Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2018
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: 001-16751
ANTHEM, INC.
(Exact name of registrant as specified in its charter)
INDIANA
 
35-2145715
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
120 MONUMENT CIRCLE
INDIANAPOLIS, INDIANA
(Address of principal executive offices)
 
46204-4903
(Zip Code)
Registrant’s telephone number, including area code: (800) 331-1476
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 every Interactive Data File required to be submitted 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 such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
x
 
  
Accelerated filer
¨
Non-accelerated filer
¨
 
  
Smaller reporting company
¨
Emerging growth company
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Title of Each Class
 
Outstanding at October 18, 2018
Common Stock, $0.01 par value
 
258,642,095 shares
 
 
 



Anthem, Inc.
Quarterly Report on Form 10-Q
For the Period Ended September 30, 2018
Table of Contents
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
PART II. OTHER INFORMATION
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.

-1-



PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Anthem, Inc.
Consolidated Balance Sheets
 
September 30,
2018
 
December 31,
2017
(In millions, except share data)
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,260

 
$
3,609

Fixed maturity securities, current (amortized cost of $17,504 and $17,055)
17,390

 
17,377

Equity securities, current
2,272

 
3,599

Other invested assets, current
21

 
17

Accrued investment income
163

 
163

Premium receivables
4,312

 
3,605

Self-funded receivables
2,631

 
2,580

Other receivables
2,374

 
2,267

Income taxes receivable
69

 
342

Securities lending collateral
741

 
455

Other current assets
2,875

 
2,249

Total current assets
37,108

 
36,263

Long-term investments:
 
 
 
Fixed maturity securities (amortized cost of $501 and $555)
496

 
561

Equity securities
34

 
33

Other invested assets
3,572

 
3,344

Property and equipment, net
2,592

 
2,175

Goodwill
20,468

 
19,231

Other intangible assets
9,101

 
8,368

Other noncurrent assets
1,074

 
565

Total assets
$
74,445

 
$
70,540

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Liabilities
 
 
 
Current liabilities:
 
 
 
Policy liabilities:
 
 
 
Medical claims payable
$
7,658

 
$
7,992

Reserves for future policy benefits
71

 
70

Other policyholder liabilities
2,929

 
2,950

Total policy liabilities
10,658

 
11,012

Unearned income
896

 
860

Accounts payable and accrued expenses
6,286

 
5,024

Security trades pending payable
168

 
113

Securities lending payable
741

 
454

Short-term borrowings
1,270

 
1,275

Current portion of long-term debt
849

 
1,275

Other current liabilities
3,306

 
3,343

Total current liabilities
24,174

 
23,356

Long-term debt, less current portion
17,300

 
17,382

Reserves for future policy benefits, noncurrent
669

 
647

Deferred tax liabilities, net
2,063

 
1,727

Other noncurrent liabilities
1,145

 
925

Total liabilities
45,351

 
44,037

 
 
 
 
Commitment and contingencies – Note 11


 


Shareholders’ equity
 
 
 
Preferred stock, without par value, shares authorized – 100,000,000; shares issued and outstanding – none

 

Common stock, par value $0.01, shares authorized – 900,000,000; shares issued and outstanding –
258,931,814 and 256,084,913
3

 
3

Additional paid-in capital
9,720

 
8,547

Retained earnings
20,182

 
18,054

Accumulated other comprehensive loss
(811
)
 
(101
)
Total shareholders’ equity
29,094

 
26,503

Total liabilities and shareholders’ equity
$
74,445

 
$
70,540

See accompanying notes.

-2-



Anthem, Inc.
Consolidated Statements of Income
(Unaudited) 
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
(In millions, except per share data)
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
Premiums
$
21,451

 
$
20,797

 
$
63,602

 
$
62,561

Administrative fees and other revenue
1,529

 
1,300

 
4,435

 
4,053

Total operating revenue
22,980

 
22,097

 
68,037

 
66,614

Net investment income
250

 
220

 
708

 
628

Net realized gains on financial instruments
27

 
115

 
5

 
138

Other-than-temporary impairment losses on investments:
 
 
 
 
 
 
 
Total other-than-temporary impairment losses on investments
(8
)
 
(6
)
 
(20
)
 
(23
)
Portion of other-than-temporary impairment losses recognized in other comprehensive income
2

 

 
2

 
2

Other-than-temporary impairment losses recognized in income
(6
)
 
(6
)
 
(18
)
 
(21
)
Total revenues
23,251

 
22,426

 
68,732

 
67,359

Expenses
 
 
 
 
 
 
 
Benefit expense
18,185

 
18,104

 
52,959

 
53,564

Selling, general and administrative expense:
 
 
 
 
 
 
 
Selling expense
330

 
348

 
972

 
1,042

General and administrative expense
3,216

 
2,663

 
9,430

 
8,214

Total selling, general and administrative expense
3,546

 
3,011

 
10,402

 
9,256

Interest expense
188

 
150

 
564

 
575

Amortization of other intangible assets
91

 
42

 
265

 
124

(Gain) loss on extinguishment of debt
(1
)
 

 
17

 

Total expenses
22,009

 
21,307

 
64,207

 
63,519

Income before income tax expense
1,242

 
1,119

 
4,525

 
3,840

Income tax expense
282

 
372

 
1,200

 
1,228

Net income
$
960

 
$
747

 
$
3,325

 
$
2,612

Net income per share
 
 
 
 
 
 
 
Basic
$
3.70

 
$
2.87

 
$
12.89

 
$
9.92

Diluted
$
3.62

 
$
2.80

 
$
12.58

 
$
9.70

Dividends per share
$
0.75

 
$
0.70

 
$
2.25

 
$
2.00









See accompanying notes.

-3-



Anthem, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited) 
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
(In millions)
2018
 
2017
 
2018
 
2017
Net income
$
960

 
$
747

 
$
3,325

 
$
2,612

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Change in net unrealized gains/losses on investments
(36
)
 
9

 
(353
)
 
190

Change in non-credit component of other-than-temporary impairment losses on investments
(2
)
 

 
(2
)
 
4

Change in net unrealized losses on cash flow hedges
2

 
(5
)
 
34

 
(68
)
Change in net periodic pension and postretirement costs
7

 
5

 
22

 
13

Foreign currency translation adjustments

 

 

 
3

Other comprehensive (loss) income
(29
)
 
9

 
(299
)
 
142

Total comprehensive income
$
931

 
$
756

 
$
3,026

 
$
2,754


































See accompanying notes.

-4-


Anthem, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended 
 September 30
(In millions)
2018
 
2017
Operating activities
 
 
 
Net income
$
3,325

 
$
2,612

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net realized gains on financial instruments
(5
)
 
(138
)
Other-than-temporary impairment losses recognized in income
18

 
21

Loss on extinguishment of debt
17

 

Loss on disposal of assets
2

 
3

Deferred income taxes
141

 
(238
)
Amortization, net of accretion
752

 
581

Depreciation expense
92

 
82

Share-based compensation
135

 
131

Changes in operating assets and liabilities:
 
 
 
Receivables, net
(823
)
 
612

Other invested assets
(17
)
 
(26
)
Other assets
(734
)
 
(517
)
Policy liabilities
(556
)
 
275

Unearned income
(42
)
 
970

Accounts payable and accrued expenses
756

 
563

Other liabilities
190

 
251

Income taxes
273

 
356

Other, net
(160
)
 
(52
)
Net cash provided by operating activities
3,364

 
5,486

Investing activities
 
 
 
Purchases of fixed maturity securities
(6,790
)
 
(10,271
)
Proceeds from fixed maturity securities:
 
 
 
Sales
4,971

 
7,668

Maturities, calls and redemptions
1,442

 
1,388

Purchases of equity securities
(812
)
 
(481
)
Proceeds from sales of equity securities
2,119

 
621

Purchases of other invested assets
(324
)
 
(253
)
Proceeds from sales of other invested assets
251

 
164

Change in collateral and settlements of non-hedging derivatives

 
65

Changes in securities lending collateral
(286
)
 
172

Purchases of subsidiaries, net of cash acquired
(1,732
)
 
(34
)
Purchases of property and equipment
(888
)
 
(516
)
Proceeds from sales of property and equipment

 
3

Other, net
17

 
12

Net cash used in investing activities
(2,032
)
 
(1,462
)
Financing activities
 
 
 
Net (repayments of) proceeds from commercial paper borrowings
(54
)
 
687

Proceeds from long-term borrowings
835

 

Repayments of long-term borrowings
(1,393
)
 
(930
)
Proceeds from short-term borrowings
5,300

 
3,850

Repayments of short-term borrowings
(5,305
)
 
(3,110
)
Changes in securities lending payable
287

 
(173
)
Changes in bank overdrafts
97

 
(127
)
Proceeds from sale of put options

 
1

Proceeds from issuance of common stock under Equity Units stock purchase contracts
1,250

 

Repurchase and retirement of common stock
(1,192
)
 
(1,635
)
Change in collateral and settlements of debt-related derivatives
22

 
(176
)
Cash dividends
(583
)
 
(525
)
Proceeds from issuance of common stock under employee stock plans
133

 
178

Taxes paid through withholding of common stock under employee stock plans
(77
)
 
(46
)
Net cash used in financing activities
(680
)
 
(2,006
)
Effect of foreign exchange rates on cash and cash equivalents
(1
)
 
4

Change in cash and cash equivalents
651

 
2,022

Cash and cash equivalents at beginning of period
3,609

 
4,075

Cash and cash equivalents at end of period
$
4,260

 
$
6,097

See accompanying notes.

-5-


Anthem, Inc.
Consolidated Statements of Shareholders’ Equity
(Unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Total
Shareholders’
Equity
(In millions)
Number of
Shares
 
Par
Value
 
December 31, 2017 (audited)
256.1

 
$
3

 
$
8,547

 
$
18,054

 
$
(101
)
 
$
26,503

Adoption of Accounting Standards Update No. 2016-01 (Note 2)

 

 

 
320

 
(320
)
 

January 1, 2018
256.1

 
3

 
8,547

 
18,374

 
(421
)
 
26,503

Net income

 

 

 
3,325

 

 
3,325

Other comprehensive loss

 

 

 

 
(299
)
 
(299
)
Issuance of common stock under Equity Units stock purchase contracts
6.0

 

 
1,250

 

 

 
1,250

Repurchase and retirement of common stock
(5.0
)
 

 
(174
)
 
(1,018
)
 

 
(1,192
)
Dividends and dividend equivalents

 

 

 
(590
)
 

 
(590
)
Issuance of common stock under employee stock plans, net of related tax benefits
1.8

 

 
192

 

 

 
192

Convertible debenture repurchases and conversions

 

 
(95
)
 

 

 
(95
)
Adoption of Accounting Standards Update No. 2018-02 (Note 2)

 

 

 
91

 
(91
)
 

September 30, 2018
258.9

 
$
3

 
$
9,720

 
$
20,182

 
$
(811
)
 
$
29,094

 
 
 
 
 
 
 
 
 
 
 
 
January 1, 2017
263.7

 
$
3

 
$
8,805

 
$
16,560

 
$
(268
)
 
$
25,100

Net income

 

 

 
2,612

 

 
2,612

Other comprehensive income

 

 

 

 
142

 
142

Premiums for and settlement of equity options

 

 
1

 

 

 
1

Repurchase and retirement of common stock
(8.7
)
 

 
(296
)
 
(1,339
)
 

 
(1,635
)
Dividends and dividend equivalents

 

 

 
(527
)
 

 
(527
)
Issuance of common stock under employee stock plans, net of related tax benefits
2.4

 

 
256

 

 

 
256

Convertible debenture repurchases and conversions

 

 
(1
)
 

 

 
(1
)
September 30, 2017
257.4

 
$
3

 
$
8,765

 
$
17,306

 
$
(126
)
 
$
25,948









See accompanying notes.

-6-


Anthem, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2018
(In Millions, Except Per Share Data or As Otherwise Stated Herein)
 
1.
Organization
References to the terms “we,” “our,” “us” or “Anthem” used throughout these Notes to Consolidated Financial Statements refer to Anthem, Inc., an Indiana corporation, and unless the context otherwise requires, its direct and indirect subsidiaries. References to the “states” include the District of Columbia, unless the context otherwise requires.
We are one of the largest health benefits companies in the United States in terms of medical membership, serving 39.5 medical members through our affiliated health plans as of September 30, 2018. We offer a broad spectrum of network-based managed care plans to Large Group, Small Group, Individual, Medicaid and Medicare markets. Our managed care plans include: Preferred Provider Organizations, or PPOs; health maintenance organizations, or HMOs; Point-of-Service, or POS, plans; traditional indemnity plans and other hybrid plans, including Consumer-Driven Health Plans, or CDHPs; and hospital only and limited benefit products. In addition, we provide a broad array of managed care services to self-funded customers, including claims processing, stop loss insurance, actuarial services, provider network access, medical cost management, disease management, wellness programs and other administrative services. We provide an array of specialty and other insurance products and services such as dental, vision, life and disability insurance benefits, radiology benefit management and analytics-driven personal health care. We also provide services to the federal government in connection with the Federal Employee Program®.
We are an independent licensee of the Blue Cross and Blue Shield Association, or BCBSA, an association of independent health benefit plans. We serve our members as the Blue Cross licensee for California and as the Blue Cross and Blue Shield, or BCBS, licensee for Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri (excluding 30 counties in the Kansas City area), Nevada, New Hampshire, New York (in the New York City metropolitan area and upstate New York), Ohio, Virginia (excluding the Northern Virginia suburbs of Washington, D.C.) and Wisconsin. In a majority of these service areas, we do business as Anthem Blue Cross, Anthem Blue Cross and Blue Shield, Blue Cross and Blue Shield of Georgia, and Empire Blue Cross Blue Shield or Empire Blue Cross. We also conduct business through arrangements with other BCBS licensees in Louisiana, South Carolina and western New York. Through our subsidiaries, we also serve customers in over 25 states across the country as America’s 1st Choice, Amerigroup, Aspire Health, CareMore, Freedom Health, HealthLink, HealthSun, Optimum HealthCare, Simply Healthcare, and/or Unicare. We are licensed to conduct insurance operations in all 50 states and the District of Columbia through our subsidiaries.
2.
Basis of Presentation and Significant Accounting Policies
Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. We have omitted certain footnote disclosures that would substantially duplicate the disclosures in our 2017 Annual Report on Form 10-K, unless the information contained in those disclosures materially changed or is required by GAAP. Certain prior year amounts have been reclassified to conform to the current year presentation or adjusted to conform to the current year rounding convention. In the opinion of management, all adjustments, including normal recurring adjustments, necessary for a fair statement of the consolidated financial statements as of and for the three and nine months ended September 30, 2018 and 2017 have been recorded. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2018, or any other period. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2017 included in our 2017 Annual Report on Form 10-K.
Cash and Cash Equivalents: Certain of our subsidiaries operate outside of the United States and have functional currencies other than the U.S. dollar, or USD. We translate the assets and liabilities of those subsidiaries to USD using the exchange rate in effect at the end of the period. We translate the revenues and expenses of those subsidiaries to USD using the average exchange rates in effect during the period. The net effect of these translation adjustments is included in “Foreign

-7-



currency translation adjustments” in our consolidated statements of comprehensive income. Additionally, we control a number of bank accounts that are used exclusively to hold customer funds for the administration of customer benefits and have cash and cash equivalents on deposit to meet certain regulatory requirements. These amounts totaled $243 and $182 at September 30, 2018 and December 31, 2017, respectively and are included in the cash and cash equivalents line on our consolidated balance sheets.
Revenue Recognition: Premiums for fully-insured contracts are recognized as revenue over the period insurance coverage is provided, and, if applicable, net of amounts recognized for the minimum medical loss ratio rebates or contractual or government-mandated premium stabilization programs. Administrative fees and other revenue includes revenue from certain group contracts that provide for the group to be at risk for all, or with supplemental insurance arrangements, a portion of their claims experience. We charge these self-funded groups an administrative fee, which is based on the number of members in a group or the group’s claim experience. Under our self-funded arrangements, revenue is recognized as administrative services are performed, and benefit payments under these programs are excluded from benefit expense. For additional information about our revenues, see Note 2, “Basis of Presentation and Significant Accounting Policies” and Note 19, “Segment Information,” to our audited consolidated financial statements as of and for the year ended December 31, 2017 included in our 2017 Annual Report on Form 10-K. In addition, see Note 15, “Segment Information,” herein for the disaggregation of revenues by segments and products.
Premium and self-funded receivables include the uncollected amounts from insured groups, individuals and government programs. Premium receivables are reported net of an allowance for doubtful accounts of $312 and $302 at September 30, 2018 and December 31, 2017, respectively. Self-funded receivables are reported net of an allowance for doubtful accounts of $40 and $153 at September 30, 2018 and December 31, 2017, respectively.
For our non-fully-insured contracts, we had no material contract assets, contract liabilities or deferred contract costs recorded on our consolidated balance sheet at September 30, 2018. For the three and nine months ended September 30, 2018, revenue recognized from performance obligations related to prior periods, such as due to changes in transaction price, was not material. For contracts that have an original expected duration of greater than one year, revenue expected to be recognized in future periods related to unfulfilled contractual performance obligations and contracts with variable consideration related to undelivered performance obligations is not material.
Recently Adopted Accounting Guidance: In February 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, or ASU 2018-02. On December 22, 2017, the federal government enacted a tax bill, H.R.1, An act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, or the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act contains significant changes to corporate taxation, including, but not limited to, reducing the U.S. federal corporate income tax rate from 35% to 21% and modifying or limiting many business deductions. Current FASB guidance requires adjustments of deferred taxes due to a change in the federal corporate income tax rate to be included in income from operations. As a result, the tax effects of items within accumulated other comprehensive loss did not reflect the appropriate tax rate. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive loss to retained earnings for stranded tax effects resulting from the change in the federal corporate income tax rate. We adopted the amendments in ASU 2018-02 for our interim and annual reporting periods beginning on January 1, 2018 and reclassified $91 of stranded tax effects from accumulated other comprehensive loss to retained earnings on our consolidated balance sheet. The adoption of ASU 2018-02 did not have any impact on our results of operations or cash flows.
In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, or ASU 2017-09. This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. We adopted ASU 2017-09 on January 1, 2018. The guidance has been and will be applied prospectively to awards modified on or after the adoption date. The adoption of ASU 2017-09 did not have any impact on our consolidated financial position, results of operations or cash flows.
In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, or ASU 2017-07. This amendment requires entities to disaggregate the service cost component from the other components of the

-8-



benefit cost and present the service cost component in the same income statement line item as other employee compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. Certain of our defined benefit plans have previously been frozen, resulting in no annual service costs, and the remaining service costs for our non-frozen plan are not material. We adopted ASU 2017-07 on January 1, 2018 and it did not have a material impact on our results of operations, cash flows or consolidated financial position.
In December 2016, the FASB issued Accounting Standards Update No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, or ASU 2016-20. In May 2016, the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, or ASU 2016-12. In April 2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, or ASU 2016-10. In March 2016, the FASB issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross verses Net), or ASU 2016-08. These updates provide additional clarification and implementation guidance on the previously issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09. Collectively, these updates require a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. These updates supersede almost all existing revenue recognition guidance under GAAP, with certain exceptions, including an exception for our premium revenues, which are recorded on the Premiums line item on our consolidated statements of income and will continue to be accounted for in accordance with the provisions of Accounting Standards Codification, or ASC, Topic 944, Financial Services - Insurance. Our administrative service and other contracts that are subject to these Accounting Standards Updates are recorded in the Administrative fees and other revenue line item on our consolidated statements of income and represents approximately 6% of our consolidated total operating revenue. We adopted these standards on January 1, 2018 using the modified retrospective approach. The adoption of these standards did not have a material impact on our beginning retained earnings, results of operations, cash flows or consolidated financial position.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, or ASU 2016-18. This update amends ASC Topic 230 to add and clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. We adopted ASU 2016-18 on January 1, 2018 using a retrospective approach. The adoption of ASU 2016-18 did not have a material impact on our consolidated statements of cash flows and did not impact our results of operations or consolidated financial position.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, or ASU 2016-15. This update addresses the presentation and classification on the statement of cash flows for eight specific items, with the objective of reducing existing diversity in practice in how certain cash receipts and cash payments are presented and classified. We adopted ASU 2016-15 on January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on our consolidated statements of cash flows, results of operations or consolidated financial position.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01. The amendments in ASU 2016-01 change the accounting for non-consolidated equity investments that are not accounted for under the equity method of accounting by requiring changes in fair value to be recognized in income. Additionally, ASU 2016-01 simplifies the impairment assessment of equity investments without readily determinable fair values; requires entities to use the exit price when estimating the fair value of financial instruments; and modifies various presentation disclosure requirements for financial instruments. We adopted ASU 2016-01 on January 1, 2018 as a cumulative-effect adjustment and reclassified $320 of unrealized gains on equity investments, net of tax, from accumulated other comprehensive loss to retained earnings on our consolidated balance sheet. Effective January 1, 2018, our results of operations include the changes in fair value of these financial instruments.

-9-



Recent Accounting Guidance Not Yet Adopted: In August 2018, the FASB issued Accounting Standards Update No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, or ASU 2018-15. The amendments in ASU 2018-15 require implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance. The amendments also require an entity to disclose the nature of its hosting arrangements and adhere to certain presentation requirements in its balance sheet, income statement and statement of cash flows. ASU 2018-15 is effective for our interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The guidance can be applied either prospectively to all implementation costs incurred after the date of adoption or retrospectively. We are currently evaluating the effects the adoption of ASU 2018-15 will have on our consolidated financial position, results of operations and cash flows.
In August 2018, the FASB issued Accounting Standards Update No. 2018-14, Compensation—Retirement Benefits - Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, or ASU 2018-14. The amendments in ASU 2018-14 eliminate, add, and modify certain disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments are effective for our annual reporting periods beginning after December 15, 2020, with early adoption permitted. The guidance is to be applied on a retrospective basis to all periods presented. We are currently evaluating the effects the adoption of ASU 2018-14 will have on our disclosures.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13. The amendments in ASU 2018-13 eliminate, add, and modify certain disclosure requirements for fair value measurements. The amendments are effective for our interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted for either the entire ASU or only the provisions that eliminate or modify requirements. The amendments with respect to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty are to be applied prospectively. All other amendments are to be applied retrospectively to all periods presented. We are currently evaluating the effects the adoption of ASU 2018-13 will have on our disclosures.
In August 2018, the FASB issued Accounting Standards Update No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, or ASU 2018-12. The amendments in ASU 2018-12 make changes to a variety of areas to simplify or improve the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. The amendments require insurers to annually review the assumptions they make about their policyholders and update the liabilities for future policy benefits if the assumptions change. The amendments also simplify the amortization of deferred contract acquisition costs and add new disclosure requirements about the assumptions insurers use to measure their liabilities and how they may affect future cash flows. The amendments in ASU 2018-12 will be effective for our interim and annual reporting periods beginning after December 15, 2020. The amendments related to the liability for future policy benefits for traditional and limited-payment contracts and deferred acquisition costs are to be applied to contracts in force as of the beginning of the earliest period presented, with an option to apply such amendments retrospectively with a cumulative-effect adjustment to the opening balance of retained earnings as of the earliest period presented. The amendments for market risk benefits are to be applied retrospectively. We are currently evaluating the effects the adoption of ASU 2018-12 will have on our consolidated financial position, results of operations, cash flows, and related disclosures.

-10-



In July 2018, the FASB issued Accounting Standards Update No. 2018-11, Leases (Topic 842): Targeted Improvements, or ASU 2018-11, and Accounting Standards Update No. 2018-10, Codification Improvements to Topic 842, Leases, or ASU 2018-10. The amendments in ASU 2018-11 provide for an additional and optional transition method that allows an entity to initially apply ASC Topic 842 at the adoption date and recognize a cumulative effect adjustment to its opening balance of retained earnings in the period of adoption and continue its reporting for the comparative periods presented in accordance with the current lease guidance, ASC Topic 840. The amendments in ASU 2018-11 also provide lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component if the nonlease components otherwise would be accounted for under the new revenue guidance, ASC Topic 606 and if certain conditions are met. The amendments in ASU 2018-10 provide additional clarification and implementation guidance on certain aspects of the previously issued Accounting Standards Update No. 2016-02, Leases (Topic 842), or ASU 2016-02, and have the same effective and transition requirements as ASU 2016-02. Upon the effective date, ASU 2016-02 will supersede the current lease guidance in ASC Topic 840. Under the new guidance, lessees will be required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis. Concurrently, lessees will be required to recognize a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. ASU 2016-02 requires a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements. As noted above, ASU 2018-11 provides for an additional and optional transition method. We plan to apply the optional transition method at the adoption date and are currently evaluating the effects the adoption of ASU 2016-02 will have on our consolidated financial statements, results of operations and cash flows.
In July 2018, the FASB issued Accounting Standards Update No. 2018-09, Codification Improvements, or ASU 2018-09. This amendment makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification. The majority of the amendments in ASU 2018-09 will be effective for us in annual periods beginning after December 15, 2018. We are currently evaluating the effects the adoption of ASU 2018-09 will have on our consolidated financial statements, results of operations and cash flows.
There were no other new accounting pronouncements that were issued or became effective since the issuance of our 2017 Annual Report on Form 10-K that had, or are expected to have, a material impact on our consolidated financial position, results of operations or cash flows.
3.
Business Acquisitions
Acquisition of America’s 1st Choice
On February 15, 2018, we completed our acquisition of Freedom Health, Inc., Optimum HealthCare, Inc., America’s 1st Choice of South Carolina, Inc. and related entities, or collectively, America’s 1st Choice, a Medicare Advantage organization that offers HMO products, including Chronic Special Needs Plans and Dual-Eligible Special Needs Plans under its Freedom Health and Optimum HealthCare brands in Florida and its America’s 1st Choice of South Carolina brand in South Carolina. At the time of acquisition, through its Medicare Advantage plans, America’s 1st Choice served approximately one hundred and thirty-five thousand members in twenty-five Florida and three South Carolina counties. This acquisition aligns with our plans for continued growth in the Medicare Advantage and Special Needs populations.
In accordance with FASB accounting guidance for business combinations, the consideration transferred was allocated to the preliminary fair value of America's 1st Choice's assets acquired and liabilities assumed, including identifiable intangible assets. The excess of the consideration transferred over the preliminary fair value of net assets acquired resulted in preliminary goodwill of $1,021 at September 30, 2018, all of which was allocated to our Government Business segment. Preliminary goodwill recognized from the acquisition of America's 1st Choice primarily relates to the future economic benefits arising from the assets acquired and is consistent with our stated intentions to strengthen our position and expand operations in the government sector to service Medicare Advantage and Special Needs populations. As of September 30, 2018, the initial accounting for the acquisition has not been finalized. Any subsequent adjustments made to the assets acquired or liabilities assumed during the measurement period will be recorded as an adjustment to goodwill. During the nine months ended September 30, 2018, we increased preliminary goodwill by $31.

-11-



The preliminary fair value of the net assets acquired from America's 1st Choice includes $711 of other intangible assets, which primarily consist of finite-lived customer relationships and provider networks with amortization periods ranging from 3 to 20 years. The results of operations of America's 1st Choice are included in our consolidated financial statements within our Government Business segment for the period following February 15, 2018. The pro forma effects of this acquisition for prior periods were not material to our consolidated results of operations.
Acquisition of HealthSun
On December 21, 2017, we completed our acquisition of HealthSun Health Plans, Inc., or HealthSun, which at the time of acquisition served approximately forty thousand members in the state of Florida through its Medicare Advantage plans, and which received a five-star rating from the Centers for Medicare & Medicaid Services. This acquisition aligns with our plans for continued growth in the Medicare Advantage and dual-eligible populations.
In accordance with FASB accounting guidance for business combinations, the consideration transferred was allocated to the preliminary fair value of HealthSun's assets acquired and liabilities assumed, including identifiable intangible assets. The excess of the consideration transferred over the preliminary fair value of net assets acquired resulted in preliminary goodwill of $1,605 at September 30, 2018, all of which was allocated to our Government Business segment. Preliminary goodwill recognized from the acquisition of HealthSun primarily relates to the future economic benefits arising from the assets acquired and is consistent with our stated intentions to strengthen our position and expand operations in the government sector to service Medicare Advantage and dual-eligible enrollees. As of September 30, 2018, the initial accounting for the acquisition has not been finalized. Any subsequent adjustments made to the assets acquired or liabilities assumed during the measurement period will be recorded as an adjustment to goodwill. During the nine months ended September 30, 2018, we reduced preliminary goodwill by $38 primarily due to adjustments made to acquired intangible assets, partially offset by the establishment of certain deferred tax liabilities.
The preliminary fair value of the net assets acquired from HealthSun includes $637 of other intangible assets, which primarily consist of finite-lived customer relationships with amortization periods ranging from 4 to 20 years. The results of operations of HealthSun are included in our consolidated financial statements within our Government Business segment for the period following December 21, 2017. The pro forma effects of this acquisition for prior periods were not material to our consolidated results of operations.
4.
Investments
Fixed Maturity Securities
We evaluate our available-for-sale fixed maturity securities for other-than-temporary declines based on qualitative and quantitative factors. There were no individually significant other-than-temporary impairment losses on investments during the three and nine months ended September 30, 2018 and 2017. We continue to review our investment portfolios under our impairment review policy. Given the inherent uncertainty of changes in market conditions and the significant judgments involved, there is a continuing risk that further declines in fair value may occur and additional material other-than-temporary impairment losses on investments may be recorded in future periods.

-12-



A summary of current and long-term fixed maturity securities, available-for-sale, at September 30, 2018 and December 31, 2017 is as follows:
 
 
 
 
 
 
 
 
 
Non-Credit
Component of
Other-Than-
Temporary
Impairments
Recognized in
Accumulated
Other
Comprehensive
Loss
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized Losses
 
Estimated
Fair Value
 
 
 
 
Less than
12 Months
 
12 Months
or Greater
 
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
$
634

 
$
1

 
$
(4
)
 
$
(6
)
 
$
625

 
$

Government sponsored securities
103

 

 
(1
)
 
(1
)
 
101

 

States, municipalities and political subdivisions, tax-exempt
4,944

 
66

 
(31
)
 
(15
)
 
4,964

 

Corporate securities
8,340

 
62

 
(98
)
 
(48
)
 
8,256

 
(2
)
Residential mortgage-backed securities
2,742

 
26

 
(23
)
 
(52
)
 
2,693

 

Commercial mortgage-backed securities
68

 

 

 
(2
)
 
66

 

Other securities
1,174

 
15

 
(3
)
 
(5
)
 
1,181

 

Total fixed maturity securities
$
18,005

 
$
170

 
$
(160
)
 
$
(129
)
 
$
17,886

 
$
(2
)
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
$
649

 
$
2

 
$
(5
)
 
$
(1
)
 
$
645

 
$

Government sponsored securities
90

 

 

 

 
90

 

States, municipalities and political subdivisions, tax-exempt
5,854

 
193

 
(5
)
 
(7
)
 
6,035

 

Corporate securities
7,363

 
166

 
(30
)
 
(13
)
 
7,486

 

Residential mortgage-backed securities
2,520

 
39

 
(8
)
 
(12
)
 
2,539

 

Commercial mortgage-backed securities
80

 
1

 

 
(2
)
 
79

 

Other securities
1,054

 
14

 
(3
)
 
(1
)
 
1,064

 

Total fixed maturity securities
$
17,610

 
$
415

 
$
(51
)
 
$
(36
)
 
$
17,938

 
$



-13-



For fixed maturity securities in an unrealized loss position at September 30, 2018 and December 31, 2017, the following table summarizes the aggregate fair values and gross unrealized losses by length of time those securities have continuously been in an unrealized loss position: 
 
Less than 12 Months
 
12 Months or Greater
(Securities are whole amounts)
Number of
Securities
 
Estimated
Fair Value
 
Gross
Unrealized
Loss
 
Number of
Securities
 
Estimated
Fair Value
 
Gross
Unrealized
Loss
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
45

 
$
374

 
$
(4
)
 
20

 
$
206

 
$
(6
)
Government sponsored securities
27

 
66

 
(1
)
 
17

 
17

 
(1
)
States, municipalities and political subdivisions, tax-exempt
997

 
1,960

 
(31
)
 
260

 
383

 
(15
)
Corporate securities
2,243

 
4,642

 
(98
)
 
593

 
936

 
(48
)
Residential mortgage-backed securities
677

 
1,144

 
(23
)
 
531

 
1,092

 
(52
)
Commercial mortgage-backed securities
17

 
31

 

 
10

 
25

 
(2
)
Other securities
192

 
575

 
(3
)
 
68

 
201

 
(5
)
Total fixed maturity securities
4,198

 
$
8,792

 
$
(160
)
 
1,499

 
$
2,860

 
$
(129
)
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
36

 
$
450

 
$
(5
)
 
11

 
$
56

 
$
(1
)
Government sponsored securities
12

 
16

 

 
16

 
15

 

States, municipalities and political subdivisions, tax-exempt
414

 
641

 
(5
)
 
189

 
356

 
(7
)
Corporate securities
1,081

 
2,200

 
(30
)
 
279

 
330

 
(13
)
Residential mortgage-backed securities
445

 
1,050

 
(8
)
 
287

 
478

 
(12
)
Commercial mortgage-backed securities
7

 
14

 

 
12

 
27

 
(2
)
Other securities
132

 
406

 
(3
)
 
20

 
36

 
(1
)
Total fixed maturity securities
2,127

 
$
4,777

 
$
(51
)
 
814

 
$
1,298

 
$
(36
)
The amortized cost and fair value of fixed maturity securities at September 30, 2018, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations.
 
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
$
559

 
$
562

Due after one year through five years
5,401

 
5,376

Due after five years through ten years
5,252

 
5,211

Due after ten years
3,983

 
3,978

Mortgage-backed securities
2,810

 
2,759

Total fixed maturity securities
$
18,005

 
$
17,886


-14-



Proceeds from sales, maturities, calls or redemptions of fixed maturity securities and the related gross realized gains and gross realized losses for the three and nine months ended September 30, 2018 and 2017 are as follows:
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
 
2018
 
2017
 
2018
 
2017
Proceeds
$
1,532

 
$
2,937

 
$
6,413

 
$
9,056

Gross realized gains
12

 
47

 
73

 
134

Gross realized losses
(16
)
 
(9
)
 
(85
)
 
(49
)
In the ordinary course of business, we may sell securities at a loss for a number of reasons, including, but not limited to: (i) changes in the investment environment; (ii) expectation that the fair value could deteriorate further; (iii) desire to reduce exposure to an issuer or an industry; (iv) changes in credit quality; or (v) changes in expected cash flow.
All securities sold resulting in investment gains and losses are recorded on the trade date. Realized gains and losses are determined on the basis of the cost or amortized cost of the specific securities sold.
Equity Securities
A summary of current and long-term equity securities at September 30, 2018 and December 31, 2017 is as follows:
 
September 30, 2018
 
December 31, 2017
Equity securities:
 
 
 
Exchange traded funds
$
487

 
$
1,300

Fixed maturity mutual funds
611

 
791

Common equity securities
890

 
1,254

Private equity securities
318

 
287

Total
$
2,306

 
$
3,632

The gains and losses related to equity securities for the three and nine months ended September 30, 2018 are as follows:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
Net realized gains (losses) recognized on equity securities
$
27

 
$
(33
)
Less: Net realized gains recognized on equity securities sold during the period
(11
)
 
(208
)
Unrealized gains (losses) recognized on equity securities still held at September 30, 2018
$
16

 
$
(241
)
The gross realized gains recognized on sales of equity securities for the three and nine months ended September 30, 2017 were $96 and $120, respectively. The gross realized losses recognized on sales of equity securities for the three and nine months ended September 30, 2017 were $8 and $13, respectively.
Securities Lending Programs
We participate in securities lending programs whereby marketable securities in our investment portfolio are transferred to independent brokers or dealers in exchange for cash and securities collateral. The fair value of the collateral received at the time of the transactions amounted to $741 and $454 at September 30, 2018 and December 31, 2017, respectively. The value of the collateral represented 103% and 104% of the market value of the securities on loan at September 30, 2018 and December 31, 2017, respectively. We recognize the collateral as an asset under the caption “Securities lending collateral” on our consolidated balance sheets and we recognize a corresponding liability for the obligation to return the collateral to the borrower under the caption “Securities lending payable.” The securities on loan are reported in the applicable investment category on our consolidated balance sheets.

-15-



The remaining contractual maturity of our securities lending agreements at September 30, 2018 is as follows:
 
Overnight and Continuous
Securities lending transactions
 
United States Government securities
$
131

Corporate securities
456

Equity securities
154

Total
$
741

The market value of loaned securities and that of the collateral pledged can fluctuate in non-synchronized fashions. To the extent the loaned securities' value appreciates faster or depreciates slower than the value of the collateral pledged, we are exposed to the risk of the shortfall. As a primary mitigating mechanism, the loaned securities and collateral pledged are marked to market on a daily basis and the shortfall, if any, is collected accordingly. Secondarily, the minimum collateral level is set at 102% of the value of the loaned securities, which provides a cushion before any shortfall arises. The investment of the cash collateral is subject to market risk, which is managed by limiting the investments to higher quality and shorter duration instruments.

-16-



5.
Derivative Financial Instruments
We primarily invest in the following types of derivative financial instruments: interest rate swaps, futures, forward contracts, put and call options, swaptions, embedded derivatives and warrants. We also enter into master netting agreements which reduce credit risk by permitting net settlement of transactions. We had posted collateral of $14 and $12 related to our derivative financial instruments at September 30, 2018 and December 31, 2017, respectively.
A summary of the aggregate contractual or notional amounts and estimated fair values related to derivative financial instruments at September 30, 2018 and December 31, 2017 is as follows:
 
Contractual/
Notional
Amount
 
Balance Sheet Location
 
Estimated Fair Value
 
Asset
 
(Liability)
September 30, 2018
 
 
 
 
 
 
 
Hedging instruments
 
 
 
 
 
 
 
Interest rate swaps - fixed to floating
$
1,200

 
Other assets/other liabilities
 
$

 
$
(19
)
Non-hedging instruments
 
 
 
 
 
 
 
Interest rate swaps
179

 
Equity securities 
 
7

 
(1
)
Futures
274

 
Equity securities 
 
3

 
(1
)
Subtotal non-hedging
453

 
Subtotal non-hedging
 
10

 
(2
)
Total derivatives
$
1,653

 
Total derivatives
 
10

 
(21
)
 
 
 
Amounts netted
 
(10
)
 
10

 
 
 
Net derivatives
 
$

 
$
(11
)
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Hedging instruments
 
 
 
 
 
 
 
Interest rate swaps - fixed to floating
$
1,235

 
Other assets/other liabilities
 
$
2

 
$
(5
)
Interest rate swaps - forward starting pay fixed swaps
425

 
Other assets/other liabilities
 

 
(9
)
Subtotal hedging
1,660

 
Subtotal hedging
 
2

 
(14
)
Non-hedging instruments
 
 
 
 
 
 
 
Interest rate swaps
171

 
Equity securities 
 
1

 
(5
)
Options
100

 
Other assets/other liabilities
 

 

Futures
117

 
Equity securities 
 

 
(2
)
Subtotal non-hedging
388

 
Subtotal non-hedging
 
1

 
(7
)
Total derivatives
$
2,048

 
Total derivatives
 
3

 
(21
)
 
 
 
Amounts netted
 
(1
)
 
1

 
 
 
Net derivatives
 
$
2

 
$
(20
)

-17-



Fair Value Hedges
We have entered into various interest rate swap contracts to convert a portion of our interest rate exposure on our long-term debt from fixed rates to floating rates. The floating rates payable on all of our fair value hedges are benchmarked to LIBOR. A summary of our outstanding fair value hedges at September 30, 2018 and December 31, 2017 is as follows:
Type of Fair Value Hedges
 
Year
Entered
Into
 
Outstanding Notional Amount
 
Interest Rate
Received
 
Expiration Date
 
September 30, 2018
 
December 31, 2017
 
Interest rate swap
 
2018
 
$
50

 
$

 
4.101
%
 
September 1, 2027
Interest rate swap
 
2018
 
450

 

 
3.300

 
January 15, 2023
Interest rate swap
 
2018
 
90

 

 
4.350
 
 
August 15, 2020
Interest rate swap
 
2017
 
50

 
50

 
4.350
 
 
August 15, 2020
Interest rate swap
 
2015
 
200

 
200

 
4.350
 
 
August 15, 2020
Interest rate swap
 
2014
 
150

 
150

 
4.350
 
 
August 15, 2020
Interest rate swap
 
2013
 
10

 
10

 
4.350
 
 
August 15, 2020
Interest rate swap
 
2012
 
200

 
200

 
4.350
 
 
August 15, 2020
Interest rate swap
 
2012
 

 
625

 
1.875
 
 
January 15, 2018
Total notional amount outstanding
 
 
 
$
1,200

 
$
1,235

 
 
 
 
 
The following amounts were recorded on our consolidated balance sheets related to cumulative basis adjustments for fair value hedges at September 30, 2018 and December 31, 2017:
Balance Sheet Classification in Which Hedged Item is Included
 
Carrying Amount of Hedged Liability
 
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability
 
September 30, 2018
 
December 31, 2017
 
September 30, 2018
 
December 31, 2017
Current portion of long term-debt
 
$
849

 
$
1,275

 
$

 
$
2

Long-term debt
 
17,300

 
17,382

 
(19
)
 
(5
)
Cash Flow Hedges
We have entered into a series of forward starting pay fixed interest rate swaps with the objective of reducing the variability of cash flows in the interest payments on anticipated future financings. We had $425 in notional amounts outstanding under forward starting pay fixed interest rate swaps at December 31, 2017. During the nine months ended September 30, 2018, swaps in the notional amount of $425 were terminated. We received an aggregate of $24 from the swap counter parties upon termination.
The unrecognized loss for all outstanding, expired and terminated cash flow hedges included in accumulated other comprehensive loss, net of tax, was $249 and $233 at September 30, 2018 and December 31, 2017, respectively. As of September 30, 2018, the total amount of amortization over the next twelve months for all cash flow hedges is estimated to increase interest expense by approximately $14. No amounts were excluded from effectiveness testing.

-18-



A summary of the effect of cash flow hedges in accumulated other comprehensive loss for the three and nine months ended September 30, 2018 and 2017 is as follows:
 
 
Hedge
Loss
Recognized
in Other
Comprehensive
(Loss) Income
 
Income Statement Location of
Loss Reclassification from
Accumulated Other Comprehensive Loss
 
Hedge Loss
Reclassified from
Accumulated
Other
Comprehensive
Loss
Type of Cash Flow Hedge
 
 
 
Three months ended September 30, 2018
 
 
 
 
 
 
Forward starting pay fixed swaps
 
$

 
Interest expense
 
$
(4
)
Three months ended September 30, 2017
 
 
 
 
 
 
Forward starting pay fixed swaps
 
$
(9
)
 
Interest expense
 
$
(2
)
Nine months ended September 30, 2018
 
 
 
 
 
 
Forward starting pay fixed swaps
 
$
(33
)
 
Interest expense
 
$
(10
)
Nine months ended September 30, 2017
 
 
 
 
 
 
Forward starting pay fixed swaps
 
$
(109
)
 
Interest expense
 
$
(5
)
Forward starting pay fixed swaps
 
 
 
Net realized gains on financial instruments
 
$
(12
)
Income Statement Relationship of Fair Value and Cash Flow Hedging
A summary of the relationship between the effects of fair value and cash flow hedges on the total amount of income and expense presented in our consolidated statements of income for the three and nine months ended September 30, 2018 and 2017 is as follows:
 
Classification and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
 
Three Months Ended September 30, 2018
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2018
 
Nine Months Ended September 30, 2017
 
Net Realized Gains on Financial Instruments
 
Interest Expense
 
Net Realized Gains on Financial Instruments
 
Interest Expense
 
Net Realized Gains on Financial Instruments
 
Interest Expense
 
Net Realized Gains on Financial Instruments
 
Interest Expense
Total amount of income or expense in the income statement in which the effects of fair value or cash flow hedges are recorded
$
27

 
$
(188
)
 
$
115

 
$
(150
)
 
$
5

 
$
(564
)
 
$
138

 
$
(575
)
(Loss) gain on fair value hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hedged items

 

 

 

 

 
(1
)
 

 

Derivatives designated as hedging instruments

 

 

 

 

 
1

 

 

Loss on cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Forward starting pay fixed swaps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of loss reclassified from accumulated other comprehensive loss into net income

 
(4
)
 

 
(2
)
 

 
(10
)
 

 
(5
)
Amount of loss reclassified from accumulated other comprehensive loss into net income due to ineffectiveness and missed forecasted transactions

 

 

 

 

 

 
(12
)
 


-19-



Non-Hedging Derivatives
A summary of the effect of non-hedging derivatives on our consolidated statements of income for the three and nine months ended September 30, 2018 and 2017 is as follows:
Type of Non-Hedging Derivatives
 
Income Statement Location of Gain (Loss) Recognized
 
Derivative
Gain (Loss)
Recognized
Three months ended September 30, 2018
 
 
 
 
Interest rate swaps
 
Net realized gains on financial instruments
 
$

Options
 
Net realized gains on financial instruments
 

Futures
 
Net realized gains on financial instruments
 
2

Total
 
 
 
$
2

Three months ended September 30, 2017
 
 
 
 
Interest rate swaps
 
Net realized gains on financial instruments
 
$

Options
 
Net realized gains on financial instruments
 
(13
)
Futures
 
Net realized gains on financial instruments
 

Total
 
 
 
$
(13
)
Nine months ended September 30, 2018
 
 
 
 
Interest rate swaps
 
Net realized gains on financial instruments
 
$
15

Options
 
Net realized gains on financial instruments
 

Futures
 
Net realized gains on financial instruments
 
7

Total
 
 
 
$
22

Nine months ended September 30, 2017
 
 
 
 
Interest rate swaps
 
Net realized gains on financial instruments
 
$
(1
)
Options
 
Net realized gains on financial instruments
 
(34
)
Futures
 
Net realized gains on financial instruments
 
(2
)
Total
 
 
 
$
(37
)
6.
Fair Value
Assets and liabilities recorded at fair value in our consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Level inputs, as defined by FASB guidance for fair value measurements and disclosures, are as follows:
Level Input
 
Input Definition
Level I
 
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level II
 
Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date.
Level III
 
Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
The following methods, assumptions and inputs were used to determine the fair value of each class of the following assets and liabilities recorded at fair value in our consolidated balance sheets:
Cash equivalents: Cash equivalents primarily consist of highly rated money market funds with maturities of three months or less and are purchased daily at par value with specified yield rates. Due to the high ratings and short-term nature of the funds, we designate all cash equivalents as Level I.
Fixed maturity securities, available-for-sale: Fair values of available-for-sale fixed maturity securities are based on quoted market prices, where available. These fair values are obtained primarily from third party pricing services, which generally use Level I or Level II inputs for the determination of fair value to facilitate fair value measurements and

-20-



disclosures. Level II securities primarily include United States Government securities, corporate securities, securities from states, municipalities and political subdivisions, mortgage-backed securities and certain other asset-backed securities. For securities not actively traded, the pricing services may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. We have controls in place to review the pricing services’ qualifications and procedures used to determine fair values. In addition, we periodically review the pricing services’ pricing methodologies, data sources and pricing inputs to ensure the fair values obtained are reasonable. Inputs that are often used in the valuation methodologies include, but are not limited to, broker quotes, benchmark yields, credit spreads, default rates and prepayment speeds. We also have certain fixed maturity securities, primarily corporate debt securities, which are designated Level III securities. For these securities, the valuation methodologies may incorporate broker quotes or discounted cash flow analyses using assumptions for inputs such as expected cash flows, benchmark yields, credit spreads, default rates and prepayment speeds that are not observable in the markets.
Equity securities: Fair values of equity securities are generally designated as Level I and are based on quoted market prices. For certain equity securities, quoted market prices for the identical security are not always available and the fair value is estimated by reference to similar securities for which quoted prices are available. These securities are designated Level II. We also have certain equity securities, including private equity securities, for which the fair value is estimated based on each security’s current condition and future cash flow projections. Such securities are designated Level III. The fair values of these private equity securities are generally based on either broker quotes or discounted cash flow projections using assumptions for inputs such as the weighted-average cost of capital, long-term revenue growth rates and earnings before interest, taxes, depreciation and amortization, and/or revenue multiples that are not observable in the markets.
Other invested assets, current: Other invested assets, current include securities held in rabbi trusts that are classified as trading. These securities are designated Level I securities, as fair values are based on quoted market prices.
Securities lending collateral: Fair values of securities lending collateral are based on quoted market prices, where available. These fair values are obtained primarily from third party pricing services, which generally use Level I or Level II inputs for the determination of fair value, to facilitate fair value measurements and disclosures.
Derivatives: Fair values are based on the quoted market prices by the financial institution that is the counterparty to the derivative transaction. We independently verify prices provided by the counterparties using valuation models that incorporate observable market inputs for similar derivative transactions. Derivatives are designated as Level II securities. Derivatives presented within the fair value hierarchy table below are presented on a gross basis and not on a master netting basis by counterparty.

-21-



A summary of fair value measurements by level for assets and liabilities measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017 is as follows:
 
Level I
 
Level II
 
Level III
 
Total
September 30, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
1,828

 
$

 
$

 
$
1,828

Fixed maturity securities, available-for-sale:
 
 
 
 
 
 
 
United States Government securities

 
625

 

 
625

Government sponsored securities

 
101

 

 
101

States, municipalities and political subdivisions, tax-exempt

 
4,964

 

 
4,964

Corporate securities
2

 
7,947

 
307

 
8,256

Residential mortgage-backed securities

 
2,689

 
4

 
2,693

Commercial mortgage-backed securities

 
66

 

 
66

Other securities

 
1,164

 
17

 
1,181

Total fixed maturity securities, available-for-sale
2

 
17,556

 
328

 
17,886

Equity securities:


 


 


 


Exchange traded funds
487

 

 

 
487

Fixed maturity mutual funds

 
611

 

 
611

Common equity securities
808

 
82

 

 
890

Private equity securities

 

 
318

 
318

Total equity securities
1,295

 
693

 
318

 
2,306

Other invested assets, current
21

 

 

 
21

Securities lending collateral
408

 
333

 

 
741

Derivatives

 
10

 

 
10

Total assets
$
3,554

 
$
18,592

 
$
646

 
$
22,792

Liabilities:
 
 
 
 
 
 
 
Derivatives
$

 
$
(21
)
 
$

 
$
(21
)
Total liabilities
$

 
$
(21
)
 
$

 
$
(21
)
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
1,956

 
$

 
$

 
$
1,956

Fixed maturity securities, available-for-sale:
 
 
 
 
 
 
 
United States Government securities

 
645

 

 
645

Government sponsored securities

 
90

 

 
90

States, municipalities and political subdivisions, tax-exempt

 
6,035

 

 
6,035

Corporate securities
25

 
7,232

 
229

 
7,486

Residential mortgage-backed securities

 
2,534

 
5

 
2,539

Commercial mortgage-backed securities

 
79

 

 
79

Other securities
75

 
973