10-Q 1 unh201633110-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 MARCH 31, 2016
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 April 29, 2016, there were 950,804,129 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,
2016
 
December 31,
2015
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
10,596

 
$
10,923

Short-term investments
 
2,418

 
1,988

Accounts receivable, net
 
7,777

 
6,523

Other current receivables, net
 
6,865

 
6,801

Assets under management
 
2,878

 
2,998

Prepaid expenses and other current assets
 
3,211

 
2,406

Total current assets
 
33,745

 
31,639

Long-term investments
 
20,895

 
18,792

Property, equipment and capitalized software, net
 
4,976

 
4,861

Goodwill
 
46,294

 
44,453

Other intangible assets, net
 
8,861

 
8,391

Other assets
 
3,084

 
3,118

Total assets
 
$
117,855

 
$
111,254

Liabilities, redeemable noncontrolling interests and equity
 
 
 
 
Current liabilities:
 
 
 
 
Medical costs payable
 
$
15,823

 
$
14,330

Accounts payable and accrued liabilities
 
13,740

 
11,994

Other policy liabilities
 
8,317

 
7,798

Commercial paper and current maturities of long-term debt
 
6,504

 
6,634

Unearned revenues
 
1,901

 
2,142

Total current liabilities
 
46,285

 
42,898

Long-term debt, less current maturities
 
27,218

 
25,331

Future policy benefits
 
2,508

 
2,496

Deferred income taxes
 
3,066

 
3,587

Other liabilities
 
1,887

 
1,481

Total liabilities
 
80,964

 
75,793

Commitments and contingencies (Note 8)
 


 


Redeemable noncontrolling interests
 
1,824

 
1,736

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; 954 and 953 issued and outstanding
 
10

 
10

Additional paid-in capital
 

 
29

Retained earnings
 
37,963

 
37,125

Accumulated other comprehensive loss
 
(2,804
)
 
(3,334
)
Nonredeemable noncontrolling interest
 
(102
)
 
(105
)
Total equity
 
35,067

 
33,725

Total liabilities, redeemable noncontrolling interests and equity
 
$
117,855

 
$
111,254


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)
 
2016
 
2015
Revenues:
 
 
 
 
Premiums
 
$
34,811

 
$
31,674

Products
 
6,393

 
1,230

Services
 
3,140

 
2,706

Investment and other income
 
183

 
146

Total revenues
 
44,527

 
35,756

Operating costs:
 
 
 
 
Medical costs
 
28,430

 
25,790

Operating costs
 
6,758

 
5,834

Cost of products sold
 
5,877

 
1,114

Depreciation and amortization
 
502

 
378

Total operating costs
 
41,567

 
33,116

Earnings from operations
 
2,960

 
2,640

Interest expense
 
(259
)
 
(150
)
Earnings before income taxes
 
2,701

 
2,490

Provision for income taxes
 
(1,074
)
 
(1,077
)
Net earnings
 
1,627

 
1,413

Earnings attributable to noncontrolling interests
 
(16
)
 

Net earnings attributable to UnitedHealth Group common shareholders
 
$
1,611

 
$
1,413

Earnings per share attributable to UnitedHealth Group common shareholders:
 
 
 
 
Basic
 
$
1.69

 
$
1.48

Diluted
 
$
1.67

 
$
1.46

Basic weighted-average number of common shares outstanding
 
953

 
954

Dilutive effect of common share equivalents
 
14

 
15

Diluted weighted-average number of common shares outstanding
 
967

 
969

Anti-dilutive shares excluded from the calculation of dilutive effect of common share equivalents
 
7

 
9

Cash dividends declared per common share
 
$
0.500

 
$
0.375


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)
 
2016
 
2015
Net earnings
 
$
1,627

 
$
1,413

Other comprehensive income (loss):
 
 
 
 
Gross unrealized gains on investment securities during the period
 
260

 
105

Income tax effect
 
(96
)
 
(37
)
Total unrealized gains, net of tax
 
164

 
68

Gross reclassification adjustment for net realized gains included in net earnings
 
(35
)
 
(3
)
Income tax effect
 
13

 
1

Total reclassification adjustment, net of tax
 
(22
)
 
(2
)
Total foreign currency translation gains (losses)
 
388

 
(959
)
Other comprehensive income (loss)
 
530

 
(893
)
Comprehensive income
 
2,157

 
520

Comprehensive income attributable to noncontrolling interests
 
(16
)
 

Comprehensive income attributable to UnitedHealth Group common shareholders
 
$
2,141

 
$
520


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 Income (Loss)
 
Nonredeemable Noncontrolling Interest
 
Total
Equity
(in millions)
 
Shares
 
Amount
 
 
 
Net Unrealized Gains on Investments
 
Foreign Currency Translation (Losses) Gains
 
 
Balance at January 1, 2016
 
953

 
$
10

 
$
29

 
$
37,125

 
$
56

 
$
(3,390
)
 
$
(105
)
 
$
33,725

Adjustment to adopt
ASU 2016-09
 
 
 
 
 
 
 
28

 
 
 
 
 
 
 
28

Net earnings
 
 
 
 
 
 
 
1,611

 
 
 
 
 
11

 
1,622

Other comprehensive income
 
 
 
 
 
 
 
 
 
142

 
388

 
 
 
530

Issuances of common stock, and related tax effects
 
5

 

 
56

 
 
 
 
 
 
 
 
 
56

Share-based compensation
 
 
 
 
 
150

 
 
 
 
 
 
 
 
 
150

Common share repurchases
 
(4
)
 

 
(176
)
 
(324
)
 
 
 
 
 
 
 
(500
)
Cash dividends paid on common shares
 
 
 
 
 
 
 
(477
)
 
 
 
 
 
 
 
(477
)
 Redeemable noncontrolling interests fair value and other adjustments
 
 
 
 
 
(59
)
 
 
 
 
 
 
 
 
 
(59
)
Distribution to nonredeemable noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
(8
)
 
(8
)
Balance at March 31, 2016
 
954

 
$
10

 
$

 
$
37,963

 
$
198

 
$
(3,002
)
 
$
(102
)
 
$
35,067

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 stock, and related tax effects
 
6

 

 

 
 
 
 
 
 
 
 
 

Share-based compensation, and related tax benefits
 
 
 
 
 
206

 
 
 
 
 
 
 
 
 
206

Common share repurchases
 
(8
)
 

 
(157
)
 
(739
)
 
 
 
 
 
 
 
(896
)
Cash dividends paid on common shares
 
 
 
 
 
 
 
(357
)
 
 
 
 
 
 
 
(357
)
Redeemable noncontrolling interests fair value and other adjustments
 
 
 
 
 
(49
)
 
 
 
 
 
 
 
 
 
(49
)
Balance at March 31, 2015
 
952

 
$
10

 
$

 
$
34,153

 
$
289

 
$
(2,574
)
 
$

 
$
31,878



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)
 
2016
 
2015
Operating activities
 
 
 
 
Net earnings
 
$
1,627

 
$
1,413

Noncash items:
 
 
 
 
Depreciation and amortization
 
502

 
378

Deferred income taxes
 
145

 
122

Share-based compensation
 
157

 
125

Other, net
 
6

 
(44
)
Net change in other operating items, net of effects from acquisitions and changes in AARP balances:
 
 
 
 
Accounts receivable
 
(1,110
)
 
(758
)
Other assets
 
(2,162
)
 
(2,162
)
Medical costs payable
 
1,368

 
1,610

Accounts payable and other liabilities
 
1,770

 
1,648

Other policy liabilities
 
266

 
154

Unearned revenues
 
(251
)
 
(217
)
Cash flows from operating activities
 
2,318

 
2,269

Investing activities
 
 
 
 
Purchases of investments
 
(5,173
)
 
(1,891
)
Sales of investments
 
2,122

 
503

Maturities of investments
 
978

 
843

Cash paid for acquisitions, net of cash assumed
 
(1,697
)
 
(575
)
Purchases of property, equipment and capitalized software
 
(425
)
 
(373
)
Other, net
 
14

 
(32
)
Cash flows used for investing activities
 
(4,181
)
 
(1,525
)
Financing activities
 
 
 
 
Common share repurchases
 
(500
)
 
(896
)
Cash dividends paid
 
(477
)
 
(357
)
Proceeds from common stock issuances
 
198

 
192

Proceeds from issuance of long-term debt
 
2,485

 

Repayments of long-term debt
 
(601
)
 
(416
)
(Repayments of) proceeds from commercial paper, net
 
(285
)
 
1,194

Customer funds administered
 
1,067

 
1,049

Other, net
 
(385
)
 
(270
)
Cash flows from financing activities
 
1,502

 
496

Effect of exchange rate changes on cash and cash equivalents
 
34

 
(85
)
(Decrease) increase in cash and cash equivalents
 
(327
)
 
1,155

Cash and cash equivalents, beginning of period
 
10,923

 
7,495

Cash and cash equivalents, end of period
 
$
10,596

 
$
8,650


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, 2015 as filed with the SEC (2015 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 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 and valuations of certain investments. 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 2015 10-K remain unchanged.
Reclassification
During the fourth quarter of 2015, the Company aligned its accounting policy to conform the presentation of certain pharmacy fulfillment costs related to an acquired OptumRx business. These costs are now included in medical costs and cost of products sold, whereas they were previously included in operating costs. Prior periods have been reclassified to conform to the current period presentation. The reclassification increased medical expenses by $101 million, decreased operating costs by $115 million and increased cost of products sold by $14 million for the three months ended March 31, 2015. The reclassification had no impact on total operating costs, earnings from operations, net earnings, earnings per share or total equity.
Recently Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2016-02, “Leases (Topic 842)” (ASU 2016-02). Under ASU 2016-02, an entity will be required to recognize assets and liabilities for the rights and obligations created by leases on the entity’s balance sheet for both finance and operating leases. For leases with a term of 12 months or less, an entity can elect to not recognize lease assets and lease liabilities and expense the lease over a straight-line basis for the term of the lease. ASU 2016-02 will require new disclosures that depict the amount, timing, and uncertainty of cash flows pertaining to an entity’s leases. Companies are required to adopt the new standard using a modified retrospective approach for annual and interim periods beginning after December 15, 2018. Early adoption of ASU 2016-02 is permitted. The Company is currently evaluating the effect of the new leasing guidance.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU 2016-01). The new guidance changes the current accounting related to (i) the classification and measurement of certain equity investments, (ii) the presentation of changes in the fair value of financial liabilities measured under the fair value option that are due to instrument-specific credit risk, and (iii) certain disclosures associated with the fair value of financial instruments. Most notably, ASU 2016-01 requires that equity investments, with certain exemptions, be measured at fair value with changes in fair value recognized in net income as opposed to other

6


comprehensive income. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company is currently evaluating the effect of the new financial instruments guidance.
In May 2014, the FASB issued 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 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” 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 may 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.
Recently Adopted Accounting Standards
In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (ASU 2016-09). ASU 2016-09 modifies several aspects of the accounting for share-based payment awards, including income tax consequences, and classification on the statement of cash flows. The Company early adopted ASU 2016-09 in the first quarter of 2016. The provisions of ASU 2016-09 related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements and forfeitures were adopted using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of January 1, 2016. The provisions of ASU 2016-09 related to the recognition of excess tax benefits in the income statement and classification in the statement of cash flows were adopted prospectively and the prior periods were not retrospectively adjusted. The adoption of ASU 2016-09 did not materially impact the Company’s consolidated financial position, results of operations, equity or cash flows.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (ASU 2015-17). ASU 2015-17 requires entities to present deferred tax assets and deferred tax liabilities as noncurrent on the balance sheet. Prior to the issuance of ASU 2015-17, deferred taxes were required to be presented as a net current asset or liability and a net noncurrent asset or liability. The Company adopted ASU 2015-17 on a prospective basis in the first quarter of 2016 and the prior period was not retrospectively adjusted. The adoption of ASU 2015-17 did not impact the Company’s consolidated financial position, results of operations, equity or cash flows.
In April 2015, the FASB issued ASU No. 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (ASU 2015-03). ASU 2015-03 requires debt issuance costs to be presented as a reduction of the carrying amount of the related debt liability. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented as an asset in the balance sheet. The Company adopted ASU 2015-03 on a retrospective basis, as required, in the first quarter of 2016. The Company reclassified $129 million in debt issuance costs that were recorded in other assets on the Consolidated Balance Sheet as of December 31, 2015 to long-term debt, less current maturities.
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.

7


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, 2016
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
2,318

 
$
13

 
$
(1
)
 
$
2,330

State and municipal obligations
 
6,233

 
180

 
(2
)
 
6,411

Corporate obligations
 
8,751

 
110

 
(30
)
 
8,831

U.S. agency mortgage-backed securities
 
2,488

 
28

 
(3
)
 
2,513

Non-U.S. agency mortgage-backed securities
 
958

 
17

 
(4
)
 
971

Total debt securities - available-for-sale
 
20,748

 
348

 
(40
)
 
21,056

Equity securities - available-for-sale
 
1,739

 
63

 
(53
)
 
1,749

Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
175

 
3

 

 
178

State and municipal obligations
 
7

 

 

 
7

Corporate obligations
 
326

 

 

 
326

Total debt securities - held-to-maturity
 
508

 
3

 

 
511

Total investments
 
$
22,995

 
$
414

 
$
(93
)
 
$
23,316

December 31, 2015
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
1,982

 
$
1

 
$
(6
)
 
$
1,977

State and municipal obligations
 
6,022

 
149

 
(3
)
 
6,168

Corporate obligations
 
7,446

 
41

 
(81
)
 
7,406

U.S. agency mortgage-backed securities
 
2,127

 
13

 
(16
)
 
2,124

Non-U.S. agency mortgage-backed securities
 
962

 
5

 
(11
)
 
956

Total debt securities - available-for-sale
 
18,539

 
209

 
(117
)
 
18,631

Equity securities - available-for-sale
 
1,638

 
58

 
(57
)
 
1,639

Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
163

 
1

 

 
164

State and municipal obligations
 
8

 

 

 
8

Corporate obligations
 
339

 

 

 
339

Total debt securities - held-to-maturity
 
510

 
1

 

 
511

Total investments
 
$
20,687

 
$
268

 
$
(174
)
 
$
20,781


The amortized cost and fair value of debt securities as of March 31, 2016, by contractual maturity, were as follows:
 
 
Available-for-Sale
 
Held-to-Maturity
(in millions)
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
2,534

 
$
2,539

 
$
128

 
$
128

Due after one year through five years
 
7,944

 
8,019

 
184

 
186

Due after five years through ten years
 
4,841

 
4,968

 
114

 
114

Due after ten years
 
1,983

 
2,046

 
82

 
83

U.S. agency mortgage-backed securities
 
2,488

 
2,513

 

 

Non-U.S. agency mortgage-backed securities
 
958

 
971

 

 

Total debt securities
 
$
20,748

 
$
21,056

 
$
508

 
$
511


8


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, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
507

 
$
(1
)
 
$

 
$

 
$
507

 
$
(1
)
State and municipal obligations
 
488

 
(2
)
 

 

 
488

 
(2
)
Corporate obligations
 
2,107

 
(22
)
 
337

 
(8
)
 
2,444

 
(30
)
U.S. agency mortgage-backed securities
 

 

 
214

 
(3
)
 
214

 
(3
)
Non-U.S. agency mortgage-backed securities
 
203

 
(1
)
 
145

 
(3
)
 
348

 
(4
)
Total debt securities - available-for-sale
 
$
3,305

 
$
(26
)
 
$
696

 
$
(14
)
 
$
4,001

 
$
(40
)
Equity securities - available-for-sale
 
$
98

 
$
(8
)
 
$
94

 
$
(45
)
 
$
192

 
$
(53
)
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
1,473

 
$
(6
)
 
$

 
$

 
$
1,473

 
$
(6
)
State and municipal obligations
 
650

 
(3
)
 

 

 
650

 
(3
)
Corporate obligations
 
4,629

 
(63
)
 
339

 
(18
)
 
4,968

 
(81
)
U.S. agency mortgage-backed securities
 
1,304

 
(12
)
 
116

 
(4
)
 
1,420

 
(16
)
Non-U.S. agency mortgage-backed securities
 
593

 
(7
)
 
127

 
(4
)
 
720

 
(11
)
Total debt securities - available-for-sale
 
$
8,649

 
$
(91
)
 
$
582

 
$
(26
)
 
$
9,231

 
$
(117
)
Equity securities - available-for-sale
 
$
112

 
$
(11
)
 
$
89

 
$
(46
)
 
$
201

 
$
(57
)
The Company’s unrealized losses from all securities as of March 31, 2016 were generated from approximately 5,000 positions out of a total of 26,000 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. As of March 31, 2016, 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.
Net realized gains reclassified out of accumulated other comprehensive income were from the following sources:
 
 
Three Months Ended March 31,
(in millions)
 
2016
 
2015
Total other than temporary impairments recognized in earnings
 
$
(21
)
 
$
(1
)
Gross realized losses from sales
 
(31
)
 
(6
)
Gross realized gains from sales
 
87

 
10

Net realized gains (included in investment and other income on the Condensed Consolidated Statements of Operations)
 
35

 
3

Income tax effect (included in provision for income taxes on the Condensed Consolidated Statements of Operations)
 
(13
)
 
(1
)
Realized gains, net of taxes
 
$
22

 
$
2

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.

9


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 5 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2015 10-K.
The Company elected to measure the entirety of the Supplemental Health Insurance Program (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 2015 10-K for further detail on the AARP Program.
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 the AARP Program:
(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, 2016
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
10,590

 
$
6

 
$

 
$
10,596

Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
2,159

 
171

 

 
2,330

State and municipal obligations
 

 
6,411

 

 
6,411

Corporate obligations
 
8

 
8,725

 
98

 
8,831

U.S. agency mortgage-backed securities
 

 
2,513

 

 
2,513

Non-U.S. agency mortgage-backed securities
 

 
971

 

 
971

Total debt securities - available-for-sale
 
2,167

 
18,791

 
98

 
21,056

Equity securities - available-for-sale
 
1,344

 
15

 
390

 
1,749

Interest rate swap assets
 

 
245

 

 
245

Total assets at fair value

$
14,101

 
$
19,057

 
$
488

 
$
33,646

Percentage of total assets at fair value
 
42
%
 
57
%
 
1
%
 
100
%
December 31, 2015
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
10,906

 
$
17

 
$

 
$
10,923

Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
1,779

 
198

 

 
1,977

State and municipal obligations
 

 
6,168

 

 
6,168

Corporate obligations
 
5

 
7,308

 
93

 
7,406

U.S. agency mortgage-backed securities
 

 
2,124

 

 
2,124

Non-U.S. agency mortgage-backed securities
 

 
951

 
5

 
956

Total debt securities - available-for-sale
 
1,784

 
16,749

 
98

 
18,631

Equity securities - available-for-sale
 
1,223

 
14

 
402

 
1,639

Interest rate swap assets
 

 
93

 

 
93

Total assets at fair value
 
$
13,913

 
$
16,873

 
$
500

 
$
31,286

Percentage of total assets at fair value
 
44
%
 
54
%
 
2
%
 
100
%
Interest rate swap liabilities
 
$

 
$
11

 
$

 
$
11

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, 2016 or 2015.

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, 2016
 
 
 
 
 
 
 
 
 
 
Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
178

 
$

 
$

 
$
178

 
$
175

State and municipal obligations
 

 

 
7

 
7

 
7

Corporate obligations
 
87

 
11

 
228

 
326

 
326

Total debt securities - held-to-maturity
 
$
265

 
$
11

 
$
235

 
$
511

 
$
508

Other assets
 
$

 
$
477

 
$

 
$
477

 
$
478

Long-term debt and other financing obligations
 
$

 
$
32,605

 
$

 
$
32,605

 
$
30,020

December 31, 2015
 
 
 
 
 
 
 
 
 
 
Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
164

 
$

 
$

 
$
164

 
$
163

State and municipal obligations
 

 

 
8

 
8

 
8

Corporate obligations
 
91

 
10

 
238

 
339

 
339

Total debt securities - held-to-maturity
 
$
255

 
$
10

 
$
246

 
$
511

 
$
510

Other assets
 
$

 
$
493

 
$

 
$
493

 
$
500

Long-term debt and other financing obligations
 
$

 
$
29,455

 
$

 
$
29,455

 
$
27,978

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, 2016 or 2015.
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, 2016
 
March 31, 2015
(in millions)
 
Debt
Securities
 
Equity
Securities
 
Total
 
Debt
Securities
 
Equity
Securities
 
Total
Balance at beginning of period
 
$
98

 
$
402

 
$
500

 
$
74

 
$
310

 
$
384

Purchases
 
4

 
12

 
16

 
4

 
4

 
8

Sales
 
(7
)
 
(2
)
 
(9
)
 

 
(1
)
 
(1
)
Net unrealized gains (losses) in accumulated other comprehensive income
 
3

 
(6
)
 
(3
)
 
1

 
(5
)
 
(4
)
Net realized (losses) gains in investment and other income
 

 
(16
)
 
(16
)
 

 
1

 
1

Balance at end of period
 
$
98

 
$
390

 
$
488

 
$
79

 
$
309

 
$
388

4.    Medicare Part D Pharmacy Benefits
The Condensed Consolidated Balance Sheets include the following amounts associated with the Medicare Part D program:
 
 
March 31, 2016
 
December 31, 2015
(in millions)
 
Subsidies
 
Drug Discount
 
Risk-Share
 
Subsidies
 
Drug Discount
 
Risk-Share
Other current receivables
 
$
1,356

 
$
242

 
$

 
$
1,703

 
$
423

 
$

Other policy liabilities
 

 
34

 
527

 

 
58

 
496

See Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2015 10-K for further detail on Medicare Part D.

11


5.    Other Current Receivables
The Company’s pharmacy care services businesses contract with pharmaceutical manufacturers, some of which provide rebates based on use of the manufacturers’ products by its affiliated and non-affiliated clients. As of March 31, 2016 and December 31, 2015, total pharmaceutical manufacturer rebates receivable included in other receivables in the Condensed Consolidated Balance Sheets amounted to $2.8 billion and $2.6 billion, respectively. See Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2015 10-K for more information on the Company’s pharmaceutical manufacturer rebates.
6.    Medical Costs Reserve Development
Favorable medical cost reserve development was $360 million and $140 million for the three months ended March 31, 2016 and 2015, respectively. In both periods, favorable development was driven by a number of individual factors that were not material.

12


7.     Commercial Paper and Long-Term Debt
Commercial paper, term loan and senior unsecured long-term debt consisted of the following:
 
 
March 31, 2016
 
December 31, 2015
(in millions, except percentages)
 
Par
Value
 
Carrying
Value
 
Fair
Value
 
Par
Value
 
Carrying
Value (a)
 
Fair
Value
Commercial paper
 
$
3,702

 
$
3,702

 
$
3,702

 
$
3,987

 
$
3,987

 
$
3,987

Floating rate term loan due July 2016
 
1,500

 
1,500

 
1,500

 
1,500

 
1,500

 
1,500

5.375% notes due March 2016
 

 

 

 
601

 
605

 
606

1.875% notes due November 2016
 
400

 
400

 
403

 
400

 
400

 
403

5.360% notes due November 2016
 
95

 
95

 
97

 
95

 
95

 
98

Floating rate notes due January 2017
 
750

 
749

 
751

 
750

 
749

 
751

6.000% notes due June 2017
 
441

 
455

 
467

 
441

 
458

 
469

1.450% notes due July 2017
 
750

 
749

 
754

 
750

 
749

 
750

1.400% notes due October 2017
 
625

 
624

 
627

 
625

 
624

 
624

6.000% notes due November 2017
 
156

 
162

 
168

 
156

 
162

 
168

1.400% notes due December 2017
 
750

 
751

 
753

 
750

 
751

 
748

6.000% notes due February 2018
 
1,100

 
1,112

 
1,194

 
1,100

 
1,114

 
1,196

1.900% notes due July 2018
 
1,500

 
1,495

 
1,523

 
1,500

 
1,494

 
1,505

1.700% notes due February 2019
 
750

 
747

 
756

 

 

 

1.625% notes due March 2019
 
500

 
502

 
504

 
500

 
502

 
494

2.300% notes due December 2019
 
500

 
509

 
508

 
500

 
499

 
502

2.700% notes due July 2020
 
1,500

 
1,494

 
1,558

 
1,500

 
1,493

 
1,516

3.875% notes due October 2020
 
450

 
464

 
487

 
450

 
452

 
476

4.700% notes due February 2021
 
400

 
424

 
452

 
400

 
413

 
438

2.125% notes due March 2021
 
750

 
744

 
757

 

 

 

3.375% notes due November 2021
 
500

 
516

 
534

 
500

 
500

 
517

2.875% notes due December 2021
 
750

 
778

 
779

 
750

 
753

 
760

2.875% notes due March 2022
 
1,100

 
1,097

 
1,140

 
1,100

 
1,059

 
1,099

3.350% notes due July 2022
 
1,000

 
994

 
1,064

 
1,000

 
994

 
1,023

0.000% notes due November 2022
 
15

 
11

 
12

 
15

 
10

 
11

2.750% notes due February 2023
 
625

 
635

 
636

 
625

 
611

 
613

2.875% notes due March 2023
 
750

 
810

 
770

 
750

 
781

 
742

3.750% notes due July 2025
 
2,000

 
1,985

 
2,155

 
2,000

 
1,985

 
2,062

3.100% notes due March 2026
 
1,000

 
994

 
1,023

 

 

 

4.625% notes due July 2035
 
1,000

 
991

 
1,116

 
1,000

 
991

 
1,038

5.800% notes due March 2036
 
850

 
837

 
1,081

 
850

 
838

 
1,003

6.500% notes due June 2037
 
500

 
491

 
674

 
500

 
492

 
628

6.625% notes due November 2037
 
650

 
640

 
896

 
650

 
641

 
829

6.875% notes due February 2038
 
1,100

 
1,074

 
1,544

 
1,100

 
1,076

 
1,439

5.700% notes due October 2040
 
300

 
295

 
377

 
300

 
296

 
348

5.950% notes due February 2041
 
350

 
345

 
454

 
350

 
345

 
416

4.625% notes due November 2041
 
600

 
588

 
669

 
600

 
588

 
609

4.375% notes due March 2042
 
502

 
483

 
540

 
502

 
483

 
493

3.950% notes due October 2042
 
625

 
606

 
629

 
625

 
606

 
582

4.250% notes due March 2043
 
750

 
733

 
790

 
750

 
734

 
728

4.750% notes due July 2045
 
2,000

 
1,971

 
2,293

 
2,000

 
1,971

 
2,107

Total commercial paper, term loan and long-term debt
 
$
33,586

 
$
33,552

 
$
36,137

 
$
31,972

 
$
31,801

 
$
33,278

                   
(a)
In the first quarter of 2016, the Company adopted ASU 2015-03, retrospectively as required. See Note 1 of Notes to the Condensed Consolidated Financial Statements for more information on the adoption of ASU 2015-03.
The Company’s long-term debt obligations also included $170 million and $164 million of other financing obligations, of which $58 million and $47 million were current as of March 31, 2016 and December 31, 2015, respectively.

13


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, 2016, the Company’s outstanding commercial paper had a weighted-average annual interest rate of 0.7%.
The Company has $3.0 billion five-year, $2.0 billion three-year and $1.0 billion 364-day revolving bank credit facilities with 23 banks, which mature in December 2020, December 2018, and November 2016, respectively. These facilities provide liquidity support for the Company’s commercial paper program and are available for general corporate purposes. As of March 31, 2016, no amounts had been drawn on any of the bank credit facilities. The annual interest rates, which are variable based on term, are calculated based on the London Interbank Offered Rate (LIBOR) plus a credit spread based on the Company’s senior unsecured credit ratings. If amounts had been drawn on the bank credit facilities as of March 31, 2016, annual interest rates would have ranged from 1.2% to 1.7%.
Debt Covenants
The Company’s bank credit facilities contain various covenants, including covenants requiring the Company to maintain a defined debt to debt-plus-shareholders’ equity ratio of not more than 55%. The Company was in compliance with its debt covenants as of March 31, 2016.
8.    Commitments and Contingencies
Legal Matters
Because of the nature of its businesses, the Company is frequently made party to a variety of legal actions and regulatory inquiries, including class actions and suits brought by members, care providers, consumer advocacy organizations, customers and regulators, relating to the Company’s businesses, including management and administration of health benefit plans and other services. These matters include medical malpractice, employment, intellectual property, antitrust, privacy and contract claims and claims related to health care benefits coverage and other business practices.
The Company records liabilities for its estimates of probable costs resulting from these matters where appropriate. Estimates of costs resulting from legal and regulatory matters involving the Company are inherently difficult to predict, particularly where the matters: involve indeterminate claims for monetary damages or may involve fines, penalties or punitive damages; present novel legal theories or represent a shift in regulatory policy; involve a large number of claimants or regulatory bodies; are in the early stages of the proceedings; or could result in a change in business practices. Accordingly, the Company is often unable to estimate the losses or ranges of losses for those matters where there is a reasonable possibility or it is probable that a loss may be incurred.
Litigation Matters
California Claims Processing Matter. On January 25, 2008, the California Department of Insurance (CDI) issued an Order to Show Cause to PacifiCare Life and Health Insurance Company, a subsidiary of the Company, alleging violations of certain insurance statutes and regulations related to an alleged failure to include certain language in standard claims correspondence, timeliness and accuracy of claims processing, interest payments, care provider contract implementation, care provider dispute resolution and other related matters. Although the Company believes that CDI had never before issued a fine in excess of $8 million, CDI advocated a fine of approximately $325 million in this matter. The matter was the subject of an administrative hearing before a California administrative law judge beginning in December 2009, and in August 2013, the administrative law judge issued a nonbinding proposed decision recommending a fine of $11.5 million. The California Insurance Commissioner rejected the administrative law judge’s recommendation and on June 9, 2014, issued his own decision imposing a fine of approximately $174 million. On July 10, 2014, the Company filed a lawsuit in California state court challenging the Commissioner’s decision. On September 8, 2015, in the first phase of that lawsuit, the California state court issued an order invalidating certain of the regulations the Commissioner had relied upon in issuing his decision and penalty. The Company cannot reasonably estimate the range of loss, if any, that may result from this matter given the procedural status of the dispute, the wide range of possible outcomes, the legal issues presented (including the legal basis for the majority of the alleged violations), the inherent difficulty in predicting a regulatory fine in the event of a remand, and the various remedies and levels of judicial review that remain available to the Company.
Government Investigations, Audits and Reviews
The Company has been involved or is currently involved in various governmental investigations, audits and reviews. These include routine, regular and special investigations, audits and reviews by the Centers for Medicare and Medicaid Services (CMS), state insurance and health and welfare departments, the Brazilian national regulatory agency for private health insurance and plans (the Agência Nacional de Saúde Suplementar), state attorneys general, the Office of the Inspector General, the Office of Personnel Management, the Office of Civil Rights, the Government Accountability Office, the Federal Trade

14


Commission, U.S. Congressional committees, the U.S. Department of Justice, the SEC, the Internal Revenue Service, the U.S. Drug Enforcement Administration, the Brazilian federal revenue service (the Secretaria da Receita Federal), the U.S. Department of Labor, the Federal Deposit Insurance Corporation, the Defense Contract Audit Agency and other governmental authorities. Certain of the Company’s businesses have been reviewed or are currently under review, including for, among other matters, compliance with coding and other requirements under the Medicare risk-adjustment model. The Company has produced documents, information and witnesses to the Department of Justice in cooperation with a current review of the Company’s risk-adjustment processes, including the Company’s patient chart review and related programs. CMS has selected certain of the Company’s local plans for risk adjustment data validation (RADV) audits to validate the coding practices of and supporting documentation maintained by health care providers and such audits may result in retrospective adjustments to payments made to the Company’s health plans.
The Company cannot reasonably estimate the range of loss, if any, that may result from any material government investigations, audits and reviews in which it is currently involved given the status of the reviews, the wide range of possible outcomes and inherent difficulty in predicting regulatory action, fines and penalties, if any, the Company’s legal and factual defenses and the various remedies and levels of judicial review available to the Company in the event of an adverse finding.
Guaranty Fund Assessments
Under state guaranty association laws, certain insurance companies can be assessed (up to prescribed limits) for certain obligations to the policyholders and claimants of impaired or insolvent insurance companies (including state health insurance cooperatives) that write the same line or similar lines of business. In 2009, the Pennsylvania Insurance Commissioner placed long term care insurer Penn Treaty Network America Insurance Company and its subsidiary (Penn Treaty), neither of which is affiliated with the Company, in rehabilitation and petitioned a state court for approval to liquidate Penn Treaty. In 2012, the court denied the liquidation petition and ordered the Insurance Commissioner to submit a rehabilitation plan. The court held a hearing in July 2015 to begin its consideration of the latest proposed rehabilitation plan. The hearing is scheduled to continue in 2016.
If the current proposed rehabilitation plan, which contemplates the partial liquidation of Penn Treaty, is approved by the court, the Company’s insurance entities and other insurers may be required to pay a portion of Penn Treaty’s policyholder claims through state guaranty association assessments. The Company continues to vigorously challenge the proposed rehabilitation plan. The Company is currently unable to estimate losses or ranges of losses because the Company cannot predict when or to what extent Penn Treaty will ultimately be liquidated, the amount of the insolvency, the amount and timing of any associated guaranty fund assessments or the availability and amount of any premium tax and other potential offsets.
9.    Segment Financial Information
The Company’s four reportable segments are UnitedHealthcare, OptumHealth, OptumInsight and OptumRx. For more information on the Company’s segments see Part I, Item I, “Business” and Note 14 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2015 10-K.

15


The following table presents the reportable segment financial information:
 
 
 
 
Optum
 
 
 
 
(in millions)
 
UnitedHealthcare
 
OptumHealth
 
OptumInsight
 
OptumRx
 
Optum Eliminations
 
Optum
 
Corporate and
Eliminations
 
Consolidated
Three Months Ended March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues - external customers:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums
 
$
33,963

 
$
848

 
$

 
$

 
$