Accumulated other comprehensive loss
 
(2,285
)
 
(1,392
)
Total shareholders’ equity
 
31,878

 
32,454

Total liabilities and shareholders’ equity
 
$
89,719

 
$
86,382

See Notes to the Condensed Consolidated Financial Statements

1


UnitedHealth Group
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three Months Ended March 31,
(in millions, except per share data)
 
2015
 
2014
Revenues:
 
 
 
 
Premiums
 
$
31,674

 
$
28,115

Services
 
2,706

 
2,404

Products
 
1,230

 
998

Investment and other income
 
146

 
191

Total revenues
 
35,756

 
31,708

Operating costs:
 
 
 
 
Medical costs
 
25,689

 
23,208

Operating costs
 
5,949

 
5,194

Cost of products sold
 
1,100

 
892

Depreciation and amortization
 
378

 
360

Total operating costs
 
33,116

 
29,654

Earnings from operations
 
2,640

 
2,054

Interest expense
 
(150
)
 
(160
)
Earnings before income taxes
 
2,490

 
1,894

Provision for income taxes
 
(1,077
)
 
(795
)
Net earnings
 
$
1,413

 
$
1,099

Earnings per share:
 
 
 
 
Basic
 
$
1.48

 
$
1.12

Diluted
 
$
1.46

 
$
1.10

Basic weighted-average number of common shares outstanding
 
954

 
983

Dilutive effect of common share equivalents
 
15

 
13

Diluted weighted-average number of common shares outstanding
 
969

 
996

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

 
9

Cash dividends declared per common share
 
$
0.3750

 
$
0.2800


See Notes to the Condensed Consolidated Financial Statements

2



UnitedHealth Group
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

 
 
Three Months Ended March 31,
(in millions)
 
2015
 
2014
Net earnings
 
$
1,413

 
$
1,099

Other comprehensive (loss) income:
 
 
 
 
Gross unrealized gains on investment securities during the period
 
105

 
166

Income tax effect
 
(37
)
 
(61
)
Total unrealized gains, net of tax
 
68

 
105

Gross reclassification adjustment for net realized gains included in net earnings
 
(3
)
 
(46
)
Income tax effect
 
1

 
17

Total reclassification adjustment, net of tax
 
(2
)
 
(29
)
Total foreign currency translation (losses) gains
 
(959
)
 
259

Other comprehensive (loss) income
 
(893
)
 
335

Comprehensive income
 
$
520

 
$
1,434


See Notes to the Condensed Consolidated Financial Statements

3


UnitedHealth Group
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
 
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss) Income
 
Total Shareholders’
Equity
(in millions)
 
Shares
 
Amount
 
 
 
Net Unrealized Gains on Investments
 
Foreign Currency Translation (Losses) Gains
 
Balance at January 1, 2015
 
954

 
$
10

 
$

 
$
33,836

 
$
223

 
$
(1,615
)
 
$
32,454

Net earnings
 
 
 
 
 
 
 
1,413

 
 
 
 
 
1,413

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
66

 
(959
)
 
(893
)
Issuances of common shares, and related tax effects
 
6

 

 

 
 
 
 
 
 
 

Share-based compensation, and related tax benefits
 
 
 
 
 
206

 
 
 
 
 
 
 
206

Noncontrolling interests fair value and other adjustments
 
 
 
 
 
(49
)
 
 
 
 
 
 
 
(49
)
Common share repurchases
 
(8
)
 

 
(157
)
 
(739
)
 
 
 
 
 
(896
)
Cash dividends paid on common shares
 
 
 
 
 
 
 
(357
)
 
 
 
 
 
(357
)
Balance at March 31, 2015
 
952

 
$
10

 
$

 
$
34,153

 
$
289

 
$
(2,574
)
 
$
31,878

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
 
988

 
$
10

 
$

 
$
33,047

 
$
54

 
$
(962
)
 
$
32,149

Net earnings
 
 
 
 
 
 
 
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



See Notes to the Condensed Consolidated Financial Statements

4


UnitedHealth Group
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Three Months Ended
March 31,
(in millions)
 
2015
 
2014
Operating activities
 
 
 
 
Net earnings
 
$
1,413

 
$
1,099

Noncash items:
 
 
 
 
Depreciation and amortization
 
378

 
360

Deferred income taxes
 
122

 
99

Share-based compensation
 
125

 
105

Other, net
 
(44
)
 
(65
)
Net change in other operating items, net of effects from acquisitions and changes in AARP balances:
 
 
 
 
Accounts receivable
 
(758
)
 
(990
)
Other assets
 
(2,162
)
 
(1,281
)
Medical costs payable
 
1,610

 
387

Accounts payable and other liabilities
 
1,648

 
1,665

Other policy liabilities
 
154

 
(203
)
Unearned revenues
 
(217
)
 
232

Cash flows from operating activities
 
2,269

 
1,408

Investing activities
 
 
 
 
Purchases of investments
 
(1,891
)
 
(2,914
)
Sales of investments
 
503

 
2,235

Maturities of investments
 
843

 
825

Cash paid for acquisitions, net of cash assumed
 
(575
)
 
(345
)
Purchases of property, equipment and capitalized software
 
(373
)
 
(353
)
Other, net
 
(32
)
 
(51
)
Cash flows used for investing activities
 
(1,525
)
 
(603
)
Financing activities
 
 
 
 
Common stock repurchases
 
(896
)
 
(911
)
Cash dividends paid
 
(357
)
 
(276
)
Proceeds from common stock issuances
 
192

 
216

Repayments of long-term debt
 
(416
)
 
(172
)
Proceeds from commercial paper, net
 
1,194

 
9

Customer funds administered
 
1,049

 
818

Other, net
 
(270
)
 
(257
)
Cash flows from (used for) financing activities
 
496

 
(573
)
Effect of exchange rate changes on cash and cash equivalents
 
(85
)
 
6

Increase in cash and cash equivalents
 
1,155

 
238

Cash and cash equivalents, beginning of period
 
7,495

 
7,276

Cash and cash equivalents, end of period
 
$
8,650

 
$
7,514


See Notes to the Condensed Consolidated Financial Statements

5


UnitedHealth Group
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. 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 the health system work better for everyone. Through its diversified family of businesses, the Company leverages core competencies in advanced, enabling technology; health care data, information and intelligence; and clinical care management and coordination to help meet the demands of the health system. 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, 2014 as filed with the SEC (2014 10-K). The accompanying Condensed Consolidated Financial Statements include all normal recurring adjustments necessary to present the interim financial statements fairly.
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 estimates and judgments for medical costs payable and 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 change in estimates is included in earnings in the period in which the estimate is adjusted.
The accounting policies disclosed in Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2014 10-K remain unchanged.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09). ASU 2014-09 will supersede existing revenue recognition standards with a single model unless those contracts are within the scope of other standards (e.g., an insurance entity’s insurance contracts). The revenue recognition principle in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, new and enhanced disclosures will be required. Companies can adopt the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. In April 2015, the FASB announced its intention to delay ASU 2014-09 for one year and is expected to become effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption at the original effective date, interim and annual periods beginning after December 15, 2016, will be permitted. The Company is currently evaluating the effect of the new revenue recognition guidance.
The Company has determined that there have been no other recently adopted or issued accounting standards that had, or will have, a material impact on its Condensed Consolidated Financial Statements.


6


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, 2015
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
1,663

 
$
19

 
$

 
$
1,682

State and municipal obligations
 
6,464

 
232

 
(3
)
 
6,693

Corporate obligations
 
7,668

 
158

 
(10
)
 
7,816

U.S. agency mortgage-backed securities
 
2,011

 
48

 
(3
)
 
2,056

Non-U.S. agency mortgage-backed securities
 
858

 
16

 
(2
)
 
872

Total debt securities - available-for-sale
 
18,664

 
473

 
(18
)
 
19,119

Equity securities - available-for-sale
 
1,526

 
37

 
(33
)
 
1,530

Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
178

 
4

 

 
182

State and municipal obligations
 
15

 

 

 
15

Corporate obligations
 
354

 

 

 
354

Total debt securities - held-to-maturity
 
547

 
4

 

 
551

Total investments
 
$
20,737

 
$
514

 
$
(51
)
 
$
21,200

December 31, 2014
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
1,614

 
$
7

 
$
(1
)
 
$
1,620

State and municipal obligations
 
6,456

 
217

 
(5
)
 
6,668

Corporate obligations
 
7,241

 
112

 
(26
)
 
7,327

U.S. agency mortgage-backed securities
 
2,022

 
39

 
(5
)
 
2,056

Non-U.S. agency mortgage-backed securities
 
872

 
12

 
(4
)
 
880

Total debt securities - available-for-sale
 
18,205

 
387

 
(41
)
 
18,551

Equity securities - available-for-sale
 
1,511

 
36

 
(25
)
 
1,522

Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
178

 
2

 

 
180

State and municipal obligations
 
19

 

 

 
19

Corporate obligations
 
298

 

 

 
298

Total debt securities - held-to-maturity
 
495

 
2

 

 
497

Total investments
 
$
20,211

 
$
425

 
$
(66
)
 
$
20,570

The amortized cost and fair value of available-for-sale debt securities as of March 31, 2015, by contractual maturity, were as follows:
(in millions)
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
1,856

 
$
1,862

Due after one year through five years
 
6,927

 
7,035

Due after five years through ten years
 
5,205

 
5,387

Due after ten years
 
1,807

 
1,907

U.S. agency mortgage-backed securities
 
2,011

 
2,056

Non-U.S. agency mortgage-backed securities
 
858

 
872

Total debt securities - available-for-sale
 
$
18,664

 
$
19,119


7


The amortized cost and fair value of held-to-maturity debt securities as of March 31, 2015, by contractual maturity, were as follows:
(in millions)
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
127

 
$
127

Due after one year through five years
 
207

 
209

Due after five years through ten years
 
109

 
110

Due after ten years
 
104

 
105

Total debt securities - held-to-maturity
 
$
547

 
$
551

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, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
State and municipal obligations
 
$
481

 
$
(2
)
 
$
27

 
$
(1
)
 
$
508

 
$
(3
)
Corporate obligations
 
1,509

 
(7
)
 
235

 
(3
)
 
1,744

 
(10
)
U.S. agency mortgage-backed securities
 
151

 
(1
)
 
133

 
(2
)
 
284

 
(3
)
Non-U.S. agency mortgage-backed securities
 
186

 
(2
)
 

 

 
186

 
(2
)
Total debt securities - available-for-sale
 
$
2,327

 
$
(12
)
 
$
395

 
$
(6
)
 
$
2,722

 
$
(18
)
Equity securities - available-for-sale
 
$
76

 
$
(7
)
 
$
83

 
$
(26
)
 
$
159

 
$
(33
)
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
420

 
$
(1
)
 
$

 
$

 
$
420

 
$
(1
)
State and municipal obligations
 
711

 
(4
)
 
99

 
(1
)
 
810

 
(5
)
Corporate obligations
 
2,595

 
(17
)
 
464

 
(9
)
 
3,059

 
(26
)
U.S. agency mortgage-backed securities
 

 

 
272

 
(5
)
 
272

 
(5
)
Non-U.S. agency mortgage-backed securities
 
254

 
(2
)
 
114

 
(2
)
 
368

 
(4
)
Total debt securities - available-for-sale
 
$
3,980

 
$
(24
)
 
$
949

 
$
(17
)
 
$
4,929

 
$
(41
)
Equity securities - available-for-sale
 
$
107

 
$
(6
)
 
$
88

 
$
(19
)
 
$
195

 
$
(25
)
The Company’s unrealized losses from all securities as of March 31, 2015 were generated from approximately 4,000 positions out of a total of 23,000 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). As of March 31, 2015, the Company did not have the intent to sell any of the securities in an unrealized loss position. Therefore, the Company believes these losses to be temporary.
The Company’s investments in equity securities consist of investments in Brazilian real denominated fixed-income funds, employee savings plan related investments, venture capital 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.

8


Net realized gains reclassified out of accumulated other comprehensive income were from the following sources:
 
 
Three Months Ended March 31,
(in millions)
 
2015
 
2014
Total OTTI
 
$
(1
)
 
$
(3
)
Portion of loss recognized in other comprehensive income
 

 

Net OTTI recognized in earnings
 
(1
)
 
(3
)
Gross realized losses from sales
 
(6
)
 
(10
)
Gross realized gains from sales
 
10

 
59

Net realized gains (included in investment and other income on the Condensed Consolidated Statements of Operations)
 
3

 
46

Income tax effect (included in provision for income taxes on the Condensed Consolidated Statements of Operations)
 
(1
)
 
(17
)
Realized gains, net of taxes
 
$
2

 
$
29

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.
For a description of the methods and assumptions that are used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument, see Note 4 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2014 10-K.


9


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 assets and liabilities, related to a Supplemental Health Insurance Program (AARP Program), 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, 2015
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
8,617

 
$
33

 
$

 
$
8,650

Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
1,466

 
216

 

 
1,682

State and municipal obligations
 

 
6,693

 

 
6,693

Corporate obligations
 
7

 
7,736

 
73

 
7,816

U.S. agency mortgage-backed securities
 

 
2,056

 

 
2,056

Non-U.S. agency mortgage-backed securities
 

 
866

 
6

 
872

Total debt securities - available-for-sale
 
1,473

 
17,567

 
79

 
19,119

Equity securities - available-for-sale
 
1,209

 
12

 
309

 
1,530

Interest rate swap assets
 

 
230

 

 
230

Total assets at fair value

$
11,299

 
$
17,842

 
$
388

 
$
29,529

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

 
$
1

 
$

 
$
1

December 31, 2014
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
7,472

 
$
23

 
$

 
$
7,495

Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
1,427

 
193

 

 
1,620

State and municipal obligations
 

 
6,668

 

 
6,668

Corporate obligations
 
2

 
7,257

 
68

 
7,327

U.S. agency mortgage-backed securities
 

 
2,056

 

 
2,056

Non-U.S. agency mortgage-backed securities
 

 
874

 
6

 
880

Total debt securities - available-for-sale
 
1,429

 
17,048

 
74

 
18,551

Equity securities - available-for-sale
 
1,200

 
12

 
310

 
1,522

Interest rate swap assets
 

 
62

 

 
62

Total assets at fair value
 
$
10,101

 
$
17,145

 
$
384

 
$
27,630

Percentage of total assets at fair value
 
37
%
 
62
%
 
1
%
 
100
%
Interest rate swap liabilities
 
$

 
$
55

 
$

 
$
55

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 the three months ended March 31, 2015 or 2014.



10


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, 2015
 
 
 
 
 
 
 
 
 
 
Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
182

 
$

 
$

 
$
182

 
$
178

State and municipal obligations
 

 

 
15

 
15

 
15

Corporate obligations
 
93

 
10

 
251

 
354

 
354

Total debt securities - held-to-maturity
 
$
275

 
$
10

 
$
266

 
$
551

 
$
547

Other assets
 
$

 
$
490

 
$

 
$
490

 
$
489

Long-term debt and other financing obligations
 
$

 
$
18,826

 
$

 
$
18,826

 
$
16,859

December 31, 2014
 
 
 
 
 
 
 
 
 
 
Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
180

 
$

 
$

 
$
180

 
$
178

State and municipal obligations
 

 

 
19

 
19

 
19

Corporate obligations
 
46

 
10

 
242

 
298

 
298

Total debt securities - held-to-maturity
 
$
226

 
$
10

 
$
261

 
$
497

 
$
495

Other assets
 
$

 
$
478

 
$

 
$
478

 
$
484

Long-term debt and other financing obligations
 
$

 
$
18,863

 
$

 
$
18,863

 
$
17,085

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, 2015 or 2014.
The carrying amounts reported on the Condensed Consolidated Balance Sheets for other current 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, 2015
 
March 31, 2014
(in millions)
 
Debt
Securities
 
Equity
Securities
 
Total
 
Debt
Securities
 
Equity
Securities
 
Total
Balance at beginning of period
 
$
74

 
$
310

 
$
384

 
$
42

 
$
269

 
$
311

Purchases
 
4

 
4

 
8

 
3

 
44

 
47

Sales
 

 
(1
)
 
(1
)
 

 
(4
)
 
(4
)
Net unrealized gains (losses) in accumulated other comprehensive income
 
1

 
(5
)
 
(4
)
 
1

 
4

 
5

Net realized gains in investment and other income
 

 
1

 
1

 

 

 

Balance at end of period
 
$
79

 
$
309

 
$
388

 
$
46

 
$
313

 
$
359


11


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, 2015
 
 
 
 
 
 
 
 
 
 
Equity securities - available-for-sale
 
 
 
 
 
 
 
 
 
 
Venture capital portfolios
 
$
259

 
Market approach - comparable companies
 
Revenue multiple
 
1.0
 
7.0
 
 
 
 
 
 
EBITDA multiple
 
8.0
 
10.0
 
 
50

 
Market approach - recent transactions
 
Inactive market transactions
 
N/A
 
N/A
Total equity securities
     available-for-sale
 
$
309

 
 
 
 
 
 
 
 
Also included in the Company’s assets measured at fair value on a recurring basis using Level 3 inputs were $79 million of available-for-sale debt securities as of March 31, 2015, which were not significant.
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 Part II, Item 8, “Financial Statements” in the Company’s 2014 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, 2015
 
 
 
 
 
 
Cash and cash equivalents
 
$
262

 
$

 
$
262

Debt securities:
 
 
 
 
 
 
U.S. government and agency obligations
 
407

 
214

 
621

State and municipal obligations
 

 
96

 
96

Corporate obligations
 

 
1,279

 
1,279

U.S. agency mortgage-backed securities
 

 
375

 
375

Non-U.S. agency mortgage-backed securities
 

 
203

 
203

Total debt securities
 
407

 
2,167

 
2,574

Other investments
 

 
85

 
85

Total assets at fair value
 
$
669

 
$
2,252

 
$
2,921

Other liabilities
 
$
8

 
$
24

 
$
32

December 31, 2014
 
 
 
 
 
 
Cash and cash equivalents
 
$
415

 
$

 
$
415

Debt securities:
 
 
 
 
 
 
U.S. government and agency obligations
 
409

 
245

 
654

State and municipal obligations
 

 
95

 
95

Corporate obligations
 

 
1,200

 
1,200

U.S. agency mortgage-backed securities
 

 
340

 
340

Non-U.S. agency mortgage-backed securities
 

 
177

 
177

Total debt securities
 
409

 
2,057

 
2,466

Other investments
 

 
81

 
81

Total assets at fair value
 
$
824

 
$
2,138

 
$
2,962

Other liabilities
 
$
5

 
$
13

 
$
18


12


4.
Medicare Part D Pharmacy Benefits
The Condensed Consolidated Balance Sheets include the following amounts associated with the Medicare Part D program:
 
 
March 31, 2015
 
December 31, 2014
(in millions)
 
Subsidies
 
Drug Discount
 
Risk-Share
 
Subsidies
 
Drug Discount
 
Risk-Share
Other current receivables
 
$
1,448

 
$
239

 
$
46

 
$
1,801

 
$
719

 
$
20

Other policy liabilities
 

 

 

 

 
302

 

As of March 31, 2015, the Centers for Medicare and Medicaid Services (CMS) had underfunded the payment for drug discounts and accordingly, the Company recorded a receivable from CMS along with the receivables from pharmaceutical manufacturers. See Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the Company’s 2014 10-K for further detail on Medicare Part D.
5.
Medical Costs Reserve Development
Favorable medical cost reserve development was $140 million and $220 million for the three months ended March 31, 2015 and 2014, respectively. In both periods, favorable development was driven by a number of individual factors that were not material.
6.
Health Insurance 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) includes an annual, nondeductible insurance industry tax (Health Insurance Industry Tax). As of March 31, 2015, the liability recorded in accounts payable and accrued liabilities related to the Health Insurance Industry Tax was $1.8 billion. The corresponding deferred cost recorded in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets was $1.4 billion. There was no liability or asset related to the Health Insurance Industry Tax recorded as of December 31, 2014 as the Health Insurance Industry Tax was paid in September 2014. See Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the Company’s 2014 10-K for further detail on the Health Insurance Industry Tax.

13


7.     Commercial Paper and Long-Term Debt
Commercial paper and senior unsecured long-term debt consisted of the following:
 
 
March 31, 2015
 
December 31, 2014
(in millions, except percentages)
 
Par
Value
 
Carrying
Value
 
Fair
Value
 
Par
Value
 
Carrying
Value
 
Fair
Value
Commercial paper
 
$
1,515

 
$
1,515

 
$
1,515

 
$
321

 
$
321

 
$
321

4.875% notes due March 2015 (a)
 

 

 

 
416

 
419

 
419

0.850% notes due October 2015 (a)
 
625

 
626

 
626

 
625

 
625

 
627

5.375% notes due March 2016 (a)
 
601

 
620

 
627

 
601

 
623

 
634

1.875% notes due November 2016 (a)
 
400

 
400

 
407

 
400

 
397

 
406

5.360% notes due November 2016
 
95

 
95

 
102

 
95

 
95

 
103

6.000% notes due June 2017 (a)
 
441

 
467

 
488

 
441

 
466

 
489

1.400% notes due October 2017 (a)
 
625

 
624

 
631

 
625

 
616

 
624

6.000% notes due November 2017 (a)
 
156

 
165

 
175

 
156

 
164

 
175

1.400% notes due December 2017 (a)
 
750

 
755

 
756

 
750

 
745

 
749

6.000% notes due February 2018 (a)
 
1,100

 
1,120

 
1,245

 
1,100

 
1,106

 
1,238

1.625% notes due March 2019 (a)
 
500

 
506

 
501

 
500

 
496

 
493

2.300% notes due December 2019 (a)
 
500

 
508

 
510

 
500

 
496

 
502

3.875% notes due October 2020 (a)
 
450

 
463

 
492

 
450

 
450

 
477

4.700% notes due February 2021 (a)
 
400

 
424

 
456

 
400

 
413

 
450

3.375% notes due November 2021 (a)
 
500

 
512

 
534

 
500

 
496

 
519

2.875% notes due December 2021 (a)
 
750

 
773

 
770

 
750

 
748

 
759

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

 
1,082

 
1,119

 
1,100

 
1,042

 
1,104

0.000% notes due November 2022
 
15

 
10

 
11

 
15

 
10

 
11

2.750% notes due February 2023 (a)
 
625

 
628

 
631

 
625

 
604

 
613

2.875% notes due March 2023 (a)
 
750

 
806

 
768

 
750

 
777

 
745

5.800% notes due March 2036
 
850

 
845

 
1,096

 
850

 
845

 
1,052

6.500% notes due June 2037
 
500

 
495

 
703

 
500

 
495

 
670

6.625% notes due November 2037
 
650

 
646

 
927

 
650

 
646

 
888

6.875% notes due February 2038
 
1,100

 
1,085

 
1,584

 
1,100

 
1,085

 
1,544

5.700% notes due October 2040
 
300

 
298

 
387

 
300

 
298

 
378

5.950% notes due February 2041
 
350

 
348

 
471

 
350

 
348

 
455

4.625% notes due November 2041
 
600

 
593

 
677

 
600

 
593

 
646

4.375% notes due March 2042
 
502

 
486

 
553

 
502

 
486

 
536

3.950% notes due October 2042
 
625

 
611

 
640

 
625

 
611

 
621

4.250% notes due March 2043
 
750

 
740

 
811

 
750

 
740

 
786

Total commercial paper and long-term debt
 
$
18,125

 
$
18,246

 
$
20,213

 
$
17,347

 
$
17,256

 
$
19,034

(a)
Fixed-rate debt instruments hedged with interest rate swap contracts. See below for more information on the Company’s interest rate swaps.
The Company’s long-term debt obligations also included $128 million and $150 million of other financing obligations, of which $36 million and $34 million were current as of March 31, 2015 and December 31, 2014, respectively.
Commercial Paper and Bank Credit Facilities
Commercial paper consists of short-duration, senior unsecured debt privately placed on a discount basis through broker-dealers. As of March 31, 2015, the Company’s outstanding commercial paper had a weighted-average annual interest rate of 0.3%.
The Company has $3.0 billion five-year and $1.0 billion 364-day revolving bank credit facilities with 23 banks, which mature in November 2019 and November 2015, respectively. These facilities provide liquidity support for the Company’s commercial paper program and are available for general corporate purposes. There were no amounts outstanding under these facilities as of March 31, 2015. The interest rates on borrowings are variable based on term and are calculated based on the London Interbank Offered Rate (LIBOR) plus a credit spread based on the Company’s senior unsecured credit ratings. As of March 31, 2015, the annual interest rates on the bank credit facilities, had they been drawn, would have ranged from 1.0% to 1.2%.
On May 1, 2015, the Company entered into an additional $2.0 billion 364-day revolving bank credit facility to provide liquidity support for the Company’s commercial paper program. In addition, on the same date, the Company entered into a $1.5 billion delayed draw term loan. The commercial paper and term loan proceeds will be used to fund a portion of the purchase of

14


Catamaran Corporation (Catamaran). No amounts have been drawn on the $2.0 billion bank credit facility or the $1.5 billion term loan. For more information on the purchase of Catamaran, see Note 9.
Debt Covenants
The Company’s bank credit facilities contain various covenants including requiring the Company to maintain a debt to debt-plus-equity ratio of not more than 50%. The Company was in compliance with its debt covenants as of March 31, 2015.
Interest Rate Swap Contracts
The Company uses interest rate swap contracts to convert a portion of its interest rate exposure from fixed rates to floating rates to more closely align interest expense with interest income received on its variable rate financial assets. The floating rates are benchmarked to LIBOR. The swaps are designated as fair value hedges on the Company’s fixed-rate debt. Since the critical terms of the swaps match those of the debt being hedged, they are considered to be highly effective hedges and all changes in the fair values of the swaps are recorded as adjustments to the carrying value of the related debt with no net impact recorded on the Condensed Consolidated Statements of Operations. Both the hedge fair value changes and the offsetting debt adjustments are recorded in interest expense on the Condensed Consolidated Statements of Operations. The following table summarizes the location and fair value of the interest rate swap fair value hedges on the Company’s Condensed Consolidated Balance Sheet:
Type of Fair Value Hedge
 
Notional Amount
 
Fair Value
 
Balance Sheet Location
 
 
(in billions)
 
(in millions)
 
 
March 31, 2015
 
 
 
 
 
 
Interest rate swap contracts
 
$
10.3

 
$
2

 
Prepaid expenses and other current assets
 
 
 
 
228

 
Other assets
 
 
 
 
1

 
Other liabilities
December 31, 2014
 
 
 
 
 
 
Interest rate swap contracts
 
$
10.7

 
$
62

 
Other assets

 
 
 
55

 
Other liabilities
The following table provides a summary of the effect of changes in fair value of fair value hedges on the Company’s Condensed Consolidated Statements of Operations:
 
 
Three Months Ended March 31,
(in millions)
 
2015
 
2014
Hedge - interest rate swap gain recognized in interest expense
 
$
222