Fair Value Measurements

6 Months Ended

Jun. 30, 2015

Fair Value Disclosures [Abstract]

Fair Value Measurements

FAIR VALUE MEASUREMENTS

We record certain assets and liabilities at fair value in the consolidated balance sheets and categorize them based upon the level of judgment associated with the inputs used to measure their fair value and the level of market price observability. We also estimate fair value when the volume and level of activity for the asset or liability have significantly decreased or in those circumstances that indicate when a transaction is not orderly.

Investments measured and reported at fair value using Level inputs are classified and disclosed in one of the following categories:

Level 1—Quoted prices are available in active markets for identical investments as of the reporting date. The types of investments included in Level 1 include U.S. Treasury securities and listed equities. We do not adjust the quoted price for these investments, even in situations where we hold a large position and a sale could reasonably impact the quoted price.

Level 2—Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models and/or other valuation methodologies that are based on an income approach. Examples include, but are not limited to, multidimensional relational model, option adjusted spread model, and various matrices. Specific pricing inputs include quoted prices for similar securities in both active and non-active markets, other observable inputs such as interest rates, yield curve volatilities, default rates, and inputs that are derived principally from or corroborated by other observable market data. Investments that are generally included in this category include asset-backed securities, corporate bonds and loans, and state and municipal bonds.

Level 3—Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation using assumptions that market participants would use, including assumptions for risk. Level 3 includes an embedded contractual derivative asset and/or liability held by the Company estimated at fair value. Significant inputs used in the derivative valuation model include the estimated growth in Health Net health care expenditures and estimated growth in national health care expenditures. The growth in these expenditures was modeled using a Monte Carlo simulation approach.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.

The following tables present information about our assets and liabilities measured at fair value on a recurring basis at June 30, 2015 and December 31, 2014, and indicate the fair value hierarchy of the valuation techniques utilized by us to determine such fair value (dollars in millions):

	Level 1		Level 2-current		Level 2- noncurrent		Level 3		Total
As of June 30, 2015:
Assets:
Cash and cash equivalents	$	756.8	$	—	$	—	$	—	$	756.8
Investments—available-for-sale
Asset-backed debt securities:
Residential mortgage-backed securities	$	—	$	242.2	$	—	$	—	$	242.2
Commercial mortgage-backed securities	—		215.5		0.4		—		215.9
Other asset-backed securities	—		164.7		—		—		164.7
U.S. government and agencies:
U.S. Treasury securities	28.2		—		—		—		28.2
U.S. Agency securities	—		—		—		—		—
Obligations of states and other political subdivisions	—		980.0		1.5		—		981.5
Corporate debt securities	—		740.9		4.6		—		745.5
Total investments at fair value	$	28.2	$	2,343.3	$	6.5	$	—	$	2,378.0
Embedded contractual derivative	—		—		—		9.5		9.5
Total assets at fair value	$	785.0	$	2,343.3	$	6.5	$	9.5	$	3,144.3

As of June 30, 2015:	Level 3	Total
Liability:
Embedded contractual derivative	9.8	9.8
Total liability at fair value	9.8	9.8

	Level 1		Level 2-current		Level 2- noncurrent		Level 3		Total
As of December 31, 2014:
Assets:
Cash and cash equivalents	$	869.1	$	—	$	—	$	—	$	869.1
Investments—available-for-sale
Asset-backed debt securities:
Residential mortgage-backed securities	$	—	$	210.9	$	—	$	—	$	210.9
Commercial mortgage-backed securities	—		145.6		0.6		—		146.2
Other asset-backed securities	—		81.4		—		—		81.4
U.S. government and agencies:
U.S. Treasury securities	36.5		—		—		—		36.5
U.S. Agency securities	—		—		—		—		—
Obligations of states and other political subdivisions	—		732.2		—		—		732.2
Corporate debt securities	—		584.4		4.0		—		588.4
Total investments at fair value	$	36.5	$	1,754.5	$	4.6	$	—	$	1,795.6
Embedded contractual derivative	—		—		—		10.0		10.0
Total assets at fair value	$	905.6	$	1,754.5	$	4.6	$	10.0	$	2,674.7

As of December 31, 2014:	Level 3		Total
Liability:
Embedded contractual derivative	$	2.6	$	2.6
Total liability at fair value	$	2.6	$	2.6

We had no transfers between Levels 1 and 2 of financial assets or liabilities that are fair valued on a recurring basis during the three and six months ended June 30, 2015 and 2014. In determining when transfers between levels are recognized, our accounting policy is to recognize the transfers based on the actual date of the event or change in circumstances that caused the transfer.

The changes in the balances of Level 3 financial assets for the three months ended June 30, 2015 and 2014 were as follows (dollars in millions):

	Three months ended June 30,
	2015						2014
	Embedded Contractual Derivative		State-Sponsored Health Plans Settlement Account Deficit		Total		Embedded Contractual Derivative		State-Sponsored Health Plans Settlement Account Deficit			Total
Opening balance	$	9.5	$	—	$	9.5	$	11.4	$	50.0		$	61.4
Transfers into Level 3	—		—		—		—		—			—
Transfers out of Level 3	—		—		—		—		—			—
Total gains or losses for the period:
Realized in net income	—		—		—		1.9		(40.4		)	(38.5		)
Unrealized in accumulated other comprehensive income	—		—		—		—		—			—
Purchases, issues, sales and settlements:
Purchases/additions	—		—		—		—		—			—
Issues	—		—		—		—		—			—
Sales	—		—		—		—		—			—
Settlements	—		—		—		—		—			—
Closing balance	$	9.5	$	—	$	9.5	$	13.3	$	9.6		$	22.9
Change in unrealized gains (losses) included in net income for assets held at the end of the reporting period	$	—	$	—	$	—	$	—	$	—		$	—

The changes in the balances of Level 3 financial assets for the six months ended June 30, 2015 and 2014 were as follows (dollars in millions):

	Six months ended June 30,
	2015									2014
		Embedded Contractual Derivative			State-Sponsored Health Plans Settlement Account Deficit		Total			Embedded Contractual Derivative		State-Sponsored Health Plans Settlement Account Deficit			Total
Opening balance		$	10.0		$	—	$	10.0		$	7.2	$	62.9		$	70.1
Transfers into Level 3		—			—		—			—		—			—
Transfers out of Level 3		—			—		—			—		—			—
Total gains or losses for the period:
Realized in net income		(0.5		)	—		(0.5		)	6.1		(53.3		)	(47.2		)
Unrealized in accumulated other comprehensive income		—			—		—			—		—			—
Purchases, issues, sales and settlements:
Purchases/additions		—			—		—			—		—			—
Issues		—			—		—			—		—			—
Sales		—			—		—			—		—			—
Settlements		—			—		—			—		—			—
Closing balance		$	9.5		$	—	$	9.5		$	13.3	$	9.6		$	22.9
Change in unrealized gains (losses) included in net income for assets held at the end of the reporting period		$	—		$	—	$	—		$	—	$	—		$	—

The changes in the balances of Level 3 financial liability for the three and six months ended June 30, 2015 were as follows (dollars in millions):

	Three months ended June 30, 2015		Six months ended June 30, 2015
	Embedded Contractual Derivative
Opening balance	$	3.3	$	2.6
Transfers into Level 3	—		—
Transfers out of Level 3	—		—
Total gains or losses for the period:
Realized in net income	6.5		7.2
Unrealized in accumulated other comprehensive income	—		—
Purchases, issues, sales and settlements:
Purchases	—		—
Issues	—		—
Sales	—		—
Settlements	—		—
Closing balance	$	9.8	$	9.8

We had no financial liabilities fair valued on a recurring basis as of June 30, 2014.

As of December 31, 2014, we classified certain assets as assets held for sale. These assets held for sale are carried at the lower of carrying value or fair value (see Note 2, under the heading "Goodwill and Other Intangibles," and Note 3 for additional information). The following table presents information about our assets classified as held for sale as of June 30, 2015 and December 31, 2014, the hierarchy of the valuation techniques utilized by us to determine such fair values and the related impairment loss for the three and six months ended June 30, 2015 and for the year ended December 31, 2014 (dollars in millions):

	Level 3		Total Asset Impairment for the Three Months Ended June 30, 2015		Total Asset Impairment for the Six Months Ended June 30, 2015		Level 3		Total Asset Impairment for the Year Ended December 31, 2014
	As of June 30, 2015						As of December 31, 2014
Property and equipment, net	$	50.0	$	—	$	1.9	$	50.0	$	80.2
Goodwill allocated to sale of business	—		—		—		—		7.0
Assets held for sale	$	50.0	$	—	$	1.9	$	50.0	$	87.2

We had no liabilities fair valued on a non-recurring basis during the three and six months ended June 30, 2015 and the year ended December 31, 2014.

The following tables present quantitative information about Level 3 Fair Value Measurements as of June 30, 2015 and December 31, 2014 (dollars in millions):

	Fair Value as of June 30, 2015		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Embedded contractual derivative asset	$	9.5	Monte Carlo Simulation Approach	Health Net Health Care Expenditures	1.52	%	—	2.72%	(2.13%)
				National Health Care Expenditures	-0.87	%	—	8.18%	(3.80%)
Embedded contractual derivative liability			Monte Carlo Simulation Approach	Health Net Health Care Expenditures	-2.80	%	—	15.33%	(6.87%)
	$	9.8		National Health Care Expenditures	-0.84	%	—	8.48%	(9.53%)
Goodwill - Western Region reporting unit	$	558.9	Income Approach	Discount Rate	7.5	%	—	7.5%	(7.5%)
Assets held for sale	$	50.0	Income Approach	Discount Rate	12.0	%	—	12.0%	(12.0%)

	Fair Value as of December 31, 2014		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Embedded contractual derivative asset	$	10.0	Monte Carlo Simulation Approach	Health Net Health Care Expenditures	-0.08	%	—	2.74%	(2.02%)
				National Health Care Expenditures	3.45	%	—	4.14%	(3.80%)
Embedded contractual derivative liability			Monte Carlo Simulation Approach	Health Net Health Care Expenditures	0.79	%	—	10.76%	(5.73%)
	$	2.6		National Health Care Expenditures	0.64	%	—	8.43%	(4.38%)
Goodwill - Western Region reporting unit	$	558.9	Income Approach	Discount Rate	7.5	%	—	7.5%	(7.5%)
Assets held for sale	$	50.0	Income Approach	Discount Rate	12.0	%	—	12.0%	(12.0%)

Valuation policies and procedures are managed by our finance group, which regularly monitors fair value measurements. Fair value measurements, including those categorized within Level 3, are prepared and reviewed on a quarterly basis and any third-party valuations are reviewed for reasonableness and compliance with the Fair Value Measurement Topic of the Accounting Standards Codification. Specifically, we compare prices received from our pricing service to prices reported by the custodian or third-party investment advisers, and we perform a review of the inputs, validating that they are reasonable and observable in the marketplace, if applicable. For our embedded contractual derivative asset and/or liability, we use internal historical and projected health care expenditure data and the national health care expenditures as reflected in the National External Trend Standards, which is published by CMS, to estimate the unobservable inputs. The growth rates in each of these health care expenditures are modeled using the Monte Carlo simulation approach, and the resulting value is discounted to the valuation date. We estimate our non-recurring Level 3 asset and goodwill for our Western Region Operations reporting unit using the income approach based on discounted cash flows. We estimate our non-recurring Level 3 assets held for sale based on a combination of the discounted total consideration expected to be received in connection with the services and asset sale agreements, income approach based on a discounted cash flow methodology, and replacement cost methodology.

The significant unobservable inputs used in the fair value measurement of our embedded contractual derivative are the estimated growth in Health Net health care expenditures and the estimated growth in national health care expenditures. Significant increases (decreases) in the estimated growth in Health Net health care expenditures or decreases (increases) in the estimated growth in national health expenditures would result in a significantly lower (higher) fair value measurement. The significant unobservable input used in the fair value measurement of our assets held for sale is our discount rate. Significant increases (decreases) in the discount rate would result in a significantly lower (higher) fair value measurement.