10-Q 1 unh201593010-q.htm 10-Q 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 SEPTEMBER 30, 2015
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission file number: 1-10864
__________________________________________________________ 
    
UnitedHealth Group Incorporated
(Exact name of registrant as specified in its charter)
 __________________________________________________________ 
Delaware
 
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 [ ]
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 [ ]
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
[ ]
 
Non-accelerated filer
[ ]
 
Smaller reporting company
[ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes [ ] No [X]

As of October 30, 2015, there were 953,108,435 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)
 
September 30,
2015
 
December 31,
2014
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
7,983

 
$
7,495

Short-term investments
 
1,942

 
1,741

Accounts receivable, net
 
6,752

 
4,252

Other current receivables, net
 
7,667

 
5,498

Assets under management
 
2,948

 
2,962

Deferred income taxes
 
670

 
556

Prepaid expenses and other current assets
 
1,973

 
1,052

Total current assets
 
29,935

 
23,556

Long-term investments
 
18,535

 
18,827

Property, equipment and capitalized software, net
 
4,532

 
4,418

Goodwill
 
43,680

 
32,940

Other intangible assets, net
 
8,405

 
3,669

Other assets
 
3,185

 
2,972

Total assets
 
$
108,272

 
$
86,382

Liabilities and equity
 
 
 
 
Current liabilities:
 
 
 
 
Medical costs payable
 
$
13,906

 
$
12,040

Accounts payable and accrued liabilities
 
11,300

 
9,247

Other policy liabilities
 
7,249

 
5,965

Commercial paper and current maturities of long-term debt
 
5,767

 
1,399

Unearned revenues
 
1,731

 
1,972

Total current liabilities
 
39,953

 
30,623

Long-term debt, less current maturities
 
26,015

 
16,007

Future policy benefits
 
2,489

 
2,488

Deferred income taxes
 
3,593

 
2,065

Other liabilities
 
1,529

 
1,357

Total liabilities
 
73,579

 
52,540

Commitments and contingencies (Note 12)
 
 
 


Redeemable noncontrolling interests
 
1,571

 
1,388

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; 953 and 954 issued and outstanding
 
10

 
10

Additional paid in capital
 
69

 

Retained earnings
 
36,382

 
33,836

Accumulated other comprehensive loss
 
(3,347
)
 
(1,392
)
Nonredeemable noncontrolling interest
 
8

 

Total equity
 
33,122

 
32,454

Total liabilities and equity
 
$
108,272

 
$
86,382


See Notes to the Condensed Consolidated Financial Statements

1


UnitedHealth Group
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions, except per share data)
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
 
Premiums
 
$
31,801

 
$
28,972

 
$
95,436

 
$
85,927

Products
 
6,482

 
1,080

 
8,935

 
3,115

Services
 
3,036

 
2,535

 
8,607

 
7,386

Investment and other income
 
170

 
172

 
530

 
613

Total revenues
 
41,489

 
32,759

 
113,508

 
97,041

Operating costs:
 
 
 
 
 
 
 
 
Medical costs
 
25,618

 
23,092

 
77,333

 
69,823

Operating costs
 
6,301

 
5,436

 
18,102

 
15,836

Cost of products sold
 
6,100

 
955

 
8,311

 
2,776

Depreciation and amortization
 
452

 
373

 
1,209

 
1,097

Total operating costs
 
38,471

 
29,856

 
104,955

 
89,532

Earnings from operations
 
3,018

 
2,903

 
8,553

 
7,509

Interest expense
 
(229
)
 
(152
)
 
(530
)
 
(467
)
Earnings before income taxes
 
2,789

 
2,751

 
8,023

 
7,042

Provision for income taxes
 
(1,171
)
 
(1,149
)
 
(3,407
)
 
(2,933
)
Net earnings
 
1,618

 
1,602

 
4,616

 
4,109

Earnings attributable to noncontrolling interests
 
(21
)
 

 
(21
)
 

Net earnings attributable to UnitedHealth Group common shareholders
 
$
1,597

 
$
1,602

 
$
4,595

 
$
4,109

Earnings per share attributable to UnitedHealth Group common shareholders:
 
 
 
 
 
 
 
 
Basic
 
$
1.68

 
$
1.65

 
$
4.82

 
$
4.21

Diluted
 
$
1.65

 
$
1.63

 
$
4.75

 
$
4.15

Basic weighted-average number of common shares outstanding
 
953

 
969

 
953

 
977

Dilutive effect of common share equivalents
 
14

 
13

 
14

 
13

Diluted weighted-average number of common shares outstanding
 
967

 
982

 
967

 
990

Anti-dilutive shares excluded from the calculation of dilutive effect of common share equivalents
 
8

 
7

 
8

 
8

Cash dividends declared per common share
 
$
0.5000

 
$
0.3750

 
$
1.3750

 
$
1.0300


See Notes to the Condensed Consolidated Financial Statements

2



UnitedHealth Group
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
 
2015
 
2014
 
2015
 
2014
Net earnings
 
$
1,618

 
$
1,602

 
$
4,616

 
$
4,109

Other comprehensive loss:
 
 
 
 
 
 
 
 
Gross unrealized gains (losses) on investment securities during the period
 
66

 
(53
)
 
(51
)
 
427

Income tax effect
 
(26
)
 
20

 
17

 
(155
)
Total unrealized gains (losses), net of tax
 
40

 
(33
)
 
(34
)
 
272

Gross reclassification adjustment for net realized gains included in net earnings
 
(28
)
 
(30
)
 
(99
)
 
(183
)
Income tax effect
 
11

 
11

 
37

 
67

Total reclassification adjustment, net of tax
 
(17
)
 
(19
)
 
(62
)
 
(116
)
Total foreign currency translation losses
 
(1,063
)
 
(642
)
 
(1,859
)
 
(232
)
Other comprehensive loss
 
(1,040
)
 
(694
)
 
(1,955
)
 
(76
)
Comprehensive income
 
578

 
908

 
2,661

 
4,033

Comprehensive income attributable to noncontrolling interests
 
(21
)
 

 
(21
)
 

Comprehensive income attributable to UnitedHealth Group common shareholders
 
$
557

 
$
908

 
$
2,640

 
$
4,033


See Notes to the Condensed Consolidated Financial Statements

3


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

 
$
10

 
$

 
$
33,836

 
$
223

 
$
(1,615
)
 
$

 
$
32,454

Net earnings
 
 
 
 
 
 
 
4,595

 
 
 
 
 
11

 
4,606

Other comprehensive loss
 
 
 
 
 
 
 
 
 
(96
)
 
(1,859
)
 
 
 
(1,955
)
Issuances of common shares, and related tax effects
 
9

 

 
112

 
 
 
 
 
 
 
 
 
112

Share-based compensation, and related tax benefits
 
 
 
 
 
477

 
 
 
 
 
 
 
 
 
477

Common share repurchases
 
(10
)
 

 
(391
)
 
(739
)
 
 
 
 
 
 
 
(1,130
)
Cash dividends paid on common shares
 
 
 
 
 
 
 
(1,310
)
 
 
 
 
 
 
 
(1,310
)
 Redeemable noncontrolling interests fair value and other adjustments
 
 
 
 
 
(129
)
 
 
 
 
 
 
 
 
 
(129
)
Acquisition of nonredeemable noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
9

 
9

Distribution to nonredeemable noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
(12
)
 
(12
)
Balance at September 30, 2015
 
953

 
$
10

 
$
69

 
$
36,382

 
$
127

 
$
(3,474
)
 
$
8

 
$
33,122

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
 
988

 
$
10

 
$

 
$
33,047

 
$
54

 
$
(962
)
 
$

 
$
32,149

Net earnings
 
 
 
 
 
 
 
4,109

 
 
 
 
 

 
4,109

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
156

 
(232
)
 
 
 
(76
)
Issuances of common shares, and related tax effects
 
12

 

 
130

 
 
 
 
 
 
 
 
 
130

Share-based compensation, and related tax benefits
 
 
 
 
 
320

 
 
 
 
 
 
 
 
 
320

Common share repurchases
 
(38
)
 

 
(450
)
 
(2,574
)
 
 
 
 
 
 
 
(3,024
)
Cash dividends paid on common shares
 
 
 
 
 
 
 
(1,004
)
 
 
 
 
 
 
 
(1,004
)
Balance at September 30, 2014
 
962

 
$
10

 
$

 
$
33,578

 
$
210

 
$
(1,194
)
 
$

 
$
32,604



See Notes to the Condensed Consolidated Financial Statements

4


UnitedHealth Group
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Nine Months Ended September 30,
(in millions)
 
2015
 
2014
Operating activities
 
 
 
 
Net earnings
 
$
4,616

 
$
4,109

Noncash items:
 
 
 
 
Depreciation and amortization
 
1,209

 
1,097

Deferred income taxes
 
(49
)
 
(107
)
Share-based compensation
 
306

 
269

Other, net
 
(208
)
 
(253
)
Net change in other operating items, net of effects from acquisitions and changes in AARP balances:
 
 
 
 
Accounts receivable
 
(907
)
 
(545
)
Other assets
 
(1,686
)
 
(819
)
Medical costs payable
 
2,137

 
654

Accounts payable and other liabilities
 
616

 
1,126

Other policy liabilities
 
374

 

Unearned revenues
 
(179
)
 
91

Cash flows from operating activities
 
6,229

 
5,622

Investing activities
 
 
 
 
Purchases of investments
 
(6,712
)
 
(7,823
)
Sales of investments
 
4,041

 
5,810

Maturities of investments
 
2,557

 
2,266

Cash paid for acquisitions, net of cash assumed
 
(16,183
)
 
(851
)
Purchases of property, equipment and capitalized software
 
(1,072
)
 
(1,121
)
Other, net
 
(51
)
 
(139
)
Cash flows used for investing activities
 
(17,420
)
 
(1,858
)
Financing activities
 
 
 
 
Common stock repurchases
 
(1,130
)
 
(3,024
)
Cash dividends paid
 
(1,310
)
 
(1,004
)
Proceeds from common stock issuances
 
366

 
400

Proceeds from long-term debt
 
11,982

 

Repayments of long-term debt
 
(416
)
 
(812
)
Proceeds from commercial paper, net
 
2,665

 
1,355

Customer funds administered
 
119

 
(440
)
Other, net
 
(446
)
 
(285
)
Cash flows from (used for) financing activities
 
11,830

 
(3,810
)
Effect of exchange rate changes on cash and cash equivalents
 
(151
)
 
3

Increase (decrease) in cash and cash equivalents
 
488

 
(43
)
Cash and cash equivalents, beginning of period
 
7,495

 
7,276

Cash and cash equivalents, end of period
 
$
7,983

 
$
7,233


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 pharmacy care services and 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.
Reincorporation
On July 1, 2015, UnitedHealth Group Incorporated changed its state of incorporation from Minnesota to Delaware pursuant to a plan of conversion. The reincorporation was approved by the Company’s shareholders at its 2015 Annual Meeting of Shareholders held on June 1, 2015. Upon reincorporation, the affairs of UnitedHealth Group Incorporated became subject to the Delaware General Corporation Law, a new certificate of incorporation and new bylaws, and each previously outstanding share of UnitedHealth Group Incorporated’s common stock as a Minnesota corporation (UNH Minnesota) converted into an outstanding share of common stock of UnitedHealth Group Incorporated as a Delaware corporation after the reincorporation (UNH Delaware). The reincorporation was a tax-free reorganization under the U.S. Internal Revenue Code and did not affect the Company’s business operations.
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) as modified by ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.” 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. ASU 2014-09 is 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.

6


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.
2.    Business Combination

On July 23, 2015, the Company acquired all of the outstanding common shares of Catamaran Corporation (Catamaran) and funded Catamaran’s payoff of its outstanding debt and credit facility for $14.3 billion in cash. Catamaran offers pharmacy benefits management services similar to OptumRx to a broad client portfolio, including health plans and employers serving 35 million people, and provides health care information technology solutions to the pharmacy benefits management industry.
The Company paid for the acquisition primarily with the proceeds of new indebtedness. Debt issuances included $10.5 billion of senior unsecured notes, approximately $2.4 billion of commercial paper and a $1.5 billion term loan. The total consideration exceeded the estimated fair value of the net tangible assets acquired by $15.6 billion, of which $5.4 billion has been allocated to finite-lived intangible assets and $10.2 billion to goodwill. The goodwill is not deductible for income tax purposes.
Acquired tangible assets (liabilities) for Catamaran at acquisition date were:
(in millions)
 
 
Accounts receivable and other current assets
 
$
1,947

Rebates receivable
 
602

Property, equipment and other long-term assets
 
215

Accounts payable and other current liabilities
 
(2,038
)
Deferred income taxes and other long-term liabilities
 
(2,019
)
Nonredeemable noncontrolling interest
 
(9
)
Total net tangible liabilities
 
$
(1,302
)
Since the Catamaran acquisition closed during the three months ended September 30, 2015, the preliminary purchase price allocation is subject to adjustment as valuation analyses, primarily related to intangible assets and contingent and tax liabilities, are finalized.
The acquisition date fair values and weighted-average useful lives assigned to Catamaran’s finite-lived intangible assets were:
(in millions, except years)
 
Fair Value
 
Weighted-Average Useful Life
Customer-related
 
$
5,278

 
19 years
Trademarks and technology
 
159

 
4 years
Total acquired finite-lived intangible assets
 
$
5,437

 
19 years

The results of operations and financial condition of Catamaran have been included in the Company’s consolidated results and the results of the OptumRx segment as of July 23, 2015. Since then, the Catamaran business has generated $5.3 billion in revenue, and had an immaterial impact on net earnings.
Unaudited pro forma revenues for the nine months ended September 30, 2015 and 2014 as if the acquisition of Catamaran had occurred on January 1, 2014 were $128 billion and $113 billion, respectively. The pro forma effects of this acquisition on net earnings were immaterial for both periods.

7


3.    Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill, by reportable segment, were as follows:
(in millions)
 
UnitedHealthcare
 
OptumHealth
 
OptumInsight
 
OptumRx
 
Consolidated
Balance at January 1, 2014
 
$
24,251

 
$
2,860

 
$
3,653

 
$
840

 
$
31,604

Acquisitions
 
266

 
978

 
591

 

 
1,835

Foreign currency effects and adjustments, net
 
(487
)
 
(4
)
 
(8
)
 

 
(499
)
Balance at December 31, 2014
 
24,030

 
3,834

 
4,236

 
840

 
32,940

Acquisitions
 
51

 
1,679

 
89

 
10,238

 
12,057

Foreign currency effects and adjustments, net
 
(1,288
)
 
(1
)
 
(28
)
 

 
(1,317
)
Balance at September 30, 2015
 
$
22,793

 
$
5,512

 
$
4,297

 
$
11,078

 
$
43,680

The increase in the Company’s goodwill is primarily due to the acquisition of Catamaran in July 2015. For more detail on the Catamaran acquisition, see Note 2 of the Notes to the Condensed Consolidated Financial Statements.
During the three months ended September 30, 2015, the Company changed its annual quantitative goodwill impairment testing date from January 1 to October 1 of each year. The change in the goodwill impairment test date better aligns the impairment testing procedures with the timing of the Company’s long-term planning process, which is a significant input to the testing. This change in testing date did not delay, accelerate, or avoid a goodwill impairment charge.
Estimated full year amortization expense relating to intangible assets for each of the next five years ending September 30 is as follows:
(in millions)
 
 
2016
 
$
799

2017
 
768

2018
 
675

2019
 
617

2020
 
543



8


4.    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
September 30, 2015
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
1,890

 
$
14

 
$

 
$
1,904

State and municipal obligations
 
5,993

 
155

 
(6
)
 
6,142

Corporate obligations
 
7,441

 
77

 
(47
)
 
7,471

U.S. agency mortgage-backed securities
 
2,026

 
27

 
(6
)
 
2,047

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

 
11

 
(4
)
 
879

Total debt securities - available-for-sale
 
18,222

 
284

 
(63
)
 
18,443

Equity securities - available-for-sale
 
1,526

 
44

 
(58
)
 
1,512

Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
162

 
2

 

 
164

State and municipal obligations
 
15

 

 

 
15

Corporate obligations
 
345

 

 

 
345

Total debt securities - held-to-maturity
 
522

 
2

 

 
524

Total investments
 
$
20,270

 
$
330

 
$
(121
)
 
$
20,479

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 September 30, 2015, by contractual maturity, were as follows:
(in millions)
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
2,047

 
$
2,051

Due after one year through five years
 
6,830

 
6,901

Due after five years through ten years
 
4,720

 
4,793

Due after ten years
 
1,727

 
1,772

U.S. agency mortgage-backed securities
 
2,026

 
2,047

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

 
879

Total debt securities - available-for-sale
 
$
18,222

 
$
18,443


9


The amortized cost and fair value of held-to-maturity debt securities as of September 30, 2015, by contractual maturity, were as follows:
(in millions)
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
121

 
$
121

Due after one year through five years
 
203

 
204

Due after five years through ten years
 
84

 
84

Due after ten years
 
114

 
115

Total debt securities - held-to-maturity
 
$
522

 
$
524

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
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
State and municipal obligations
 
$
507

 
$
(5
)
 
$
17

 
$
(1
)
 
$
524

 
$
(6
)
Corporate obligations
 
2,799

 
(39
)
 
270

 
(8
)
 
3,069

 
(47
)
U.S. agency mortgage-backed securities
 
365

 
(3
)
 
122

 
(3
)
 
487

 
(6
)
Non-U.S. agency mortgage-backed securities
 
317

 
(3
)
 
93

 
(1
)
 
410

 
(4
)
Total debt securities - available-for-sale
 
$
3,988

 
$
(50
)
 
$
502

 
$
(13
)
 
$
4,490

 
$
(63
)
Equity securities - available-for-sale
 
$
140

 
$
(16
)
 
$
82

 
$
(42
)
 
$
222

 
$
(58
)
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 September 30, 2015 were generated from approximately 6,000 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 September 30, 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.

10


Net realized gains reclassified out of accumulated other comprehensive income were from the following sources:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
 
2015
 
2014
 
2015
 
2014
Total OTTI
 
$
(4
)
 
$
(18
)
 
$
(8
)
 
$
(25
)
Portion of loss recognized in other comprehensive income
 

 

 

 

Net OTTI recognized in earnings
 
(4
)
 
(18
)
 
(8
)

(25
)
Gross realized losses from sales
 
(9
)
 
(3
)
 
(20
)
 
(42
)
Gross realized gains from sales
 
41

 
51

 
127

 
250

Net realized gains (included in investment and other income on the Condensed Consolidated Statements of Operations)
 
28

 
30

 
99

 
183

Income tax effect (included in provision for income taxes on the Condensed Consolidated Statements of Operations)
 
(11
)
 
(11
)
 
(37
)
 
(67
)
Realized gains, net of taxes
 
$
17

 
$
19

 
$
62

 
$
116

5.    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.


11


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
September 30, 2015
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
7,865

 
$
118

 
$

 
$
7,983

Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
1,705

 
199

 

 
1,904

State and municipal obligations
 

 
6,142

 

 
6,142

Corporate obligations
 
15

 
7,368

 
88

 
7,471

U.S. agency mortgage-backed securities
 

 
2,047

 

 
2,047

Non-U.S. agency mortgage-backed securities
 

 
874

 
5

 
879

Total debt securities - available-for-sale
 
1,720

 
16,630

 
93

 
18,443

Equity securities - available-for-sale
 
1,137

 
12

 
363

 
1,512

Interest rate swap assets
 

 
168

 

 
168

Total assets at fair value

$
10,722

 
$
16,928

 
$
456

 
$
28,106

Percentage of total assets at fair value
 
38
%
 
60
%
 
2
%
 
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 nine months ended September 30, 2015 or 2014.



12


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
September 30, 2015
 
 
 
 
 
 
 
 
 
 
Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
164

 
$

 
$

 
$
164

 
$
162

State and municipal obligations
 

 

 
15

 
15

 
15

Corporate obligations
 
91

 
13

 
241

 
345

 
345

Total debt securities - held-to-maturity
 
$
255

 
$
13

 
$
256

 
$
524

 
$
522

Other assets
 
$

 
$
478

 
$

 
$
478

 
$
480

Long-term debt and other financing obligations
 
$

 
$
30,309

 
$

 
$
30,309

 
$
28,796

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 nine months ended September 30, 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.

13


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:
 
 
Three Months Ended
 
Nine Months Ended
(in millions)
 
Debt
Securities
 
Equity
Securities
 
Total
 
Debt
Securities
 
Equity
Securities
 
Total
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
84

 
$
319

 
$
403

 
$
74

 
$
310

 
$
384

Purchases
 
12

 
45

 
57

 
22

 
59

 
81

Sales
 
(2
)
 
(6
)
 
(8
)
 
(4
)
 
(20
)
 
(24
)
Net unrealized gains in accumulated other comprehensive income
 

 
6

 
6

 
2

 
1

 
3

Net realized (losses) gains in investment and other income
 
(1
)
 
(1
)
 
(2
)
 
(1
)
 
13

 
12

Balance at end of period
 
$
93

 
$
363

 
$
456

 
$
93

 
$
363

 
$
456

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
57

 
$
302

 
$
359

 
$
42

 
$
269

 
$
311

Purchases
 
11

 
36

 
47

 
24

 
86

 
110

Sales
 

 
(18
)
 
(18
)
 

 
(169
)
 
(169
)
Net unrealized (losses) gains in accumulated other comprehensive income
 
(2
)
 
(4
)
 
(6
)
 

 
6

 
6

Net realized (losses) gains in investment and other income
 

 
(15
)
 
(15
)
 

 
109

 
109

Balance at end of period
 
$
66

 
$
301

 
$
367

 
$
66

 
$
301

 
$
367

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, except ranges)
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Low
 
High
September 30, 2015
 
 
 
 
 
 
 
 
 
 
Equity securities - available-for-sale:
 
 
 
 
 
 
 
 
 
 
Venture capital portfolios
 
$
322

 
Market approach - comparable companies
 
Revenue multiple
 
1.0
 
5.0
 
 
 
 
 
 
EBITDA multiple
 
9.0
 
10.0
 
 
41

 
Market approach - recent transactions
 
Inactive market transactions
 
N/A
 
N/A
Total equity securities
      available-for-sale
 
$
363

 
 
 
 
 
 
 
 
Also included in the Company’s assets measured at fair value on a recurring basis using Level 3 inputs were $93 million of available-for-sale debt securities as of September 30, 2015, which were not significant.

14


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
September 30, 2015
 
 
 
 
 
 
Cash and cash equivalents
 
$
292

 
$

 
$
292

Debt securities:
 
 
 
 
 
 
U.S. government and agency obligations
 
444

 
142

 
586

State and municipal obligations
 

 
105

 
105

Corporate obligations
 

 
1,292

 
1,292

U.S. agency mortgage-backed securities
 

 
391

 
391

Non-U.S. agency mortgage-backed securities
 

 
199

 
199

Total debt securities
 
444

 
2,129

 
2,573

Other investments
 

 
83

 
83

Total assets at fair value
 
$
736

 
$
2,212

 
$
2,948

Other liabilities
 
$
7

 
$
6

 
$
13

December 31, 2014
 
 
 
 
 
 
Cash and cash equivalents
 
$
415

 
$

 
$
415

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

 
245

 
654

State and municipal obligations