Notes to Consolidated Financial Statements
December 31, 2017
(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.
We are one of the largest health benefits companies in the United States in terms of medical membership, serving
40.2
medical members through our affiliated health plans as of
December 31, 2017
.
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, underwriting, 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 healthcare. We also provide services to the federal government in connection with the Federal Employee Program
®
, or FEP
®
.
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 varying counties as BCBS, Blue Cross or Empire BlueCross BlueShield HealthPlus)
, 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 (in our New York service areas). We also conduct business through arrangements with other BCBS licensees in Louisiana, South Carolina and western New York. Through our AMERIGROUP Corporation, or Amerigroup, subsidiary and other subsidiaries, we conduct business in Florida, Georgia, Iowa, Kansas, Maryland, Nevada, New Jersey, New Mexico, Tennessee, Texas, Washington and Washington, D.C. In addition, we conduct business through our
Simply Healthcare Holdings, Inc., or Simply Healthcare, and HealthSun Health Plans, Inc., or HealthSun,
subsidiaries in Florida. We also serve customers throughout the country as HealthLink, UniCare, and in certain Arizona, California, Connecticut, Iowa, Nevada, Tennessee and Virginia markets through our CareMore Health Group, Inc., or CareMore, subsidiary. 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 consolidated financial statements include the accounts of Anthem and its subsidiaries and have been prepared in conformity with U.S. generally accepted accounting principles, or GAAP. All significant intercompany accounts and transactions have been eliminated in consolidation.
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 currency translation adjustments” in our consolidated statements of comprehensive income.
Reclassifications:
Certain prior year amounts have been reclassified to conform to the current year presentation.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Use of Estimates:
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents:
Cash and cash equivalents includes available cash and all highly liquid investments with maturities of three months or less when purchased. We control a number of bank accounts that are used exclusively to hold customer funds for the administration of customer benefits. At
December 31, 2017
and
2016
, we held
$91.2
and $
157.0
, respectively, of customer funds with an offsetting liability in other current liabilities.
Investments:
Certain Financial Accounting Standards Board, or FASB,
other-than-temporary impairment, or OTTI, guidance applies to fixed maturity securities and provides guidance on the recognition, presentation of, and disclosures for OTTIs. If a fixed maturity security is in an unrealized loss position and we have the intent to sell the fixed maturity security, or it is more likely than not that we will have to sell the fixed maturity security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is presented within the other-than-temporary impairment losses recognized in income line item on our consolidated statements of income. For impaired fixed maturity securities that we do not intend to sell or it is more likely than not that we will not have to sell such securities, but we expect that we will not fully recover the amortized cost basis, the credit component of the OTTI is presented within the other-than-temporary impairment losses recognized in income line item on our consolidated statements of income and the non-credit component of the OTTI is recognized in other comprehensive income. Furthermore, unrealized losses entirely caused by non-credit related factors related to fixed maturity securities for which we expect to fully recover the amortized cost basis continue to be recognized in accumulated other comprehensive loss.
The credit component of an OTTI is determined primarily by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed maturity security. The net present value is calculated by discounting our best estimate of projected future cash flows at the effective interest rate implicit in the fixed maturity security at the date of acquisition. For mortgage-backed and asset-backed securities, cash flow estimates are based on assumptions regarding the underlying collateral including prepayment speeds, vintage, type of underlying asset, geographic concentrations, default rates, recoveries and changes in value. For all other securities, cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings, and estimates regarding timing and amount of recoveries associated with a default.
The unrealized gains or losses on our current and long-term equity securities classified as available-for-sale are included in accumulated other comprehensive loss as a separate component of shareholders’ equity, unless the decline in value is deemed to be other-than-temporary and we do not have the intent and ability to hold such equity securities until their full cost can be recovered, in which case such equity securities are written down to fair value and the loss is charged to other-than-temporary impairment losses recognized in income.
We maintain various rabbi trusts to account for the assets and liabilities under certain deferred compensation plans. Under these plans, the participants can defer certain types of compensation and elect to receive a return on the deferred amounts based on the changes in fair value of various investment options, primarily a variety of mutual funds. We have corporate-owned life insurance policies on certain participants in the deferred compensation plans. The cash surrender value of the corporate-owned life insurance policies is reported in other invested assets, long-term, in the consolidated balance sheets. The remaining rabbi trust assets are generally invested according to the participant's investment election, and are classified as trading, which are reported in other invested assets, current, in the consolidated balance sheets.
We use the equity method of accounting for investments in companies in which our ownership interest enables us to influence the operating or financial decisions of the investee company. Our proportionate share of equity in net income of these unconsolidated affiliates is reported within net investment income.
For asset-backed securities included in fixed maturity securities, we recognize income using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The net investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the securities. Such adjustments are reported within net investment income.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Investment income is recorded when earned. 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.
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. Under FASB guidance related to accounting for transfers and servicing of financial assets and extinguishments of liabilities, we recognize the collateral as an asset, which is reported as securities lending collateral on our consolidated balance sheets and we record a corresponding liability for the obligation to return the collateral to the borrower, which is reported as securities lending payable. The securities on loan are reported in the applicable investment category on our consolidated balance sheets. Unrealized gains or losses on securities lending collateral are included in accumulated other comprehensive loss as a separate component of shareholders’ equity. 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 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.
Premium and Self-Funded Receivables:
Premium and self-funded receivables include the uncollected amounts from fully-insured and self-funded groups, individuals and government programs, and are reported net of an allowance for doubtful accounts of
$455.3
and
$333.5
at
December 31, 2017
and
2016
, respectively. The allowance for doubtful accounts is based on historical collection trends and our judgment regarding the ability to collect specific accounts.
Other Receivables:
Other receivables include pharmacy rebates, provider advances, claims recoveries, reinsurance, proceeds due from brokers on investment trades, other government receivables and other miscellaneous amounts due to us. These receivables are reported net of an allowance for doubtful accounts of
$305.6
and
$197.6
at
December 31, 2017
and
2016
, respectively, which is based on historical collection trends and our judgment regarding the ability to collect specific accounts.
Income Taxes:
We file a consolidated income tax return. Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement and tax return basis of assets and liabilities based on enacted tax rates and laws. The deferred tax benefits of the deferred tax assets are recognized to the extent realization of such benefits is more likely than not. Deferred income tax expense or benefit generally represents the net change in deferred income tax assets and liabilities during the year, excluding the impact from amounts initially recorded for business combinations, if any, and amounts recorded to accumulated other comprehensive loss. Current income tax expense represents the tax consequences of revenues and expenses currently taxable or deductible on various income tax returns for the year reported.
We account for income tax contingencies in accordance with FASB guidance that contains a model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing a minimum recognition threshold, which all income tax positions must achieve before being recognized in the financial statements.
Property and Equipment:
Property and equipment is recorded at cost, net of accumulated depreciation. Depreciation is computed principally by the straight-line method over estimated useful lives ranging from
fifteen
to
thirty-nine years
for buildings and improvements,
three
to
five years
for computer equipment and software, and the lesser of the remaining life of the building lease, if any, or
seven years
for furniture and other equipment. Leasehold improvements are depreciated over the term of the related lease. Certain costs related to the development or purchase of internal-use software are capitalized and amortized over five years.
Goodwill and Other Intangible Assets:
FASB guidance requires business combinations to be accounted for using the acquisition method of accounting and it also specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill. Goodwill represents the excess of cost of acquisition over the fair value of net assets acquired. Other intangible assets represent the values assigned to customer relationships, provider and hospital networks, Blue Cross and Blue Shield and other trademarks, licenses, non-compete and other agreements. Goodwill and other intangible assets are allocated to reportable segments based on the relative fair value of the components of the businesses acquired.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment at least annually. We complete our annual impairment tests of existing goodwill and other intangible assets with indefinite lives during the fourth quarter of each year. Certain interim impairment tests are also performed when potential impairment indicators exist or changes in our business or other triggering events occur. Goodwill and other intangible assets are allocated to reporting units for purposes of the annual goodwill impairment test. In addition, certain other intangible assets with indefinite lives, such as trademarks, are also tested separately.
FASB guidance allows for qualitative assessments of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount for purposes of a goodwill impairment analysis and whether it is more likely than not that an indefinite-lived intangible asset is impaired for purposes of an indefinite-lived intangible asset impairment analysis. Quantitative analysis must be performed if qualitative analyses are not conclusive. Entities also have the option to bypass the assessment of qualitative factors and proceed directly to performing quantitative analyses. We begin our annual tests with quantitative analyses. Our impairment tests require us to make assumptions and judgments regarding the estimated fair value of our reporting units, including goodwill and other intangible assets with indefinite lives. Estimated fair values developed based on our assumptions and judgments might be significantly different if other reasonable assumptions and estimates were to be used.
Fair value for purposes of the goodwill impairment test is calculated using a blend of the projected income and market valuation approaches. The projected income approach is developed using assumptions about future revenue, expenses and net income derived from our internal planning process. Our assumed discount rate is based on our industry’s weighted-average cost of capital and reflects volatility associated with the cost of equity capital. Market valuations include market comparisons to publicly traded companies in our industry and are based on observed multiples of certain measures including revenue; earnings before interest, taxes, depreciation and amortization, or EBITDA; and book value of invested capital. A goodwill impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, the fair value of a reporting unit is determined and compared to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation on a business acquisition, at the impairment test date.
The fair value of indefinite-lived intangible assets is estimated and compared to the carrying value. We estimate the fair value of indefinite-lived intangible assets using a projected income approach. We recognize an impairment loss when the estimated fair value of indefinite-lived intangible assets is less than the carrying value. If significant impairment indicators are noted relative to other intangible assets subject to amortization, we may be required to record impairment losses against future income.
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.
Derivatives embedded within non-derivative instruments, such as options embedded in convertible fixed maturity securities, are bifurcated from the host instrument when the embedded derivative is not clearly and closely related to the host instrument. Our use of derivatives is limited by statutes and regulations promulgated by the various regulatory bodies to which we are subject, and by our own derivative policy. Our derivative use is generally limited to hedging purposes, on an economic basis, and we generally do not use derivative instruments for speculative purposes.
We have exposure to economic losses due to interest rate risk arising from changes in the level or volatility of interest rates. We attempt to mitigate our exposure to interest rate risk through active portfolio management, including rebalancing our existing portfolios of assets and liabilities, as well as changing the characteristics of investments to be purchased or sold in the future. In addition, derivative financial instruments are used to modify the interest rate exposure of certain liabilities or forecasted transactions. These strategies include the use of interest rate swaps and forward contracts, which are used to lock-in interest rates or to hedge, on an economic basis, interest rate risks associated with variable rate debt. We have used these types of instruments as designated hedges against specific liabilities.
All investments in derivatives are recorded as assets or liabilities at fair value. If certain correlation, hedge effectiveness and risk reduction criteria are met, a derivative may be specifically designated as a hedge of exposure to changes in fair value or cash flow. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
the nature of any hedge designation thereon. Amounts excluded from the assessment of hedge effectiveness, if any, as well as the ineffective portion of the gain or loss, are reported in results of operations immediately. If the derivative is not designated as a hedge, the gain or loss resulting from the change in the fair value of the derivative is recognized in results of operations in the period of change. Cash flows associated with the settlement of non-designated derivatives are shown on a net basis in investing activity in our consolidated statements of cash flow.
From time to time, we may also purchase derivatives to hedge, on an economic basis, our exposure to foreign currency exchange fluctuations associated with the operations of certain of our subsidiaries. We generally use futures or forward contracts for these transactions. We generally do not designate these contracts as hedges and, accordingly, the changes in fair value of these derivatives are recognized in results of operations immediately.
Credit exposure associated with non-performance by the counterparties to derivative instruments is generally limited to the uncollateralized fair value of the asset related to instruments recognized in the consolidated balance sheets. We attempt to mitigate the risk of non-performance by selecting counterparties with high credit ratings and monitoring their creditworthiness and by diversifying derivatives among multiple counterparties. At
December 31, 2017
, we believe there were no material concentrations of credit risk with any individual counterparty.
We generally enter into master netting agreements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. Certain of our derivative agreements also contain credit support provisions that require us or the counterparty to post collateral if there are declines in the derivative fair value or our credit rating. The derivative assets and derivative liabilities are reported at their fair values net of collateral and netting by the counterparty.
Retirement Benefits:
We recognize the funded status of pension and other postretirement benefit plans on the consolidated balance sheets based on fiscal-year-end measurements of plan assets and benefit obligations. Prepaid pension benefits represent prepaid costs related to defined benefit pension plans and are reported with other noncurrent assets. Postretirement benefits represent outstanding obligations for retiree medical, life, vision and dental benefits. Liabilities for pension and other postretirement benefits are reported with current and noncurrent liabilities based on the amount by which the actuarial present value of benefits payable in the next twelve months included in the benefit obligation exceeds the fair value of plan assets.
We determine the expected return on plan assets using the calculated value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner over three years. We apply a corridor approach to amortize unrecognized actuarial gains or losses. Under this approach, only accumulated net actuarial gains or losses in excess of 10% of the greater of the projected benefit obligation or the fair value of plan assets are amortized over the average remaining service or lifetime of the workforce as a component of net periodic benefit cost.
The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year based on our most recent measurement date. At the December 31, 2017 measurement date, we changed the discount rate setting methodology from the single equivalent discount rate to the annual spot rate approach. Under the spot rate approach, individual spot rates from a full yield curve of published rates are used to discount each plan's cash flows to determine the plan's obligations. The spot rate approach produces a more precise measure of service and interest cost, and results in obligations that are equal at the measurement date under both methods.
Medical Claims Payable:
Liabilities for medical claims payable include estimated provisions for incurred but not paid claims on an undiscounted basis, as well as estimated provisions for expenses related to the processing of claims. Incurred but not paid claims include (1) an estimate for claims that are incurred but not reported, as well as claims reported to us but not yet processed through our systems; and (2) claims reported to us and processed through our systems but not yet paid.
Liabilities for both claims incurred but not reported and reported but not yet processed through our systems are determined in the aggregate, employing actuarial methods that are commonly used by health insurance actuaries and meet Actuarial Standards of Practice. Actuarial Standards of Practice require that the claim liabilities be appropriate under moderately adverse circumstances. We determine the amount of the liability for incurred but not paid claims by following a detailed actuarial process that uses both historical claim payment patterns as well as emerging medical cost trends to project our best estimate of claim liabilities. Under this process, historical paid claims data is formatted into “claim triangles,” which compare claim incurred dates to the dates of claim payments. This information is analyzed to create “completion factors” that represent the average percentage of total incurred claims that have been paid through a given date after being incurred.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Completion factors are applied to claims paid through the period-end date to estimate the ultimate claim expense incurred for the period. Actuarial estimates of incurred but not paid claim liabilities are then determined by subtracting the actual paid claims from the estimate of the ultimate incurred claims.
For the most recent incurred months (typically the most recent two months), the percentage of claims paid for claims incurred in those months is generally low. This makes the completion factor methodology less reliable for such months. Therefore, incurred claims for recent months are not projected from historical completion and payment patterns; rather, they are projected by estimating the claims expense for those months based on recent claims expense levels and healthcare trend levels, or “trend factors.”
We regularly review and set assumptions regarding cost trends and utilization when initially establishing claim liabilities. We continually monitor and adjust the claims liability and benefit expense based on subsequent paid claims activity. If it is determined that our assumptions regarding cost trends and utilization are materially different than actual results, our income statement and financial position could be impacted in future periods.
Premium deficiencies are recognized when it is probable that expected claims and administrative expenses will exceed future premiums on existing medical insurance contracts without consideration of investment income. Determination of premium deficiencies for longer duration life and disability contracts includes consideration of investment income. For purposes of premium deficiencies, contracts are deemed to be either short or long duration and are grouped in a manner consistent with our method of acquiring, servicing and measuring the profitability of such contracts. Once established, premium deficiencies are released commensurate with actual claims experience over the remaining life of the contract. No premium deficiencies were established at
December 31, 2017
or
2016
.
Benefit expense includes incurred medical claims as well as quality improvement expenses for our fully-insured members. Quality improvement activities are those designed to improve member health outcomes, prevent hospital readmissions and improve patient safety. They also include expenses for wellness and health promotion provided to our members.
Reserves for Future Policy Benefits:
Reserves for future policy benefits include liabilities for life and long-term disability insurance policy benefits based upon interest, mortality and morbidity assumptions from published actuarial tables, modified based upon our experience. Future policy benefits also include liabilities for insurance policies for which some of the premiums received in earlier years are intended to pay anticipated benefits to be incurred in future years. Future policy benefits are continually monitored and reviewed, and when reserves are adjusted, differences are reflected in benefit expense.
The current portion of reserves for future policy benefits relates to the portion of such reserves that we expect to pay within
one year
. We believe that our liabilities for future policy benefits, along with future premiums received are adequate to satisfy our ultimate benefit liability; however, these estimates are inherently subject to a number of variable circumstances. Consequently, the actual results could differ materially from the amounts recorded in our consolidated financial statements.
Other Policyholder Liabilities:
Other policyholder liabilities include rate stabilization reserves associated with retrospectively rated insurance contracts and certain case-specific reserves. Other policyholder liabilities also includes liabilities for premium refunds based upon the minimum medical loss ratio, or MLR, the relative health risk of members, or other contractual or regulatory requirements. Rate stabilization reserves represent accumulated premiums that exceed what customers owe us based on actual claim experience. The timing of payment of these retrospectively rated refunds is based on the contractual terms with our customers and can vary from period to period based on the specific contractual requirements.
We are required to meet certain minimum MLR thresholds prescribed by the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, as amended, or collectively, the ACA. If we do not meet or exceed the minimum MLR thresholds specified by the ACA, we are required to pay rebates to certain customers. Minimum MLR rebates are calculated by applicable line of business (Large Group, Small Group, Individual and Medicare) and legal entity in accordance with regulations issued by the Department of Health and Human Services, or HHS. Such calculations are made using estimated calendar year medical loss expense and premiums, as defined by HHS.
We follow HHS guidelines for determining the types of expenses that may be included in our minimum MLR rebate calculations, which differ from benefit expense and premiums as reported in our consolidated financial statements prepared in conformity with GAAP. Certain amounts reported as expense in our GAAP basis consolidated financial statements may be
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
reported as a reduction of premiums in accordance with HHS regulations. In addition, profit amounts included in our payments to third party administrative service providers are recorded as benefit expense in our consolidated GAAP financial statements while HHS does not allow for the inclusion of these expenses within the medical loss expense for purposes of calculating minimum MLR.
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 ACA minimum MLR rebates, risk adjustment, reinsurance and risk corridor or contractual premium stabilization programs. Premium payments from contracted government agencies are based on eligibility lists produced by the government agencies. Premiums related to the unexpired contractual coverage periods are reflected in the accompanying consolidated balance sheets as unearned income. Premiums include revenue from retrospectively rated contracts where revenue is based on the estimated loss experience of the contract. Premium revenue includes an adjustment for retrospectively rated refunds based on an estimate of incurred claims. Premium rates for certain lines of business are subject to approval by the Department of Insurance of each respective state. Additionally, delays in annual premium rate changes from contracted government agencies require that we defer the recognition of any increases to the period in which the premium rates become final. The value of the impact can be significant in the period in which it is recognized depending on the magnitude of the premium rate increase, the membership to which it applies and the length of the delay between the effective date of the rate increase and the final contract date. Premium rate decreases are recognized in the period the change in premium rate becomes effective and the change in the rate is known, which may be prior to the period when the contract amendment affecting the rate is finalized.
Administrative fees include 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. In addition, administrative fees include amounts received for the administration of Medicare or certain other government programs. Under our self-funded arrangements, revenue is recognized as administrative services are performed. All benefit payments under these programs are excluded from benefit expense.
Share-Based Compensation:
Our current compensation philosophy provides for share-based compensation, including stock options, restricted stock awards and an employee stock purchase plan. Stock options are granted for a fixed number of shares with an exercise price at least equal to the fair value of the shares at the date of the grant. Restricted stock awards are issued at the fair value of the stock on the grant date. The employee stock purchase plan allows for a purchase price per share which is
95%
of the fair value of a share of common stock on the last trading day of the plan quarter. The employee stock purchase plan discount is not recognized as compensation expense based on GAAP guidance. All other share-based payments to employees are recognized as compensation expense in the income statement based on their fair values. Additionally, excess tax benefits, which result from actual tax benefits realized when awards vest or options are exercised exceeding deferred tax benefits previously recognized based on grant date fair value, are recognized as tax benefits in the income statement. Our share-based employee compensation plans and assumptions are described in Note 14, “Capital Stock.” Also see "
Recently Adopted Accounting Guidance"
within this Note 2 for reference to accounting changes adopted related to share-based compensation.
Advertising and Marketing Costs
:
We use print, broadcast and other advertising to promote our products and to develop our corporate image. We market our products through direct marketing activities and an extensive network of independent agents, brokers and retail partnerships for Individual and Medicare customers, and for certain Local Group customers with a smaller employee base. Products for National Accounts and Local Group customers with a larger employee base are generally sold through independent brokers or consultants retained by the customer and working with industry specialists from our in-house sales force. In the Individual and Small Group markets we offer products through state or federally facilitated marketplaces, or public exchanges, and off-exchange products. The cost of advertising and marketing for product promotion is expensed as incurred while advertising and marketing costs associated with our corporate image is expensed when first aired. Total advertising and marketing expense was
$337.9
,
$246.2
and
$313.5
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Health Insurance Provider Fee
:
The ACA imposed an annual Health Insurance Provider Fee, or HIP Fee,
on health insurers that write certain types of health insurance on U.S. risks. The annual HIP Fee is allocated to health insurers based on the ratio of the amount of an insurer's net premium revenues written during the preceding calendar year to an adjusted amount of health insurance for all U.S. health risk for those certain lines of business written during the preceding calendar year. We
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
record our estimated liability for the HIP Fee in full at the beginning of the year with a corresponding deferred asset that is amortized on a straight-line basis to general and administrative expense. The final calculation and payment of the annual HIP Fee occurs in the third quarter each year. The HIP Fee is non-deductible for federal income tax purposes. We price our affected products to cover the increased general and administrative and tax expenses associated with the HIP Fee. The total amount due from allocations to health insurers was
$11,300.0
for each of 2015 and 2016, was suspended for 2017, has resumed and increased to
$14,300.0
for 2018 and is suspended for 2019. For the years ended December 31, 2016 and 2015, we recognized
$1,176.3
and
$1,207.5
, respectively, as general and administrative expense related to the HIP Fee. There was no corresponding expense for 2017 due to the suspension of the HIP Fee for 2017.
Earnings per Share:
Earnings per share amounts, on a basic and diluted basis, have been calculated based upon the weighted-average common shares outstanding for the period.
Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share may include the dilutive effect of stock options, restricted stock, convertible debentures and Equity Units, using the treasury stock method. See Note 12, “Debt,” for a description of our Equity Units. The treasury stock method assumes exercise of stock options and vesting of restricted stock, with the assumed proceeds used to purchase common stock at the average market price for the period. The difference between the number of shares assumed issued and number of shares assumed purchased represents the dilutive shares.
Recently Adopted Accounting Guidance:
In August 2017, the FASB issued Accounting Standards Update No. 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
, or ASU 2017-12. This update amends the hedge accounting recognition and presentation requirements in Topic 815 with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. The update also makes certain targeted improvements to simplify the application of the hedge accounting guidance and provides several transition elections. We adopted ASU 2017-12 on October 1, 2017. The adoption of ASU 2017-12 did not have a material impact on our consolidated financial position, results of operations or cash flows.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, or ASU 2016-09. The amendments in this update simplify several aspects of accounting for and reporting on share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. We adopted the amendments in ASU 2016-09 on January 1, 2017. We continue to estimate forfeitures expected to occur in determining stock compensation recognized in each period. We prospectively recognized tax benefits of
$35.6
, or
$0.13
per diluted share, for the year ended December 31, 2017 in our consolidated statements of income, which previously would have been recorded to additional paid-in capital. In addition, we prospectively recognized excess tax benefits as an operating activity within our consolidated statement of cash flows for the year ended December 31, 2017. Finally, we retrospectively recognized taxes paid on our employees' behalf through the withholding of common stock as a financing activity within our consolidated statements of cash flows for the years ended December 31, 2017, 2016 and 2015.
In May 2015, the FASB issued Accounting Standards Update No. 2015-09,
Financial Services—Insurance (Topic 944): Disclosures about Short-Duration Contracts,
or ASU 2015-09. This update requires new and expanded disclosures in interim and annual reporting periods related to the liability for unpaid claims and claim adjustment expenses for short-duration insurance contracts. ASU 2015-09 became effective for our annual reporting period ended December 31, 2016, and interim reporting periods beginning January 1, 2017. The adoption of ASU 2015-09 did not have an impact on our consolidated financial position, results of operations or cash flows.
In April 2015, the FASB issued Accounting Standards Update No. 2015-05,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
, or ASU 2015-05. This update provides guidance to help entities determine whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software or as a service contract. ASU 2015-05 became effective January 1, 2016 and we elected to adopt the provisions of the new guidance prospectively to all arrangements entered into or materially modified on or after January 1, 2016. The adoption of ASU 2015-05 did not have an impact on our consolidated financial position, results of operations or cash flows.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
In February 2015, the FASB issued Accounting Standards Update No. 2015-02,
Consolidation (Topic 810): Amendments to the Consolidation Analysis
, or ASU 2015-02. This update amended the consolidation guidance by modifying the evaluation criteria for whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, eliminating the presumption that a general partner should consolidate a limited partnership, and affecting the consolidation analysis of reporting entities that are involved with variable interest entities. We adopted the provisions of ASU 2015-02 effective January 1, 2016 and re-evaluated all legal entity investments under the revised consolidation model. The adoption of ASU 2015-02 did not have a material impact on our consolidated financial position, results of operations or cash flows.
Recent Accounting Guidance Not Yet Adopted:
In February 2018, the 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 do 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. The stranded tax effects in accumulated other comprehensive loss resulting from the remeasurement of our deferred tax balance was
$20.8
at December 31, 2017. For additional information, see Note 7, "Income Taxes." ASU 2018-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The guidance is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The adoption of ASU 2018-02 will not have a material impact on our consolidated financial position, 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. ASU 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The guidance is to be applied prospectively to an award modified on or after the adoption date. The adoption of ASU 2017-09 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
In March 2017, the FASB issued Accounting Standards Update No. 2017-08,
Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
, or ASU 2017-08. This update changes the amortization period for certain purchased callable debt securities held at a premium by shortening the amortization period for the premium to the earliest call date. Under current guidance, the premium is generally amortized over the contractual life of the instrument. ASU 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. Upon adoption, the amendments are to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of ASU 2017-08 is not expected to have a material 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 update requires entities to disaggregate the service cost component from the other components of the 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. In addition, the amendment allows only the service cost component to be eligible for asset capitalization. Upon adoption, the guidance on the presentation of the components of net periodic benefit cost in the income statement is to be applied retrospectively and the guidance limiting the capitalization of net periodic benefit cost in assets to the service cost component is to be applied prospectively. ASU 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The adoption of ASU 2017-07 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
In January 2017, the FASB issued Accounting Standards Update No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, or ASU 2017-04. This update removes Step 2 of the goodwill impairment test under current guidance, which requires a hypothetical purchase price allocation. The new guidance requires an impairment charge to be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. Upon adoption, the guidance is to be applied prospectively. ASU 2017-04 is effective for us on January 1, 2020, with early adoption permitted. The adoption of ASU 2017-04 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
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. The amendments in ASU 2016-20 provide technical corrections to various implementation examples and clarifying guidance on the treatment of capitalized advertising costs, impairment testing of capitalized contract costs, performance obligation disclosures and scope exceptions. The amendments in ASU 2016-12 provide clarifying guidance on assessing collectability; noncash consideration; presentation of sales taxes; and transition. The amendments in ASU 2016-10 provide clarifying guidance on the materiality and evaluation of performance obligations; treatment of shipping and handling costs; and determining whether an entity's promise to grant a license provides a customer with either a right to use or a right to access an entity's intellectual property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. Collectively, these updates will 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. The adoption of ASU 2016-20, ASU 2016-12, ASU 2016-10 and ASU 2016-08 is to coincide with an entity's adoption of ASU 2014-09, which we will adopt for interim and annual reporting periods beginning after December 15, 2017. Upon the effective date, these updates will supersede almost all existing revenue recognition guidance under GAAP, with certain exceptions, including an exception for our premium revenues, recorded on the premiums line item on our consolidated statements of income, which 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 will be subject to these Accounting Standards Updates are recorded in the administrative fees and other revenue line items on our consolidated statements of income and represent approximately
6.0%
of our consolidated total operating revenue. The new guidance permits adoption through either a full retrospective approach or a modified retrospective approach with a cumulative effect adjustment to retained earnings. We will use the modified retrospective approach upon adoption. The adoption of these updates will not have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures.
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. The guidance will be applied retrospectively and is effective for annual periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. We are currently evaluating the effects the adoption of ASU 2016-18 will have on our consolidated statements of cash flows, if any. ASU 2016-18 will 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. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. We are currently evaluating
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
the effects the adoption of ASU 2016-15 will have on our consolidated statements of cash flows, if any. ASU 2016-15 will not impact our results of operations or consolidated financial position.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,
or ASU 2016-13. This update introduces a current expected credit loss model for measuring expected credit losses for certain types of financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. ASU 2016-13 replaces the current incurred loss model for measuring expected credit losses, requires expected losses on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities, and provides for additional disclosure requirements. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted for interim and annual reporting periods beginning after December 15, 2018. We are currently evaluating the effects the adoption of ASU 2016-13 will have on our consolidated financial statements, results of operations and cash flows.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases (Topic 842)
, or ASU 2016-02. Upon the effective date, ASU 2016-02 will supersede the current lease guidance in Topic 840,
Leases
. 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. The guidance is required to be applied using 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. We 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 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. Under current guidance, changes in fair value for investments of this nature are recognized in accumulated other comprehensive loss as a component of shareholders’ equity. 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. ASU 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. At December 31, 2017, we recognized
$507.2
of unrealized gains on equity securities that will be reclassified from accumulated other comprehensive loss to retained earnings effective January 1, 2018. Beginning with the first quarter of 2018, results of operations will include any change in fair value in the period of change.
There were no other new accounting pronouncements that were issued or became effective during the year ended
December 31, 2017
that had, or are expected to have, a material impact on our financial position, results of operations, cash flows or financial statement disclosures.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
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. Through its Medicare Advantage Plans, America’s 1st Choice currently serves approximately one hundred and thirty thousand members in twenty-five Florida and three South Carolina counties. The acquisition of America's 1st Choice aligns with our plans for continued growth in the Medicare Advantage and Special Needs populations. We are currently evaluating the fair value of the assets acquired and liabilities assumed. Any excess of the consideration transferred over the fair value of net assets acquired will be recognized as goodwill and allocated to our Government Business segment.
Acquisition of HealthSun
On December 21, 2017, we completed our acquisition of HealthSun, which serves approximately forty thousand members in the state of Florida through its Medicare Advantage Plans, 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 $
1,643.4
, at December 31, 2017, 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. Any subsequent adjustments made to the assets acquired or liabilities assumed during the measurement period will be recorded as an adjustment to goodwill.
The preliminary fair value of the net assets acquired from HealthSun includes
$572.0
of other intangible assets at December 31, 2017, which primarily consist of finite-lived customer relationships with amortization periods ranging from
7
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.
Acquisition of Simply Healthcare
On February 17, 2015, we completed our acquisition of Simply Healthcare, a leading managed care company for people enrolled in Medicaid and Medicare programs in Florida. This acquisition aligns with our strategy for continued growth in our Government Business segment. The results of operations of Simply Healthcare are included in our consolidated financial statements within our Government Business segment for the period following February 17, 2015. The pro forma effects of this acquisition for prior periods were not material to our consolidated results of operations.
Termination of Agreement and Plan of Merger with Cigna Corporation
On July 24, 2015, we and Cigna Corporation, or Cigna, announced that we entered into an Agreement and Plan of Merger, or Cigna Merger Agreement, dated as of July 23, 2015, to acquire all outstanding shares of Cigna. On May 12, 2017, we delivered to Cigna a notice terminating the Cigna Merger Agreement. For additional information, see Note 13, “Commitments and Contingencies -
Litigation.
”
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
4. Investments
A summary of current and long-term investments, available-for-sale, at
December 31, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Credit
Component of
OTTIs 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
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
United States Government securities
|
$
|
649.0
|
|
|
$
|
2.2
|
|
|
$
|
(5.0
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
645.5
|
|
|
$
|
—
|
|
Government sponsored securities
|
90.3
|
|
|
0.3
|
|
|
(0.1
|
)
|
|
(0.4
|
)
|
|
90.1
|
|
|
—
|
|
States, municipalities and political subdivisions, tax-exempt
|
5,854.6
|
|
|
192.6
|
|
|
(5.0
|
)
|
|
(7.3
|
)
|
|
6,034.9
|
|
|
—
|
|
Corporate securities
|
7,362.8
|
|
|
165.8
|
|
|
(30.2
|
)
|
|
(12.6
|
)
|
|
7,485.8
|
|
|
(0.3
|
)
|
Residential mortgage-backed securities
|
2,520.0
|
|
|
38.5
|
|
|
(8.0
|
)
|
|
(11.6
|
)
|
|
2,538.9
|
|
|
—
|
|
Commercial mortgage-backed securities
|
80.1
|
|
|
0.7
|
|
|
(0.1
|
)
|
|
(2.0
|
)
|
|
78.7
|
|
|
—
|
|
Other securities
|
1,053.7
|
|
|
14.4
|
|
|
(2.4
|
)
|
|
(1.5
|
)
|
|
1,064.2
|
|
|
—
|
|
Total fixed maturity securities
|
17,610.5
|
|
|
414.5
|
|
|
(50.8
|
)
|
|
(36.1
|
)
|
|
17,938.1
|
|
|
$
|
(0.3
|
)
|
Equity securities
|
3,124.8
|
|
|
525.2
|
|
|
(18.0
|
)
|
|
—
|
|
|
3,632.0
|
|
|
|
Total investments, available-for-sale
|
$
|
20,735.3
|
|
|
$
|
939.7
|
|
|
$
|
(68.8
|
)
|
|
$
|
(36.1
|
)
|
|
$
|
21,570.1
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
United States Government securities
|
$
|
561.7
|
|
|
$
|
2.5
|
|
|
$
|
(5.7
|
)
|
|
$
|
—
|
|
|
$
|
558.5
|
|
|
$
|
—
|
|
Government sponsored securities
|
40.1
|
|
|
0.3
|
|
|
(0.3
|
)
|
|
(0.1
|
)
|
|
40.0
|
|
|
—
|
|
States, municipalities and political subdivisions, tax-exempt
|
6,024.6
|
|
|
139.1
|
|
|
(55.2
|
)
|
|
(3.2
|
)
|
|
6,105.3
|
|
|
(3.8
|
)
|
Corporate securities
|
8,011.7
|
|
|
159.5
|
|
|
(49.5
|
)
|
|
(27.1
|
)
|
|
8,094.6
|
|
|
(3.4
|
)
|
Residential mortgage-backed securities
|
1,916.9
|
|
|
32.3
|
|
|
(15.3
|
)
|
|
(4.6
|
)
|
|
1,929.3
|
|
|
—
|
|
Commercial mortgage-backed securities
|
216.8
|
|
|
1.2
|
|
|
(0.3
|
)
|
|
(3.4
|
)
|
|
214.3
|
|
|
—
|
|
Other securities
|
744.6
|
|
|
6.4
|
|
|
(1.5
|
)
|
|
(4.0
|
)
|
|
745.5
|
|
|
—
|
|
Total fixed maturity securities
|
17,516.4
|
|
|
341.3
|
|
|
(127.8
|
)
|
|
(42.4
|
)
|
|
17,687.5
|
|
|
$
|
(7.2
|
)
|
Equity securities
|
1,103.3
|
|
|
407.3
|
|
|
(10.7
|
)
|
|
—
|
|
|
1,499.9
|
|
|
|
Total investments, available-for-sale
|
$
|
18,619.7
|
|
|
$
|
748.6
|
|
|
$
|
(138.5
|
)
|
|
$
|
(42.4
|
)
|
|
$
|
19,187.4
|
|
|
|
Equity securities include exchange traded fund, or ETF, securities, with an estimated fair value of
$1,300.3
and unrealized losses of
$1.2
, fixed maturity mutual funds with an estimated fair value of
$790.6
and unrealized gains of
$25.2
, and common and private equity securities and equity mutual funds with an aggregate estimated fair value of
$1,541.1
and unrealized gains of
$483.2
at December 31, 2017. ETF securities are highly marketable, liquid and trade on exchanges similar to common stock and have underlying fixed maturity indices spanning various subdivisions of bond types, credit and duration. Fixed maturity mutual funds have underlying assets which primarily consist of emerging market and international fixed maturity securities. Common equity securities and equity mutual funds primarily consist of investments in highly liquid and marketable securities traded on equity exchanges. Private equity securities generally consist of private investments in less liquid and marketable securities.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
For available-for-sale securities in an unrealized loss position at
December 31, 2017
and
2016
, 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
|
|
Number of
Securities
|
|
Estimated
Fair Value
|
|
Gross
Unrealized
Loss
|
|
Number of
Securities
|
|
Estimated
Fair Value
|
|
Gross
Unrealized
Loss
|
(Securities are whole amounts)
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
United States Government securities
|
36
|
|
|
$
|
450.4
|
|
|
$
|
(5.0
|
)
|
|
11
|
|
|
$
|
56.1
|
|
|
$
|
(0.7
|
)
|
Government sponsored securities
|
12
|
|
|
16.3
|
|
|
(0.1
|
)
|
|
16
|
|
|
14.8
|
|
|
(0.4
|
)
|
States, municipalities and political subdivisions, tax-exempt
|
414
|
|
|
641.4
|
|
|
(5.0
|
)
|
|
189
|
|
|
355.5
|
|
|
(7.3
|
)
|
Corporate securities
|
1,081
|
|
|
2,200.1
|
|
|
(30.2
|
)
|
|
279
|
|
|
329.7
|
|
|
(12.6
|
)
|
Residential mortgage-backed securities
|
445
|
|
|
1,050.3
|
|
|
(8.0
|
)
|
|
287
|
|
|
478.0
|
|
|
(11.6
|
)
|
Commercial mortgage-backed securities
|
7
|
|
|
13.7
|
|
|
(0.1
|
)
|
|
12
|
|
|
27.2
|
|
|
(2.0
|
)
|
Other securities
|
132
|
|
|
406.1
|
|
|
(2.4
|
)
|
|
20
|
|
|
35.8
|
|
|
(1.5
|
)
|
Total fixed maturity securities
|
2,127
|
|
|
4,778.3
|
|
|
(50.8
|
)
|
|
814
|
|
|
1,297.1
|
|
|
(36.1
|
)
|
Equity securities
|
386
|
|
|
1,070.5
|
|
|
(18.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total fixed maturity and equity securities
|
2,513
|
|
|
$
|
5,848.8
|
|
|
$
|
(68.8
|
)
|
|
814
|
|
|
$
|
1,297.1
|
|
|
$
|
(36.1
|
)
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
United States Government securities
|
51
|
|
|
$
|
359.9
|
|
|
$
|
(5.7
|
)
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Government sponsored securities
|
18
|
|
|
26.4
|
|
|
(0.3
|
)
|
|
1
|
|
|
1.0
|
|
|
(0.1
|
)
|
States, municipalities and political subdivisions, tax-exempt
|
1,022
|
|
|
1,849.0
|
|
|
(55.2
|
)
|
|
28
|
|
|
60.7
|
|
|
(3.2
|
)
|
Corporate securities
|
1,272
|
|
|
2,640.6
|
|
|
(49.5
|
)
|
|
203
|
|
|
422.8
|
|
|
(27.1
|
)
|
Residential mortgage-backed securities
|
430
|
|
|
905.8
|
|
|
(15.3
|
)
|
|
114
|
|
|
136.9
|
|
|
(4.6
|
)
|
Commercial mortgage-backed securities
|
19
|
|
|
61.2
|
|
|
(0.3
|
)
|
|
24
|
|
|
60.8
|
|
|
(3.4
|
)
|
Other securities
|
66
|
|
|
144.3
|
|
|
(1.5
|
)
|
|
55
|
|
|
133.8
|
|
|
(4.0
|
)
|
Total fixed maturity securities
|
2,878
|
|
|
5,987.2
|
|
|
(127.8
|
)
|
|
425
|
|
|
816.0
|
|
|
(42.4
|
)
|
Equity securities
|
452
|
|
|
233.1
|
|
|
(10.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total fixed maturity and equity securities
|
3,330
|
|
|
$
|
6,220.3
|
|
|
$
|
(138.5
|
)
|
|
425
|
|
|
$
|
816.0
|
|
|
$
|
(42.4
|
)
|
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
The amortized cost and fair value of available-for-sale fixed maturity securities at
December 31, 2017
, 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
|
$
|
496.2
|
|
|
$
|
496.5
|
|
Due after one year through five years
|
4,945.2
|
|
|
5,000.1
|
|
Due after five years through ten years
|
5,556.4
|
|
|
5,668.0
|
|
Due after ten years
|
4,012.6
|
|
|
4,155.9
|
|
Mortgage-backed securities
|
2,600.1
|
|
|
2,617.6
|
|
Total available-for-sale fixed maturity securities
|
$
|
17,610.5
|
|
|
$
|
17,938.1
|
|
The major categories of net investment income for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Fixed maturity securities
|
$
|
614.2
|
|
|
$
|
673.1
|
|
|
$
|
679.0
|
|
Equity securities
|
116.4
|
|
|
61.7
|
|
|
61.7
|
|
Cash equivalents
|
24.8
|
|
|
3.6
|
|
|
0.7
|
|
Other
|
152.2
|
|
|
84.9
|
|
|
(22.6
|
)
|
Investment income
|
907.6
|
|
|
823.3
|
|
|
718.8
|
|
Investment expense
|
(41.1
|
)
|
|
(43.8
|
)
|
|
(41.2
|
)
|
Net investment income
|
$
|
866.5
|
|
|
$
|
779.5
|
|
|
$
|
677.6
|
|
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Net realized investment gains/losses and the net change in unrealized appreciation/depreciation on investments for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Net realized gains (losses):
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
Gross realized gains from sales
|
$
|
136.6
|
|
|
$
|
209.9
|
|
|
$
|
135.9
|
|
Gross realized losses from sales
|
(54.9
|
)
|
|
(152.1
|
)
|
|
(182.1
|
)
|
Net realized gains (losses) from sales of fixed maturity securities
|
81.7
|
|
|
57.8
|
|
|
(46.2
|
)
|
Equity securities:
|
|
|
|
|
|
Gross realized gains from sales
|
140.1
|
|
|
205.5
|
|
|
233.4
|
|
Gross realized losses from sales
|
(16.9
|
)
|
|
(50.0
|
)
|
|
(45.1
|
)
|
Net realized gains from sales of equity securities
|
123.2
|
|
|
155.5
|
|
|
188.3
|
|
Other investments:
|
|
|
|
|
|
Gross realized gains from sales
|
0.3
|
|
|
7.2
|
|
|
5.0
|
|
Gross realized losses from sales
|
(4.9
|
)
|
|
(0.4
|
)
|
|
—
|
|
Net realized (losses) gains from sales of other investments
|
(4.6
|
)
|
|
6.8
|
|
|
5.0
|
|
Net realized gains
|
200.3
|
|
|
220.1
|
|
|
147.1
|
|
|
|
|
|
|
|
Other-than-temporary impairment losses recognized in income:
|
|
|
|
|
|
Fixed maturity securities
|
(3.7
|
)
|
|
(74.7
|
)
|
|
(31.2
|
)
|
Equity securities
|
(15.5
|
)
|
|
(22.3
|
)
|
|
(35.6
|
)
|
Other investments
|
(13.9
|
)
|
|
(18.4
|
)
|
|
(16.6
|
)
|
Other-than-temporary impairment losses recognized in income
|
(33.1
|
)
|
|
(115.4
|
)
|
|
(83.4
|
)
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on investments:
|
|
|
|
|
|
Fixed maturity securities
|
156.5
|
|
|
193.3
|
|
|
(372.9
|
)
|
Equity securities
|
110.6
|
|
|
6.9
|
|
|
(217.7
|
)
|
Other investments
|
(9.8
|
)
|
|
(2.5
|
)
|
|
(4.1
|
)
|
Total change in net unrealized gains (losses) on investments
|
257.3
|
|
|
197.7
|
|
|
(594.7
|
)
|
Deferred income tax (expense) benefit
|
(84.8
|
)
|
|
(79.8
|
)
|
|
210.4
|
|
Net change in net unrealized gains (losses) on investments
|
172.5
|
|
|
117.9
|
|
|
(384.3
|
)
|
|
|
|
|
|
|
Net realized gains on investments, other-than-temporary impairment losses recognized in income and net change in net unrealized gains (losses) on investments
|
$
|
339.7
|
|
|
$
|
222.6
|
|
|
$
|
(320.6
|
)
|
A primary objective in the management of our fixed maturity and equity portfolios is to maximize total return relative to underlying liabilities and respective liquidity needs. In achieving this goal, assets may be sold to take advantage of market conditions or other investment opportunities as well as tax considerations. Sales will generally produce realized gains and losses. 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) expectations 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.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Proceeds from fixed maturity securities, equity securities and other invested assets and the related gross realized gains and gross realized losses for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Proceeds
|
$
|
13,460.8
|
|
|
$
|
11,952.3
|
|
|
$
|
11,779.8
|
|
Gross realized gains
|
277.0
|
|
|
422.6
|
|
|
374.3
|
|
Gross realized losses
|
(76.7
|
)
|
|
(202.5
|
)
|
|
(227.2
|
)
|
A significant judgment in the valuation of investments is the determination of when an other-than-temporary decline in value has occurred. We follow a consistent and systematic process for recognizing impairments on securities that sustain other-than-temporary declines in value. We have established a committee responsible for the impairment review process. The decision to impair a security incorporates both quantitative criteria and qualitative information. The impairment review process considers a number of factors including, but not limited to: (i) the length of time and the extent to which the fair value has been less than book value, (ii) the financial condition and near term prospects of the issuer, (iii) our intent and ability to retain impaired investments for a period of time sufficient to allow for any anticipated recovery in fair value, (iv) our intent to sell or the likelihood that we will need to sell a fixed maturity security before recovery of its amortized cost basis, (v) whether the debtor is current on interest and principal payments, (vi) the reasons for the decline in value (i.e., credit event compared to liquidity, general credit spread widening, currency exchange rate or interest rate factors) and (vii) general market conditions and industry or sector specific factors. For securities that are deemed to be other-than-temporarily impaired, the security is adjusted to fair value and the resulting losses are recognized in the consolidated statements of income. The new cost basis of the impaired securities is not increased for future recoveries in fair value.
Other-than-temporary impairments recorded in
2017
,
2016
and
2015
were primarily the result of the continued credit deterioration on specific issuers in the bond markets and the fair values of certain equity securities remaining below cost for an extended period of time. There were no individually significant OTTI losses on investments by issuer during
2017
,
2016
or
2015
.
Investment securities are exposed to various risks, such as interest rate, market and credit. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of investment securities, it is possible that changes in these risk factors in the near term could have an adverse material impact on our results of operations or shareholders’ equity.
The changes in the amount of the credit component of OTTI losses on fixed maturity securities recognized in income, for which a portion of the OTTI losses was recognized in other comprehensive income, was not material for the years ended
December 31, 2017
,
2016
or
2015
.
At
December 31, 2017
and
2016
, no investments exceeded 10% of shareholders’ equity.
At
December 31, 2017
and
2016
, the carrying value of fixed maturity investments that did not produce income during the years then ended were
$8.8
and
$0.5
, respectively.
As of
December 31, 2017
and
2016
, we had committed approximately
$823.8
and
$789.1
, respectively, to future capital calls from various third-party investments in exchange for an ownership interest in the related entities.
At
December 31, 2017
and
2016
, securities with carrying values of approximately
$560.8
and
$524.4
, respectively, were deposited by our insurance subsidiaries under requirements of regulatory authorities.
Securities Lending Programs
The fair value of the collateral received at the time of the securities lending transactions amounted to
$454.4
and
$1,078.9
at
December 31, 2017
and
2016
, respectively. The value of the collateral represented
104%
and
103%
of the market value of the securities on loan at
December 31, 2017
and
2016
, respectively.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
The remaining contractual maturity of our securities lending agreements at
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overnight and Continuous
|
|
Less than 30 days
|
|
30-90 days
|
|
Greater Than 90 days
|
|
Total
|
Securities lending transactions
|
|
|
|
|
|
|
|
|
|
United States Government securities
|
$
|
16.3
|
|
|
$
|
—
|
|
|
$
|
6.1
|
|
|
$
|
—
|
|
|
$
|
22.4
|
|
Corporate securities
|
368.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
368.6
|
|
Equity securities
|
63.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
63.4
|
|
Total
|
$
|
448.3
|
|
|
$
|
—
|
|
|
$
|
6.1
|
|
|
$
|
—
|
|
|
$
|
454.4
|
|
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. At
December 31, 2017
, we had posted collateral of
$11.5
related to our derivative financial instruments. At
December 31, 2016
, we had posted collateral of
$92.4
and received collateral of
$591.1
related to our derivative financial instruments.
In addition to collateral posted for derivative transactions, from time to time, we may have cash on deposit to meet certain regulatory requirements, which are included in Cash and cash equivalents on the balance sheets. At
December 31, 2017
and
2016
, we had cash on deposit of
$51.0
and
$405.3
, respectively.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
A summary of the aggregate contractual or notional amounts and estimated fair values related to derivative financial instruments at
December 31, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual/
Notional
Amount
|
|
Balance Sheet Location
|
|
Estimated Fair Value
|
|
Asset
|
|
(Liability)
|
December 31, 2017
|
|
|
|
|
|
|
|
Hedging instruments
|
|
|
|
|
|
|
|
Interest rate swaps - fixed to floating
|
$
|
1,235.0
|
|
|
Other assets/other liabilities
|
|
$
|
2.0
|
|
|
$
|
(5.3
|
)
|
Interest rate swaps - forward starting pay fixed
|
425.0
|
|
|
Other assets/other liabilities
|
|
—
|
|
|
(8.9
|
)
|
Subtotal hedging
|
1,660.0
|
|
|
Subtotal hedging
|
|
2.0
|
|
|
(14.2
|
)
|
|
|
|
|
|
|
|
|
Non-hedging instruments
|
|
|
|
|
|
|
|
Interest rate swaps
|
171.3
|
|
|
Equity securities
|
|
1.0
|
|
|
(4.7
|
)
|
Options
|
100.0
|
|
|
Other assets/other liabilities
|
|
—
|
|
|
(0.1
|
)
|
Futures
|
116.8
|
|
|
Equity securities
|
|
0.1
|
|
|
(2.5
|
)
|
Subtotal non-hedging
|
388.1
|
|
|
Subtotal non-hedging
|
|
1.1
|
|
|
(7.3
|
)
|
Total derivatives
|
$
|
2,048.1
|
|
|
Total derivatives
|
|
3.1
|
|
|
(21.5
|
)
|
|
|
|
Amounts netted
|
|
(1.6
|
)
|
|
1.6
|
|
|
|
|
Net derivatives
|
|
$
|
1.5
|
|
|
$
|
(19.9
|
)
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Hedging instruments
|
|
|
|
|
|
|
|
Interest rate swaps - fixed to floating
|
$
|
1,385.0
|
|
|
Other assets/other liabilities
|
|
$
|
4.0
|
|
|
$
|
(0.7
|
)
|
Interest rate swaps - forward starting pay fixed
|
4,775.0
|
|
|
Other assets/other liabilities
|
|
528.8
|
|
|
$
|
(6.0
|
)
|
Subtotal hedging
|
6,160.0
|
|
|
Subtotal hedging
|
|
532.8
|
|
|
(6.7
|
)
|
|
|
|
|
|
|
|
|
Non-hedging instruments
|
|
|
|
|
|
|
|
Interest rate swaps
|
209.4
|
|
|
Equity securities
|
|
4.7
|
|
|
(0.2
|
)
|
Options
|
10,280.2
|
|
|
Other assets/other liabilities
|
|
220.7
|
|
|
(233.9
|
)
|
Futures
|
185.3
|
|
|
Equity securities
|
|
0.5
|
|
|
(1.1
|
)
|
Subtotal non-hedging
|
10,674.9
|
|
|
Subtotal non-hedging
|
|
225.9
|
|
|
(235.2
|
)
|
Total derivatives
|
$
|
16,834.9
|
|
|
Total derivatives
|
|
758.7
|
|
|
(241.9
|
)
|
|
|
|
Amounts netted
|
|
(92.8
|
)
|
|
92.8
|
|
|
|
|
Net derivatives
|
|
$
|
665.9
|
|
|
$
|
(149.1
|
)
|
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
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
December 31, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Fair Value Hedges
|
|
Year
Entered
Into
|
|
Outstanding Notional Amount
|
|
Interest Rate
Received
|
|
Expiration Date
|
|
2017
|
|
2016
|
|
Interest rate swap
|
|
2017
|
|
$
|
50.0
|
|
|
$
|
—
|
|
|
4.350
|
%
|
|
August 15, 2020
|
Interest rate swap
|
|
2015
|
|
200.0
|
|
|
200.0
|
|
|
4.350
|
|
|
August 15, 2020
|
Interest rate swap
|
|
2014
|
|
150.0
|
|
|
150.0
|
|
|
4.350
|
|
|
August 15, 2020
|
Interest rate swap
|
|
2013
|
|
10.0
|
|
|
10.0
|
|
|
4.350
|
|
|
August 15, 2020
|
Interest rate swap
|
|
2012
|
|
200.0
|
|
|
200.0
|
|
|
4.350
|
|
|
August 15, 2020
|
Interest rate swap
|
|
2012
|
|
625.0
|
|
|
625.0
|
|
|
1.875
|
|
|
January 15, 2018
|
Interest rate swap
|
|
2012
|
|
—
|
|
|
200.0
|
|
|
2.375
|
|
|
February 15, 2017
|
Total notional amount outstanding
|
|
|
|
$
|
1,235.0
|
|
|
$
|
1,385.0
|
|
|
|
|
|
|
The following amounts were recorded on our consolidated balance sheets related to cumulative basis adjustments for fair value hedges at December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Current portion of long term-debt
|
|
$
|
1,274.6
|
|
|
$
|
928.4
|
|
|
$
|
2.0
|
|
|
$
|
0.3
|
|
Long-term debt
|
|
17,382.2
|
|
|
14,358.5
|
|
|
(5.3
|
)
|
|
3.0
|
|
Cash Flow Hedges
We have entered into a series of forward starting pay fixed interest rate swaps with the objective of eliminating the variability of cash flows in the interest payments on anticipated future financings. During 2017, swaps in the notional amount of
$10,625.0
were terminated. We received an aggregate of
$412.2
from the swap counter parties upon termination. As of December 31, 2017, we recognized a hedge loss of
$8.9
on the outstanding swaps, which was recorded in accumulated other comprehensive loss. We had
$425.0
and
$4,775.0
in notional amount outstanding under these swaps at
December 31, 2017
and
2016
, respectively.
The unrecognized loss for all outstanding, expired and terminated cash flow hedges included in accumulated other comprehensive loss, net of tax, was
$233.0
and
$168.4
at
December 31, 2017
and
2016
, respectively. As of
December 31, 2017
, the total amount of amortization over the next twelve months for all cash flow hedges is estimated to increase interest expense by approximately
$11.7
. No amounts were excluded from effectiveness testing.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
A summary of the effect of cash flow hedges in accumulated other comprehensive loss for the year ended
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge
Loss
Recognized
in Other
Comprehensive
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
|
|
|
|
Year ended December 31, 2017
|
|
|
|
|
|
|
Forward starting pay fixed swaps
|
|
$
|
(112.0
|
)
|
|
Interest expense
|
|
$
|
(6.6
|
)
|
Forward starting pay fixed swaps
|
|
|
|
Net realized gains on financial instruments
|
|
$
|
(7.2
|
)
|
A summary of the effect of cash flow hedges in accumulated other comprehensive loss for the years ended December 31, 2016 and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion
|
|
|
|
|
Hedge
Loss
Recognized
in Other
Comprehensive
Income (Loss)
|
|
Income Statement
Location of
Loss
Reclassification
from Accumulated
Other
Comprehensive Loss
|
|
Hedge Loss
Reclassified from
Accumulated
Other
Comprehensive
Loss
|
|
Ineffective Portion
|
Type of Cash Flow Hedge
|
|
|
|
|
Income Statement Location of
Loss Recognized
|
|
Hedge Loss
Recognized
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Forward starting pay fixed swaps
|
|
$
|
(140.1
|
)
|
|
Interest expense
|
|
$
|
(5.8
|
)
|
|
Net realized gains on financial instruments
|
|
$
|
(7.7
|
)
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Forward starting pay fixed swaps
|
|
$
|
(75.2
|
)
|
|
Interest expense
|
|
$
|
(5.5
|
)
|
|
None
|
|
$
|
—
|
|
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
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 years ended December 31, 2017, 2016 and 2015 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
|
|
2017
|
|
2016
|
|
2015
|
|
Net Realized Gains on Financial Instruments
|
|
Interest Expense
|
|
Net Realized Gains on Financial Instruments
|
|
Interest Expense
|
|
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
|
$
|
144.8
|
|
|
$
|
(739.0
|
)
|
|
$
|
4.9
|
|
|
$
|
(723.0
|
)
|
|
$
|
(653.0
|
)
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on fair value hedging relationships
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
|
|
|
|
|
|
|
Hedged items
|
—
|
|
|
0.4
|
|
|
—
|
|
|
(8.1
|
)
|
|
(12.1
|
)
|
Derivatives designated as hedging instruments
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
8.1
|
|
|
12.1
|
|
|
|
|
|
|
|
|
|
|
|
Loss on cash flow hedging relationships
|
|
|
|
|
|
|
|
|
|
Forward starting pay fixed swaps
|
|
|
|
|
|
|
|
|
|
Amount of loss reclassified from accumulated other comprehensive loss into net income
|
—
|
|
|
(6.6
|
)
|
|
—
|
|
|
(5.8
|
)
|
|
(5.5
|
)
|
Amount of loss reclassified from accumulated other comprehensive loss into net income due to ineffectiveness and missed forecasted transactions
|
(7.2
|
)
|
|
—
|
|
|
(7.7
|
)
|
|
—
|
|
|
—
|
|
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Non-Hedging Derivatives
A summary of the effect of non-hedging derivatives on our consolidated statements of income for the years ended
December 31, 2017
,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
Type of Non-hedging Derivatives
|
|
Income Statement Location of
(Loss) Gain Recognized
|
|
Derivative
(Loss) Gain
Recognized
|
Year ended December 31, 2017
|
|
|
|
|
Interest rate swaps
|
|
Net realized gains on financial instruments
|
|
$
|
(9.2
|
)
|
Options
|
|
Net realized gains on financial instruments
|
|
(35.6
|
)
|
Futures
|
|
Net realized gains on financial instruments
|
|
(3.5
|
)
|
Total
|
|
|
|
$
|
(48.3
|
)
|
Year ended December 31, 2016
|
|
|
|
|
Interest rate swaps
|
|
Net realized gains on financial instruments
|
|
$
|
0.2
|
|
Options
|
|
Net realized gains on financial instruments
|
|
(209.1
|
)
|
Futures
|
|
Net realized gains on financial instruments
|
|
1.4
|
|
Total
|
|
|
|
$
|
(207.5
|
)
|
Year ended December 31, 2015
|
|
|
|
|
Derivatives embedded in convertible fixed maturity securities
|
|
Net realized gains on financial instruments
|
|
$
|
(22.2
|
)
|
Interest rate swaps
|
|
Net realized gains on financial instruments
|
|
(1.9
|
)
|
Options
|
|
Net realized gains on financial instruments
|
|
34.6
|
|
Futures
|
|
Net realized gains on financial instruments
|
|
(0.1
|
)
|
Total
|
|
|
|
$
|
10.4
|
|
6. Fair Value
Assets and liabilities recorded at fair value in the 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 the 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 disclosures. United States Government securities represent Level I or Level II securities, depending on whether the securities are actively traded. Level II securities primarily include corporate securities, securities from states, municipalities and
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
political subdivisions, mortgage-backed securities and certain other asset back 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, that 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, available-for-sale:
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 EBITDA, 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 market observable inputs for similar derivative transactions. Derivatives are designated as Level II securities.
In addition, the following methods and assumptions were used to determine the fair value of each class of pension benefit plan assets and other benefit plan assets not defined above (see Note 10, “Retirement Benefits,” for fair values of benefit plan assets):
Mutual funds
: Fair values are based on quoted market prices, which represent the net asset value, or NAV, of the shares held.
Common and collective trusts
: Fair values of common/collective trusts that replicate traded money market funds are based on cost, which approximates fair value. Fair values of common/collective trusts that invest in securities are valued at the NAV of the shares held, where the trust applies fair value measurements to the underlying investments to determine the NAV.
Partnership interests
: Fair values are estimated based on the plan’s proportionate share of the undistributed partners’ capital as reported in audited financial statements of the partnership.
Contract with insurance company
: Fair value of the contract in the insurance company general investment account is determined by the insurance company based on the fair value of the underlying investments of the account.
Investment in DOL 103-12 trust:
Fair value is based on the plan’s proportionate share of the fair value of investments held by the trust, qualified as a Department of Labor Regulation 2520.103-12 entity, or DOL 103-12 trust, as reported in the audited financial statements of the trust, where the trustee applies fair value measurements to the underlying investments of the trust.
Life insurance contracts:
Fair value is based on the cash surrender value of the policies as reported by the insurer.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
A summary of fair value measurements by level for assets and liabilities measured at fair value on a recurring basis at
December 31, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
December 31, 2017
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
1,956.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,956.4
|
|
Investments available-for-sale:
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
United States Government securities
|
—
|
|
|
645.5
|
|
|
—
|
|
|
645.5
|
|
Government sponsored securities
|
—
|
|
|
90.1
|
|
|
—
|
|
|
90.1
|
|
States, municipalities and political subdivisions, tax-exempt
|
—
|
|
|
6,034.9
|
|
|
—
|
|
|
6,034.9
|
|
Corporate securities
|
24.8
|
|
|
7,231.8
|
|
|
229.2
|
|
|
7,485.8
|
|
Residential mortgage-backed securities
|
—
|
|
|
2,533.9
|
|
|
5.0
|
|
|
2,538.9
|
|
Commercial mortgage-backed securities
|
—
|
|
|
78.7
|
|
|
—
|
|
|
78.7
|
|
Other securities
|
75.2
|
|
|
973.1
|
|
|
15.9
|
|
|
1,064.2
|
|
Total fixed maturity securities
|
100.0
|
|
|
17,588.0
|
|
|
250.1
|
|
|
17,938.1
|
|
Equity securities
|
2,446.9
|
|
|
897.7
|
|
|
287.4
|
|
|
3,632.0
|
|
Other invested assets, current
|
17.2
|
|
|
—
|
|
|
—
|
|
|
17.2
|
|
Securities lending collateral
|
214.1
|
|
|
241.0
|
|
|
—
|
|
|
455.1
|
|
Derivatives
|
—
|
|
|
3.1
|
|
|
—
|
|
|
3.1
|
|
Total assets
|
$
|
4,734.6
|
|
|
$
|
18,729.8
|
|
|
$
|
537.5
|
|
|
$
|
24,001.9
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivatives
|
$
|
—
|
|
|
$
|
(21.5
|
)
|
|
$
|
—
|
|
|
$
|
(21.5
|
)
|
Total liabilities
|
$
|
—
|
|
|
$
|
(21.5
|
)
|
|
$
|
—
|
|
|
$
|
(21.5
|
)
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
1,546.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,546.0
|
|
Investments available-for-sale:
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
United States Government securities
|
558.5
|
|
|
—
|
|
|
—
|
|
|
558.5
|
|
Government sponsored securities
|
—
|
|
|
40.0
|
|
|
—
|
|
|
40.0
|
|
States, municipalities and political subdivisions, tax-exempt
|
—
|
|
|
6,105.3
|
|
|
—
|
|
|
6,105.3
|
|
Corporate securities
|
79.9
|
|
|
7,775.9
|
|
|
238.8
|
|
|
8,094.6
|
|
Residential mortgage-backed securities
|
—
|
|
|
1,917.3
|
|
|
12.0
|
|
|
1,929.3
|
|
Commercial mortgage-backed securities
|
—
|
|
|
214.3
|
|
|
—
|
|
|
214.3
|
|
Other securities
|
53.4
|
|
|
649.3
|
|
|
42.8
|
|
|
745.5
|
|
Total fixed maturity securities
|
691.8
|
|
|
16,702.1
|
|
|
293.6
|
|
|
17,687.5
|
|
Equity securities
|
1,200.2
|
|
|
111.9
|
|
|
187.8
|
|
|
1,499.9
|
|
Other invested assets, current
|
15.8
|
|
|
—
|
|
|
—
|
|
|
15.8
|
|
Securities lending collateral
|
726.0
|
|
|
353.8
|
|
|
—
|
|
|
1,079.8
|
|
Derivatives
|
—
|
|
|
758.7
|
|
|
—
|
|
|
758.7
|
|
Total assets
|
$
|
4,179.8
|
|
|
$
|
17,926.5
|
|
|
$
|
481.4
|
|
|
$
|
22,587.7
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivatives
|
$
|
—
|
|
|
$
|
(241.9
|
)
|
|
$
|
—
|
|
|
$
|
(241.9
|
)
|
Total liabilities
|
$
|
—
|
|
|
$
|
(241.9
|
)
|
|
$
|
—
|
|
|
$
|
(241.9
|
)
|
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level III inputs for the years ended
December 31, 2017
,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
Securities
|
|
Residential
Mortgage-
backed
Securities
|
|
Commercial
Mortgage-
backed
Securities
|
|
Other
Securities
|
|
Equity
Securities
|
|
Total
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2017
|
$
|
238.8
|
|
|
$
|
12.0
|
|
|
$
|
—
|
|
|
$
|
42.8
|
|
|
$
|
187.8
|
|
|
$
|
481.4
|
|
Total (losses) gains:
|
|
|
|
|
|
|
|
|
|
|
|
Recognized in net income
|
(0.7
|
)
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
(0.2
|
)
|
|
(1.0
|
)
|
Recognized in accumulated other comprehensive loss
|
3.3
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
10.7
|
|
|
14.2
|
|
Purchases
|
88.3
|
|
|
3.6
|
|
|
—
|
|
|
35.6
|
|
|
89.6
|
|
|
217.1
|
|
Sales
|
(48.1
|
)
|
|
(5.4
|
)
|
|
—
|
|
|
(1.2
|
)
|
|
(0.5
|
)
|
|
(55.2
|
)
|
Settlements
|
(64.1
|
)
|
|
(2.3
|
)
|
|
—
|
|
|
(6.7
|
)
|
|
—
|
|
|
(73.1
|
)
|
Transfers into Level III
|
14.2
|
|
|
3.2
|
|
|
—
|
|
|
15.3
|
|
|
—
|
|
|
32.7
|
|
Transfers out of Level III
|
(2.5
|
)
|
|
(6.1
|
)
|
|
—
|
|
|
(70.0
|
)
|
|
—
|
|
|
(78.6
|
)
|
Ending balance at December 31, 2017
|
$
|
229.2
|
|
|
$
|
5.0
|
|
|
$
|
—
|
|
|
$
|
15.9
|
|
|
$
|
287.4
|
|
|
$
|
537.5
|
|
Change in unrealized losses included in net income related to assets still held for the year ended December 31, 2017
|
$
|
(3.3
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2016
|
$
|
186.2
|
|
|
$
|
—
|
|
|
$
|
1.9
|
|
|
$
|
25.6
|
|
|
$
|
102.1
|
|
|
$
|
315.8
|
|
Total (losses) gains:
|
|
|
|
|
|
|
|
|
|
|
|
Recognized in net income
|
(2.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.7
|
|
|
(2.2
|
)
|
Recognized in accumulated other comprehensive loss
|
(2.0
|
)
|
|
—
|
|
|
—
|
|
|
(0.5
|
)
|
|
(0.5
|
)
|
|
(3.0
|
)
|
Purchases
|
170.2
|
|
|
4.3
|
|
|
—
|
|
|
—
|
|
|
222.6
|
|
|
397.1
|
|
Sales
|
(5.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(136.7
|
)
|
|
(142.1
|
)
|
Settlements
|
(56.8
|
)
|
|
—
|
|
|
—
|
|
|
(0.9
|
)
|
|
(0.4
|
)
|
|
(58.1
|
)
|
Transfers into Level III
|
6.6
|
|
|
9.3
|
|
|
—
|
|
|
28.8
|
|
|
—
|
|
|
44.7
|
|
Transfers out of Level III
|
(57.1
|
)
|
|
(1.6
|
)
|
|
(1.9
|
)
|
|
(10.2
|
)
|
|
—
|
|
|
(70.8
|
)
|
Ending balance at December 31, 2016
|
$
|
238.8
|
|
|
$
|
12.0
|
|
|
$
|
—
|
|
|
$
|
42.8
|
|
|
$
|
187.8
|
|
|
$
|
481.4
|
|
Change in unrealized losses included in net income related to assets still held for the year ended December 31, 2016
|
$
|
(2.0
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2015
|
$
|
144.6
|
|
|
$
|
—
|
|
|
$
|
3.3
|
|
|
$
|
6.6
|
|
|
$
|
48.3
|
|
|
$
|
202.8
|
|
Total gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
Recognized in net income
|
1.4
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
(1.5
|
)
|
|
0.1
|
|
Recognized in accumulated other comprehensive loss
|
0.7
|
|
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
|
3.9
|
|
|
4.4
|
|
Purchases
|
132.6
|
|
|
—
|
|
|
1.1
|
|
|
28.3
|
|
|
52.1
|
|
|
214.1
|
|
Sales
|
(11.7
|
)
|
|
—
|
|
|
(1.1
|
)
|
|
(0.9
|
)
|
|
(13.8
|
)
|
|
(27.5
|
)
|
Settlements
|
(51.6
|
)
|
|
—
|
|
|
(1.4
|
)
|
|
(0.2
|
)
|
|
—
|
|
|
(53.2
|
)
|
Transfers into Level III
|
4.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13.1
|
|
|
17.9
|
|
Transfers out of Level III
|
(34.6
|
)
|
|
—
|
|
|
—
|
|
|
(8.2
|
)
|
|
—
|
|
|
(42.8
|
)
|
Ending balance at December 31, 2015
|
$
|
186.2
|
|
|
$
|
—
|
|
|
$
|
1.9
|
|
|
$
|
25.6
|
|
|
$
|
102.1
|
|
|
$
|
315.8
|
|
Change in unrealized losses included in net income related to assets still held for the year ended December 31, 2015
|
$
|
(0.6
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1.4
|
)
|
|
$
|
(2.0
|
)
|
Transfers between levels, if any, are recorded as of the beginning of the reporting period. During 2017, we transferred our United States Government securities from Level I to Level II based on the inputs used to measure fair value. There were no material transfers between levels during the years ended
December 31, 2016
or
2015
.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. As disclosed in Note 3, “Business Acquisitions,” we completed our acquisition of HealthSun on December 21, 2017. The preliminary values of net assets acquired in our acquisition of HealthSun and resulting goodwill and other intangible assets were recorded at fair value primarily using Level III inputs. The majority of HealthSun's assets acquired and liabilities assumed were recorded at their carrying values as of the respective date of acquisition, as their carrying values approximated their fair values due to their short-term nature. The preliminary fair values of goodwill and other intangible assets acquired in our acquisition of HealthSun were internally estimated based on the income approach. The income approach estimates fair value based on the present value of the cash flows that the assets could be expected to generate in the future. We developed internal estimates for the expected cash flows and discount rate in the present value calculation. Other than the assets acquired and liabilities assumed in our acquisition of HealthSun described above, there were no other material assets or liabilities measured at fair value on a nonrecurring basis during the years ended
December 31, 2017
or
2016
.
Our valuation policy is determined by members of our treasury and accounting departments. Whenever possible, our policy is to obtain quoted market prices in active markets to estimate fair values for recognition and disclosure purposes. Where quoted market prices in active markets are not available, fair values are estimated using discounted cash flow analyses, broker quotes or other valuation techniques. These techniques are significantly affected by our assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs are not considered in estimating fair values. Our valuation policy is generally to obtain only one quoted price for each security from third party pricing services, which are derived through recently reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information. When broker quotes are used, we generally obtain only one broker quote per security. As we are responsible for the determination of fair value, we perform monthly analysis on the prices received from the pricing services to determine whether the prices are reasonable estimates of fair value. This analysis is performed by our internal treasury personnel who are familiar with our investment portfolios, the pricing services engaged and the valuation techniques and inputs used. Our analysis includes a review of month-to-month price fluctuations. If unusual fluctuations are noted in this review, we may obtain additional information from other pricing services to validate the quoted price. There were no adjustments to quoted market prices obtained from the pricing services during the years ended
December 31, 2017
,
2016
or
2015
.
In addition to the preceding disclosures on assets recorded at fair value in the consolidated balance sheets, FASB guidance also requires the disclosure of fair values for certain other financial instruments for which it is practicable to estimate fair value, whether or not such values are recognized in the consolidated balance sheets.
Non-financial instruments such as real estate, property and equipment, other current assets, deferred income taxes, intangible assets and certain financial instruments, such as policy liabilities, are excluded from the fair value disclosures. Therefore, the fair value amounts cannot be aggregated to determine our underlying economic value.
The carrying amounts reported in the consolidated balance sheets for cash, accrued investment income, premium and self-funded receivables, other receivables, income taxes receivable/payable, unearned income, accounts payable and accrued expenses, security trades pending payable, securities lending payable and certain other current liabilities approximate fair value because of the short term nature of these items. These assets and liabilities are not listed in the table below.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument that is recorded at its carrying value on the consolidated balance sheets:
Other invested assets, long-term
: Other invested assets, long-term primarily include our investments in limited partnerships, joint ventures and other non-controlled corporations, as well as the cash surrender value of corporate-owned life insurance policies. Investments in limited partnerships, joint ventures and other non-controlled corporations are carried at our share in the entities’ undistributed earnings, which approximates fair value. The carrying value of corporate-owned life insurance policies represents the cash surrender value as reported by the respective insurer, which approximates fair value.
Short-term borrowings
: The fair value of our short-term borrowings is based on quoted market prices for the same or similar debt, or if no quoted market prices were available, on the current market interest rates estimated to be available to us for debt of similar terms and remaining maturities.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Long-term debt - commercial paper
: The carrying amount for commercial paper approximates fair value as the underlying instruments have variable interest rates at market value.
Long-term debt - senior unsecured notes, remarketable subordinated notes and surplus notes
: The fair values of our notes are based on quoted market prices in active markets for the same or similar debt, or, if no quoted market prices are available, on the current market observable rates estimated to be available to us for debt of similar terms and remaining maturities.
Long-term debt—convertible debentures
: The fair value of our convertible debentures is based on the quoted market price in the active private market in which the convertible debentures trade.
A summary of the estimated fair values by level of each class of financial instrument that is recorded at its carrying value on our consolidated balance sheets at
December 31, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Estimated Fair Value
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Other invested assets, long-term
|
$
|
3,343.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,343.8
|
|
|
$
|
3,343.8
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
1,275.0
|
|
|
—
|
|
|
1,275.0
|
|
|
—
|
|
|
1,275.0
|
|
Commercial paper
|
803.6
|
|
|
—
|
|
|
803.6
|
|
|
—
|
|
|
803.6
|
|
Notes
|
17,592.7
|
|
|
—
|
|
|
18,815.1
|
|
|
—
|
|
|
18,815.1
|
|
Convertible debentures
|
260.5
|
|
|
—
|
|
|
1,215.7
|
|
|
—
|
|
|
1,215.7
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Other invested assets, long-term
|
$
|
2,240.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,240.5
|
|
|
$
|
2,240.5
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
440.0
|
|
|
—
|
|
|
440.0
|
|
|
—
|
|
|
440.0
|
|
Commercial paper
|
629.0
|
|
|
—
|
|
|
629.0
|
|
|
—
|
|
|
629.0
|
|
Notes
|
14,323.8
|
|
|
—
|
|
|
14,858.4
|
|
|
—
|
|
|
14,858.4
|
|
Convertible debentures
|
334.1
|
|
|
—
|
|
|
1,020.2
|
|
|
—
|
|
|
1,020.2
|
|
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
7. Income Taxes
The components of deferred income taxes at
December 31, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Deferred tax assets relating to:
|
|
|
|
Retirement benefits
|
$
|
210.7
|
|
|
$
|
362.9
|
|
Accrued expenses
|
278.6
|
|
|
331.9
|
|
Insurance reserves
|
136.5
|
|
|
229.5
|
|
Net operating loss carryforwards
|
3.7
|
|
|
9.2
|
|
Bad debt reserves
|
128.4
|
|
|
119.6
|
|
State income tax
|
32.7
|
|
|
59.8
|
|
Deferred compensation
|
23.7
|
|
|
38.2
|
|
Investment basis difference
|
23.9
|
|
|
42.4
|
|
Other
|
81.5
|
|
|
110.5
|
|
Total deferred tax assets
|
919.7
|
|
|
1,304.0
|
|
Deferred tax liabilities relating to:
|
|
|
|
Unrealized gains on securities
|
174.9
|
|
|
202.9
|
|
Intangible assets:
|
|
|
|
Trademarks and state Medicaid licenses
|
1,528.5
|
|
|
2,547.6
|
|
Customer, provider and hospital relationships
|
186.0
|
|
|
194.1
|
|
Internally developed software and other amortization differences
|
324.1
|
|
|
450.5
|
|
Retirement benefits
|
170.2
|
|
|
267.3
|
|
Debt discount
|
27.6
|
|
|
60.8
|
|
State deferred tax
|
104.5
|
|
|
106.0
|
|
Depreciation and amortization
|
41.5
|
|
|
54.1
|
|
Other
|
88.9
|
|
|
200.6
|
|
Total deferred tax liabilities
|
2,646.2
|
|
|
4,083.9
|
|
Net deferred tax liability
|
$
|
(1,726.5
|
)
|
|
$
|
(2,779.9
|
)
|
Significant components of the provision for income taxes for the years ended
December 31, 2017
,
2016
and
2015
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Current tax expense:
|
|
|
|
|
|
Federal
|
$
|
1,355.9
|
|
|
$
|
1,862.6
|
|
|
$
|
1,996.6
|
|
State and local
|
39.5
|
|
|
93.9
|
|
|
133.0
|
|
Total current tax expense
|
1,395.4
|
|
|
1,956.5
|
|
|
2,129.6
|
|
Deferred tax (benefit) expense
|
(1,274.4
|
)
|
|
129.1
|
|
|
(58.6
|
)
|
Total income tax expense
|
$
|
121.0
|
|
|
$
|
2,085.6
|
|
|
$
|
2,071.0
|
|
State and local current tax expense is reported gross of federal benefit, and includes amounts related to audit settlements, uncertain tax positions, state tax credits and true up of prior years’ tax. Such items are included in multiple lines in the following rate reconciliation table on a net of federal tax basis.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
A reconciliation of income tax expense recorded in the consolidated statements of income and amounts computed at the statutory federal income tax rate for the years ended
December 31, 2017
,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Amount at statutory rate
|
$
|
1,387.3
|
|
|
35.0
|
%
|
|
$
|
1,594.4
|
|
|
35.0
|
%
|
|
$
|
1,620.9
|
|
|
35.0
|
%
|
State and local income taxes net of federal tax expense/benefit
|
(2.2
|
)
|
|
(0.1
|
)
|
|
61.5
|
|
|
1.4
|
|
|
75.3
|
|
|
1.6
|
|
Tax exempt interest and dividends received deduction
|
(57.9
|
)
|
|
(1.4
|
)
|
|
(61.7
|
)
|
|
(1.4
|
)
|
|
(63.2
|
)
|
|
(1.3
|
)
|
HIP Fee
|
—
|
|
|
—
|
|
|
411.7
|
|
|
9.0
|
|
|
422.6
|
|
|
9.1
|
|
Tax Cuts and Jobs Act
|
(1,108.3
|
)
|
|
(27.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other, net
|
(97.9
|
)
|
|
(2.5
|
)
|
|
79.7
|
|
|
1.8
|
|
|
15.4
|
|
|
0.3
|
|
Total income tax expense
|
$
|
121.0
|
|
|
3.1
|
%
|
|
$
|
2,085.6
|
|
|
45.8
|
%
|
|
$
|
2,071.0
|
|
|
44.7
|
%
|
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. At December 31, 2017, we had not completed our accounting for the tax effects resulting from the enactment of the Tax Cuts and Jobs Act; however, we have made a reasonable estimate of the effects on our existing deferred tax balances. We remeasured deferred tax assets and liabilities based on the rates at which they are expected to be utilized in the future, which is generally 21%. However, we are still analyzing certain aspects of the Tax Cuts and Jobs Act and refining our calculations, which could potentially affect the measurement of those balances or give rise to new deferred tax amounts.
The provisional amount recorded related to the remeasurement of our deferred tax balance was a benefit of
$1,108.3
, or
$4.14
per diluted share, and is included as a component of income tax expense.
During the year ended
December 31, 2016
, we recognized income tax expense of
$411.7
, or
$1.54
per diluted share, as a result of the non-tax deductibility of the HIP Fee payments.
During the year ended
December 31, 2015
, we recognized income tax expense of
$422.6
, or
$1.55
per diluted share, as a result of the non-tax deductibility of the HIP Fee payments. We also recognized income tax expense of
$42.3
, or
$0.16
per diluted share, as a result of an adverse California franchise tax ruling. This expense is allocated between the "state and local income taxes net of federal tax benefit" and the "other, net" line items in the table above.
The change in the carrying amount of gross unrecognized tax benefits from uncertain tax positions for the years ended
December 31, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Balance at January 1
|
$
|
131.1
|
|
|
$
|
212.0
|
|
Additions based on:
|
|
|
|
Tax positions related to current year
|
2.6
|
|
|
—
|
|
Tax positions related to prior years
|
83.4
|
|
|
13.9
|
|
Reductions based on:
|
|
|
|
Tax positions related to current year
|
—
|
|
|
(1.1
|
)
|
Tax positions related to prior years
|
(18.5
|
)
|
|
(88.4
|
)
|
Settlements with taxing authorities
|
(9.0
|
)
|
|
(5.3
|
)
|
Balance at December 31
|
$
|
189.6
|
|
|
$
|
131.1
|
|
The table above excludes interest, net of related tax benefits, which is treated as income tax expense (benefit) under our accounting policy. The interest is included in the amounts described in the following paragraph.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
As of
December 31, 2017
,
$174.8
of unrecognized tax benefits would impact our effective tax rate in future periods, if recognized. Also included in the table above is
$2.4
that would be recognized as an adjustment to additional paid-in capital, which would not affect our effective tax rate. In addition to the contingent liabilities included in the table above, during 2017 we filed protective state income tax refund claims of approximately
$309.5
.
For the years ended
December 31, 2017
,
2016
and
2015
, we recognized net interest expense (benefits) of
$3.0
,
$6.6
and
$(1.8)
, respectively. We had accrued approximately
$21.9
and
$18.9
for the payment of interest at
December 31, 2017
and
2016
, respectively.
As of
December 31, 2017
, as further described below, certain tax years remain open to examination by the Internal Revenue Service, or IRS, and various state and local authorities. In addition, we continue to discuss certain industry issues with the IRS. As a result of these examinations and discussions, we have recorded amounts for uncertain tax positions. It is anticipated that the amount of unrecognized tax benefits will change in the next twelve months due to possible settlements of audits and changes in temporary items. However, the ultimate resolution of these items is dependent on the completion of negotiations with various taxing authorities. While it is difficult to determine when other tax settlements will actually occur, it is reasonably possible that one could occur in the next twelve months and our unrecognized tax benefits could change within a range of approximately
$(5.1)
to
$(117.4)
.
We are a member of the IRS Compliance Assurance Process, or CAP. The objective of CAP is to reduce taxpayer burden and uncertainty while assuring the IRS of the accuracy of tax returns prior to filing, thereby reducing or eliminating the need for post-filing examinations.
As of
December 31, 2017
, the IRS examination of our 2017 tax year continues to be in process. During 2017, the examination of our 2016 tax year was resolved with the IRS.
In certain states, we pay premium taxes in lieu of state income taxes. Premium taxes are reported with general and administrative expense.
At
December 31, 2017
, we had unused federal tax net operating loss carryforwards of approximately
$10.6
to offset future taxable income. The loss carryforwards expire in the years
2018
through
2036
. During
2017
,
2016
and
2015
, federal income taxes paid totaled
$1,502.7
,
$1,665.2
and
$1,952.1
, respectively.
8. Property and Equipment
A summary of property and equipment at
December 31, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Land and improvements
|
$
|
17.8
|
|
|
$
|
21.2
|
|
Building and improvements
|
167.7
|
|
|
215.1
|
|
Computer equipment, furniture and other equipment
|
1,080.1
|
|
|
1,024.5
|
|
Computer software, purchased and internally developed
|
2,612.9
|
|
|
2,416.7
|
|
Leasehold improvements
|
494.0
|
|
|
462.4
|
|
Property and equipment, gross
|
4,372.5
|
|
|
4,139.9
|
|
Accumulated depreciation and amortization
|
(2,197.6
|
)
|
|
(2,162.0
|
)
|
Property and equipment, net
|
$
|
2,174.9
|
|
|
$
|
1,977.9
|
|
Depreciation expense for
2017
,
2016
and
2015
was
$110.7
,
$104.0
and
$105.8
, respectively. Amortization expense on computer software and leasehold improvements for
2017
,
2016
and
2015
was
$490.3
,
$472.0
and
$409.8
, respectively, which includes amortization expense on computer software, both purchased and internally developed, for
2017
,
2016
and
2015
of
$434.6
,
$411.8
and
$366.7
, respectively. Capitalized costs related to the internal development of software of
$2,372.8
and
$2,157.2
at
December 31, 2017
and
2016
, respectively, are reported with computer software.
During the years ended December 31,
2017
,
2016
and
2015
, we recognized
$2.5
,
$25.3
and
$1.8
, respectively, of impairments related to computer software, primarily internally developed. We also recognized
$19.5
of impairments related
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
to computer equipment in 2016. These impairments were due to project cancellation or asset replacement, some of which resulted from a change in strategic focus needed to effectively manage business operations in a post-ACA environment.
9. Goodwill and Other Intangible Assets
A summary of the change in the carrying amount of goodwill for our segments (see Note 19, “Segment Information”) for
2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and Specialty
Business
|
|
Government
Business
|
|
Other
|
|
Total
|
Balance as of January 1, 2016
|
$
|
11,818.9
|
|
|
$
|
5,743.3
|
|
|
$
|
—
|
|
|
$
|
17,562.2
|
|
Other adjustments
|
(1.0
|
)
|
|
—
|
|
|
—
|
|
|
(1.0
|
)
|
Balance as of December 31, 2016
|
11,817.9
|
|
|
5,743.3
|
|
|
—
|
|
|
17,561.2
|
|
Acquisitions
|
—
|
|
|
1,658.5
|
|
|
11.5
|
|
|
1,670.0
|
|
Balance as of December 31, 2017
|
$
|
11,817.9
|
|
|
$
|
7,401.8
|
|
|
$
|
11.5
|
|
|
$
|
19,231.2
|
|
Accumulated impairment as of December 31, 2017
|
$
|
(41.0
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(41.0
|
)
|
The increase in goodwill in 2017 was primarily due to the acquisition of HealthSun in December 2017. For additional information regarding this acquisition, see Note 3, "Business Acquisitions".
As required by FASB guidance, we completed annual impairment tests of existing goodwill and other intangible assets with indefinite lives during
2017
,
2016
and
2015
. We perform these annual impairment tests during the fourth quarter. FASB guidance also requires interim impairment testing to be performed when potential impairment indicators exist. These tests involve the use of estimates related to the fair value of goodwill and intangible assets with indefinite lives and require a significant degree of management judgment and the use of subjective assumptions. The fair values were estimated using the projected income and market valuation approaches, incorporating Level III internal estimates for inputs, including, but not limited to, revenue projections, income projections, cash flows and discount rates.
We did not incur any impairment losses in
2017
,
2016
or
2015
, as the estimated fair values of our reporting units were substantially in excess of their carrying values.
The components of other intangible assets as of
December 31, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
3,724.9
|
|
|
$
|
(2,877.8
|
)
|
|
$
|
847.1
|
|
|
$
|
3,310.9
|
|
|
$
|
(2,759.7
|
)
|
|
$
|
551.2
|
|
Provider and hospital relationships
|
187.4
|
|
|
(73.2
|
)
|
|
114.2
|
|
|
150.5
|
|
|
(65.9
|
)
|
|
84.6
|
|
Other
|
184.0
|
|
|
(67.2
|
)
|
|
116.8
|
|
|
89.4
|
|
|
(50.6
|
)
|
|
38.8
|
|
Total
|
4,096.3
|
|
|
(3,018.2
|
)
|
|
1,078.1
|
|
|
3,550.8
|
|
|
(2,876.2
|
)
|
|
674.6
|
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
Blue Cross and Blue Shield and other trademarks
|
6,298.7
|
|
|
—
|
|
|
6,298.7
|
|
|
6,298.7
|
|
|
—
|
|
|
6,298.7
|
|
State Medicaid licenses
|
991.6
|
|
|
—
|
|
|
991.6
|
|
|
991.6
|
|
|
—
|
|
|
991.6
|
|
Total
|
7,290.3
|
|
|
—
|
|
|
7,290.3
|
|
|
7,290.3
|
|
|
—
|
|
|
7,290.3
|
|
Other intangible assets
|
$
|
11,386.6
|
|
|
$
|
(3,018.2
|
)
|
|
$
|
8,368.4
|
|
|
$
|
10,841.1
|
|
|
$
|
(2,876.2
|
)
|
|
$
|
7,964.9
|
|
As of
December 31, 2017
, the estimated amortization expense for each of the five succeeding years is as follows:
2018
,
$236.9
;
2019
,
$197.3
;
2020
,
$158.6
;
2021
,
$126.9
; and
2022
,
$100.6
.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
10. Retirement Benefits
We sponsor various non-contributory employee defined benefit plans through certain subsidiaries.
The Anthem Cash Balance Plan A and the Anthem Cash Balance Plan B are cash balance pension plans covering certain eligible employees of the affiliated companies that participate in these plans. Effective January 1, 2006, benefits were curtailed, with the result that most participants stopped accruing benefits but continue to earn interest on benefits accrued prior to the curtailment. Certain participants subject to collective bargaining and certain other participants who met grandfathering rules continue to accrue benefits. Participants that do not receive credits and/or benefit accruals are included in the Anthem Cash Balance Plan A, while current employees who are still receiving credits and/or benefits participate in the Anthem Cash Balance Plan B. Several pension plans acquired through various corporate mergers and acquisitions have been merged into these plans in prior years.
The UGS Pension Plan is a defined benefit pension plan with a cash balance component. The UGS Pension Plan covers eligible employees of the affiliated companies that participate in the UGS Pension Plan. Effective January 1, 2004, benefits were curtailed, with the result that most participants stopped accruing benefits but continue to earn interest on benefits previously accrued. Certain employees subject to collective bargaining agreements and certain other employees who met grandfathering rules continue to accrue benefits. Effective December 31, 2017, the UGS Pension Plan was merged into the Anthem Cash Balance Plan B.
The Employees’ Retirement Plan of Blue Cross of California, or the BCC Plan, is a defined benefit pension plan that covers eligible employees of Blue Cross of California who are covered by a collective bargaining agreement. Effective January 1, 2007, benefits were curtailed under the BCC Plan with the result that no Blue Cross of California employees hired or rehired after December 31, 2006 are eligible to participate in the BCC Plan.
All of the plans’ assets consist primarily of common stocks, fixed maturity securities, investment funds and short-term investments. The funding policies for all plans are to contribute amounts at least sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, as amended, or ERISA, including amendment by the Pension Protection Act of 2006, and in accordance with income tax regulations, plus such additional amounts as are necessary to provide assets sufficient to meet the benefits to be paid to plan participants.
We use a December 31 measurement date for determining benefit obligations and fair value of plan assets.
The following tables disclose consolidated “pension benefits,” which include the defined benefit pension plans described above, and consolidated “other benefits,” which include postretirement health and welfare benefits including medical, vision and dental benefits offered to certain employees. Calculations were computed using assumptions at the December 31 measurement dates.
The reconciliation of the benefit obligation is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Benefit obligation at beginning of year
|
$
|
1,824.9
|
|
|
$
|
1,833.3
|
|
|
$
|
565.2
|
|
|
$
|
578.7
|
|
Service cost
|
10.1
|
|
|
11.6
|
|
|
1.4
|
|
|
1.6
|
|
Interest cost
|
66.3
|
|
|
68.5
|
|
|
20.8
|
|
|
22.4
|
|
Actuarial loss (gain)
|
103.7
|
|
|
32.2
|
|
|
(39.2
|
)
|
|
(4.2
|
)
|
Benefits paid
|
(132.6
|
)
|
|
(120.7
|
)
|
|
(24.0
|
)
|
|
(33.3
|
)
|
Benefit obligation at end of year
|
$
|
1,872.4
|
|
|
$
|
1,824.9
|
|
|
$
|
524.2
|
|
|
$
|
565.2
|
|
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
The changes in the fair value of plan assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Fair value of plan assets at beginning of year
|
$
|
1,887.8
|
|
|
$
|
1,865.2
|
|
|
$
|
331.8
|
|
|
$
|
328.4
|
|
Actual return on plan assets
|
253.2
|
|
|
132.2
|
|
|
41.0
|
|
|
21.8
|
|
Employer contributions
|
3.9
|
|
|
11.1
|
|
|
7.5
|
|
|
14.9
|
|
Benefits paid
|
(132.6
|
)
|
|
(120.7
|
)
|
|
(24.0
|
)
|
|
(33.3
|
)
|
Fair value of plan assets at end of year
|
$
|
2,012.3
|
|
|
$
|
1,887.8
|
|
|
$
|
356.3
|
|
|
$
|
331.8
|
|
The net amount included in the consolidated balance sheets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Noncurrent assets
|
$
|
202.0
|
|
|
$
|
126.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current liabilities
|
(5.4
|
)
|
|
(3.7
|
)
|
|
—
|
|
|
—
|
|
Noncurrent liabilities
|
(56.7
|
)
|
|
(60.1
|
)
|
|
(167.9
|
)
|
|
(233.4
|
)
|
Net amount at December 31
|
$
|
139.9
|
|
|
$
|
62.9
|
|
|
$
|
(167.9
|
)
|
|
$
|
(233.4
|
)
|
The net amounts included in accumulated other comprehensive loss that have not been recognized as components of net periodic benefit costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net actuarial loss
|
$
|
624.7
|
|
|
$
|
655.8
|
|
|
$
|
77.5
|
|
|
$
|
146.6
|
|
Prior service cost (credit)
|
1.0
|
|
|
0.5
|
|
|
(46.1
|
)
|
|
(59.7
|
)
|
Net amount before tax at December 31
|
$
|
625.7
|
|
|
$
|
656.3
|
|
|
$
|
31.4
|
|
|
$
|
86.9
|
|
The estimated net actuarial loss and prior service cost for the defined benefit pension plans that will be reclassified from accumulated other comprehensive loss into net periodic benefit costs over the next year are
$22.4
and
$0.2
, respectively. The estimated net actuarial loss and prior service credit for postretirement benefit plans that will be reclassified from accumulated other comprehensive loss into net periodic benefit costs over the next year are
$3.5
and
$12.4
, respectively.
The accumulated benefit obligation for the defined benefit pension plans was
$1,868.9
and
$1,821.1
at
December 31, 2017
and
2016
, respectively.
As of
December 31, 2017
, certain pension plans had accumulated benefit obligations in excess of plan assets. For those same plans, the projected benefit obligation was also in excess of plan assets. Such plans had a combined projected benefit obligation, accumulated benefit obligation and fair value of plan assets of
$101.9
,
$100.4
and
$39.8
, respectively.
The weighted-average assumptions used in calculating the benefit obligations for all plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Discount rate
|
3.44
|
%
|
|
3.77
|
%
|
|
3.42
|
%
|
|
3.82
|
%
|
Rate of compensation increase
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
Expected rate of return on plan assets
|
7.83
|
%
|
|
7.95
|
%
|
|
7.00
|
%
|
|
7.00
|
%
|
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
The components of net periodic (benefit credit) benefit cost included in the consolidated statements of income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Pension Benefits
|
|
|
|
|
|
Service cost
|
$
|
10.1
|
|
|
$
|
11.6
|
|
|
$
|
13.1
|
|
Interest cost
|
66.3
|
|
|
68.5
|
|
|
68.2
|
|
Expected return on assets
|
(147.6
|
)
|
|
(147.1
|
)
|
|
(143.2
|
)
|
Recognized actuarial loss
|
21.8
|
|
|
19.0
|
|
|
25.7
|
|
Amortization of prior service credit
|
(0.4
|
)
|
|
(0.6
|
)
|
|
(0.6
|
)
|
Settlement loss
|
7.4
|
|
|
7.3
|
|
|
6.5
|
|
Net periodic benefit credit
|
$
|
(42.4
|
)
|
|
$
|
(41.3
|
)
|
|
$
|
(30.3
|
)
|
|
|
|
|
|
|
Other Benefits
|
|
|
|
|
|
Service cost
|
$
|
1.4
|
|
|
$
|
1.6
|
|
|
$
|
2.1
|
|
Interest cost
|
20.8
|
|
|
22.4
|
|
|
23.4
|
|
Expected return on assets
|
(22.6
|
)
|
|
(22.4
|
)
|
|
(23.7
|
)
|
Recognized actuarial loss
|
11.4
|
|
|
12.4
|
|
|
15.3
|
|
Amortization of prior service credit
|
(13.6
|
)
|
|
(13.8
|
)
|
|
(14.4
|
)
|
Net periodic (benefit credit) benefit cost
|
$
|
(2.6
|
)
|
|
$
|
0.2
|
|
|
$
|
2.7
|
|
During the years ended
December 31, 2017
,
2016
and
2015
we incurred total settlement losses of
$7.4
,
$7.3
and
$6.5
, respectively, as lump-sum payments exceeded the service cost and interest cost components of net periodic benefit cost for certain of our plans.
The weighted-average assumptions used in calculating the net periodic benefit cost for all plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Pension Benefits
|
|
|
|
|
|
Discount rate
|
3.77
|
%
|
|
3.92
|
%
|
|
3.66
|
%
|
Rate of compensation increase
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
Expected rate of return on plan assets
|
7.95
|
%
|
|
7.84
|
%
|
|
7.62
|
%
|
|
|
|
|
|
|
Other Benefits
|
|
|
|
|
|
Discount rate
|
3.82
|
%
|
|
4.01
|
%
|
|
3.74
|
%
|
Rate of compensation increase
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
Expected rate of return on plan assets
|
7.00
|
%
|
|
7.00
|
%
|
|
7.00
|
%
|
The assumed healthcare cost trend rates used to measure the expected cost of pre-Medicare (those who are not currently eligible for Medicare benefits) other benefits at our
December 31, 2017
measurement date was
8.00%
for
2018
with a gradual decline to
4.50%
by the year
2028
. The assumed healthcare cost trend rates used to measure the expected cost of post-Medicare (those who are currently eligible for Medicare benefits) other benefits at our
December 31, 2017
measurement date was
6.00%
for
2018
with a gradual decline to
4.50%
by the year
2028
. These estimated trend rates are subject to change in the future. The healthcare cost trend rate assumption affects the amounts reported. For example, an increase in the assumed healthcare cost trend rate of one percentage point would increase the postretirement benefit obligation as of
December 31, 2017
by
$35.0
and would increase service and interest costs by
$1.6
. Conversely, a decrease in the assumed healthcare cost trend rate of one percentage point would decrease the postretirement benefit obligation as of
December 31, 2017
by
$30.3
and would decrease service and interest costs by
$1.4
.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Plan assets include a diversified mix of investment grade fixed maturity securities, equity securities and alternative investments across a range of sectors and levels of capitalization to maximize the long-term return for a prudent level of risk.
The weighted-average target allocation for pension benefit plan assets is
45%
equity securities,
46%
fixed maturity securities, and
9%
to all other types of investments. Equity securities primarily include a mix of domestic securities, foreign securities and mutual funds invested in equities. Fixed maturity securities primarily include treasury securities, corporate bonds and asset-backed investments issued by corporations and the U.S. government. Other types of investments primarily include partnership interests, collective trusts that replicate money market funds and insurance contracts designed specifically for employee benefit plans. As of
December 31, 2017
, there were no significant concentrations of investments in the pension benefit assets or other benefit assets. No plan assets were invested in Anthem common stock.
Pension benefit assets and other benefit assets recorded at fair value are categorized based upon the level of judgment associated with the inputs used to measure their fair value.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
The fair values of our pension benefit assets and other benefit assets by asset category and level inputs at
December 31, 2017
, excluding cash, investment income receivable and amounts due to/from brokers, resulting in a net asset of
$15.1
, are as follows (see Note 6, “Fair Value,” for additional information regarding the definition of level inputs):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
December 31, 2017
|
|
|
|
|
|
|
|
Pension Benefit Assets:
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
U.S. securities
|
$
|
584.4
|
|
|
$
|
4.8
|
|
|
$
|
—
|
|
|
$
|
589.2
|
|
Foreign securities
|
178.7
|
|
|
—
|
|
|
—
|
|
|
178.7
|
|
Mutual funds
|
39.4
|
|
|
—
|
|
|
—
|
|
|
39.4
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
Government securities
|
226.9
|
|
|
—
|
|
|
—
|
|
|
226.9
|
|
Corporate securities
|
—
|
|
|
376.5
|
|
|
—
|
|
|
376.5
|
|
Asset-backed securities
|
—
|
|
|
139.9
|
|
|
—
|
|
|
139.9
|
|
Other types of investments:
|
|
|
|
|
|
|
|
Common and collective trusts
|
—
|
|
|
53.9
|
|
|
—
|
|
|
53.9
|
|
Partnership interests
|
—
|
|
|
—
|
|
|
220.8
|
|
|
220.8
|
|
Insurance company contracts
|
—
|
|
|
—
|
|
|
173.4
|
|
|
173.4
|
|
Total pension benefit assets
|
$
|
1,029.4
|
|
|
$
|
575.1
|
|
|
$
|
394.2
|
|
|
$
|
1,998.7
|
|
|
|
|
|
|
|
|
|
Other Benefit Assets:
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
U.S. securities
|
$
|
10.3
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
10.5
|
|
Foreign securities
|
3.3
|
|
|
—
|
|
|
—
|
|
|
3.3
|
|
Mutual funds
|
47.8
|
|
|
—
|
|
|
—
|
|
|
47.8
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
Government securities
|
2.5
|
|
|
—
|
|
|
—
|
|
|
2.5
|
|
Corporate securities
|
—
|
|
|
5.2
|
|
|
—
|
|
|
5.2
|
|
Asset-backed securities
|
—
|
|
|
4.7
|
|
|
—
|
|
|
4.7
|
|
Other types of investments:
|
|
|
|
|
|
|
|
Common and collective trusts
|
—
|
|
|
0.5
|
|
|
—
|
|
|
0.5
|
|
Partnership interests
|
—
|
|
|
—
|
|
|
0.4
|
|
|
0.4
|
|
Life insurance contracts
|
—
|
|
|
—
|
|
|
268.5
|
|
|
268.5
|
|
Investment in DOL 103-12 trust
|
—
|
|
|
11.4
|
|
|
—
|
|
|
11.4
|
|
Total other benefit assets
|
$
|
63.9
|
|
|
$
|
22.0
|
|
|
$
|
268.9
|
|
|
$
|
354.8
|
|
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
The fair values of our pension benefit assets and other benefit assets by asset category and level inputs at
December 31, 2016
, excluding cash, investment income receivable and amounts due to/from brokers, resulting in a net asset of
$2.8
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
December 31, 2016
|
|
|
|
|
|
|
|
Pension Benefit Assets:
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
U.S. securities
|
$
|
561.4
|
|
|
$
|
4.4
|
|
|
$
|
—
|
|
|
$
|
565.8
|
|
Foreign securities
|
264.5
|
|
|
—
|
|
|
—
|
|
|
264.5
|
|
Mutual funds
|
36.6
|
|
|
—
|
|
|
—
|
|
|
36.6
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
Government securities
|
183.9
|
|
|
—
|
|
|
—
|
|
|
183.9
|
|
Corporate securities
|
—
|
|
|
385.9
|
|
|
—
|
|
|
385.9
|
|
Asset-backed securities
|
—
|
|
|
134.7
|
|
|
—
|
|
|
134.7
|
|
Other types of investments:
|
|
|
|
|
|
|
|
Common and collective trusts
|
—
|
|
|
27.5
|
|
|
—
|
|
|
27.5
|
|
Partnership interests
|
—
|
|
|
—
|
|
|
112.5
|
|
|
112.5
|
|
Insurance company contracts
|
—
|
|
|
—
|
|
|
173.3
|
|
|
173.3
|
|
Treasury futures contracts
|
0.3
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
Total pension benefit assets
|
$
|
1,046.7
|
|
|
$
|
552.5
|
|
|
$
|
285.8
|
|
|
$
|
1,885.0
|
|
|
|
|
|
|
|
|
|
Other Benefit Assets:
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
U.S. securities
|
$
|
13.0
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
13.2
|
|
Foreign securities
|
5.4
|
|
|
—
|
|
|
—
|
|
|
5.4
|
|
Mutual funds
|
47.1
|
|
|
—
|
|
|
—
|
|
|
47.1
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
Government securities
|
2.7
|
|
|
—
|
|
|
—
|
|
|
2.7
|
|
Corporate securities
|
—
|
|
|
7.9
|
|
|
—
|
|
|
7.9
|
|
Asset-backed securities
|
—
|
|
|
5.8
|
|
|
—
|
|
|
5.8
|
|
Other types of investments:
|
|
|
|
|
|
|
|
Common and collective trusts
|
—
|
|
|
1.0
|
|
|
—
|
|
|
1.0
|
|
Partnership interests
|
—
|
|
|
—
|
|
|
1.2
|
|
|
1.2
|
|
Life insurance contracts
|
—
|
|
|
—
|
|
|
237.7
|
|
|
237.7
|
|
Investment in DOL 103-12 trust
|
—
|
|
|
9.8
|
|
|
—
|
|
|
9.8
|
|
Total other benefit assets
|
$
|
68.2
|
|
|
$
|
24.7
|
|
|
$
|
238.9
|
|
|
$
|
331.8
|
|
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
A reconciliation of the beginning and ending balances of plan assets measured at fair value using Level III inputs for the years ended
December 31, 2017
,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership
Interests
|
|
Insurance
Company
Contracts
|
|
Life
Insurance
Contracts
|
|
Total
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2017
|
$
|
113.7
|
|
|
$
|
173.3
|
|
|
$
|
237.7
|
|
|
$
|
524.7
|
|
Actual return on plan assets relating to assets still held at the reporting date
|
20.4
|
|
|
(0.5
|
)
|
|
30.8
|
|
|
50.7
|
|
Purchases
|
126.1
|
|
|
9.7
|
|
|
—
|
|
|
135.8
|
|
Sales
|
(39.0
|
)
|
|
(9.1
|
)
|
|
—
|
|
|
(48.1
|
)
|
Ending balance at December 31, 2017
|
$
|
221.2
|
|
|
$
|
173.4
|
|
|
$
|
268.5
|
|
|
$
|
663.1
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2016
|
$
|
118.6
|
|
|
$
|
174.2
|
|
|
$
|
229.9
|
|
|
$
|
522.7
|
|
Actual return on plan assets relating to assets still held at the reporting date
|
(3.5
|
)
|
|
(3.1
|
)
|
|
10.8
|
|
|
4.2
|
|
Purchases
|
17.8
|
|
|
8.9
|
|
|
—
|
|
|
26.7
|
|
Sales
|
(19.2
|
)
|
|
(6.7
|
)
|
|
(3.0
|
)
|
|
(28.9
|
)
|
Ending balance at December 31, 2016
|
$
|
113.7
|
|
|
$
|
173.3
|
|
|
$
|
237.7
|
|
|
$
|
524.7
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2015
|
$
|
122.2
|
|
|
$
|
187.7
|
|
|
$
|
238.4
|
|
|
$
|
548.3
|
|
Actual return on plan assets relating to assets still held at the reporting date
|
(5.9
|
)
|
|
(5.7
|
)
|
|
(6.8
|
)
|
|
(18.4
|
)
|
Purchases
|
10.9
|
|
|
7.0
|
|
|
—
|
|
|
17.9
|
|
Sales
|
(8.6
|
)
|
|
(14.8
|
)
|
|
(1.7
|
)
|
|
(25.1
|
)
|
Ending balance at December 31, 2015
|
$
|
118.6
|
|
|
$
|
174.2
|
|
|
$
|
229.9
|
|
|
$
|
522.7
|
|
There were no transfers between Levels I, II and III during the years ended
December 31, 2017
,
2016
and
2015
.
Our current funding strategy is to fund an amount at least equal to the minimum required funding as determined under ERISA with consideration of maximum tax deductible amounts. We may elect to make discretionary contributions up to the maximum amount deductible for income tax purposes. For the years ended
December 31, 2017
,
2016
and
2015
, no material contributions were necessary to meet ERISA required funding levels. However, during the years ended
December 31, 2017
,
2016
and
2015
, we made tax deductible discretionary contributions to the pension benefit plans of
$3.9
,
$11.1
and
$3.7
, respectively. Employer contributions to other benefit plans represent discretionary contributions and do not include payments to retirees for current benefits.
Our estimated future payments for pension benefits and postretirement benefits, which reflect expected future service, as appropriate, are as follows:
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Other
Benefits
|
2018
|
$
|
156.4
|
|
|
$
|
39.6
|
|
2019
|
152.3
|
|
|
40.0
|
|
2020
|
149.6
|
|
|
39.9
|
|
2021
|
145.8
|
|
|
39.6
|
|
2022
|
144.5
|
|
|
39.3
|
|
2023 - 2027
|
636.9
|
|
|
179.4
|
|
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
In addition to the defined benefit plans, we maintain the Anthem 401(k) Plan which is a qualified defined contribution plan covering substantially all employees. Voluntary employee contributions are matched by us subject to certain limitations. Contributions made by us totaled
$141.9
,
$131.5
and
$125.4
during
2017
,
2016
and
2015
, respectively.
11.
Medical Claims Payable
A reconciliation of the beginning and ending balances for medical claims payable, by segment (see Note 19, "Segment Information"), for the year ended
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
& Specialty
Business
|
|
Government
Business
|
|
Total
|
Gross medical claims payable, beginning of year
|
$
|
3,267.0
|
|
|
$
|
4,625.6
|
|
|
$
|
7,892.6
|
|
Ceded medical claims payable, beginning of year
|
(521.3
|
)
|
|
(17.8
|
)
|
|
(539.1
|
)
|
Net medical claims payable, beginning of year
|
2,745.7
|
|
|
4,607.8
|
|
|
7,353.5
|
|
Business combinations and purchase adjustments
|
—
|
|
|
75.8
|
|
|
75.8
|
|
Net incurred medical claims:
|
|
|
|
|
|
Current year
|
29,722.1
|
|
|
42,150.2
|
|
|
71,872.3
|
|
Prior years redundancies
|
(462.7
|
)
|
|
(701.9
|
)
|
|
(1,164.6
|
)
|
Total net incurred medical claims
|
29,259.4
|
|
|
41,448.3
|
|
|
70,707.7
|
|
Net payments attributable to:
|
|
|
|
|
|
Current year medical claims
|
26,481.8
|
|
|
37,767.9
|
|
|
64,249.7
|
|
Prior years medical claims
|
2,194.7
|
|
|
3,806.0
|
|
|
6,000.7
|
|
Total net payments
|
28,676.5
|
|
|
41,573.9
|
|
|
70,250.4
|
|
Net medical claims payable, end of year
|
3,328.6
|
|
|
4,558.0
|
|
|
7,886.6
|
|
Ceded medical claims payable, end of year
|
78.0
|
|
|
26.9
|
|
|
104.9
|
|
Gross medical claims payable, end of year
|
$
|
3,406.6
|
|
|
$
|
4,584.9
|
|
|
$
|
7,991.5
|
|
A reconciliation of the beginning and ending balances for medical claims payable, by segment, for the year ended
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
& Specialty
Business
|
|
Government
Business
|
|
Total
|
Gross medical claims payable, beginning of year
|
$
|
3,396.1
|
|
|
$
|
4,173.7
|
|
|
$
|
7,569.8
|
|
Ceded medical claims payable, beginning of year
|
(635.7
|
)
|
|
(9.9
|
)
|
|
(645.6
|
)
|
Net medical claims payable, beginning of year
|
2,760.4
|
|
|
4,163.8
|
|
|
6,924.2
|
|
Net incurred medical claims:
|
|
|
|
|
|
Current year
|
27,797.3
|
|
|
38,574.1
|
|
|
66,371.4
|
|
Prior years redundancies
|
(466.5
|
)
|
|
(383.9
|
)
|
|
(850.4
|
)
|
Total net incurred medical claims
|
27,330.8
|
|
|
38,190.2
|
|
|
65,521.0
|
|
Net payments attributable to:
|
|
|
|
|
|
Current year medical claims
|
25,119.3
|
|
|
34,037.3
|
|
|
59,156.6
|
|
Prior years medical claims
|
2,226.2
|
|
|
3,708.9
|
|
|
5,935.1
|
|
Total net payments
|
27,345.5
|
|
|
37,746.2
|
|
|
65,091.7
|
|
Net medical claims payable, end of year
|
2,745.7
|
|
|
4,607.8
|
|
|
7,353.5
|
|
Ceded medical claims payable, end of year
|
521.3
|
|
|
17.8
|
|
|
539.1
|
|
Gross medical claims payable, end of year
|
$
|
3,267.0
|
|
|
$
|
4,625.6
|
|
|
$
|
7,892.6
|
|
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
A reconciliation of the beginning and ending balances for medical claims payable, by segment, for the year ended
December 31, 2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
& Specialty
Business
|
|
Government
Business
|
|
Total
|
Gross medical claims payable, beginning of year
|
$
|
3,541.4
|
|
|
$
|
3,319.8
|
|
|
$
|
6,861.2
|
|
Ceded medical claims payable, beginning of year
|
(762.5
|
)
|
|
(4.9
|
)
|
|
(767.4
|
)
|
Net medical claims payable, beginning of year
|
2,778.9
|
|
|
3,314.9
|
|
|
6,093.8
|
|
Business combinations and purchase adjustments
|
—
|
|
|
121.8
|
|
|
121.8
|
|
Net incurred medical claims:
|
|
|
|
|
|
Current year
|
26,798.5
|
|
|
33,909.9
|
|
|
60,708.4
|
|
Prior years redundancies
|
(480.3
|
)
|
|
(319.9
|
)
|
|
(800.2
|
)
|
Total net incurred medical claims
|
26,318.2
|
|
|
33,590.0
|
|
|
59,908.2
|
|
Net payments attributable to:
|
|
|
|
|
|
Current year medical claims
|
24,145.7
|
|
|
29,922.0
|
|
|
54,067.7
|
|
Prior years medical claims
|
2,191.0
|
|
|
2,940.9
|
|
|
5,131.9
|
|
Total net payments
|
26,336.7
|
|
|
32,862.9
|
|
|
59,199.6
|
|
Net medical claims payable, end of year
|
2,760.4
|
|
|
4,163.8
|
|
|
6,924.2
|
|
Ceded medical claims payable, end of year
|
635.7
|
|
|
9.9
|
|
|
645.6
|
|
Gross medical claims payable, end of year
|
$
|
3,396.1
|
|
|
$
|
4,173.7
|
|
|
$
|
7,569.8
|
|
Amounts incurred related to prior years vary from previously estimated liabilities as the claims are ultimately settled. Liabilities at any period-end are continually reviewed and re-estimated as information regarding actual claims payments, or runout, becomes known. This information is compared to the originally
established year end liability. Negative amounts reported for incurred medical claims related to prior years result from claims being settled for amounts less than originally estimated. The prior year redundancy of
$1,164.6
shown above for the year ended
December 31, 2017
represents an estimate based on paid claim activity from
January 1, 2017
to
December 31, 2017
. Medical claim liabilities are usually described as having a “short tail,” which means that they are generally paid within twelve months of the member receiving service from the provider. Accordingly, the majority of the
$1,164.6
redundancy relates to claims incurred in calendar year
2016
.
The following table provides a summary of the two key assumptions having the most significant impact on our incurred but not paid liability estimates for the years ended
December 31, 2017
,
2016
and
2015
, which are the completion and trend factors. These
two key assumptions can be influenced by utilization levels, unit costs, mix of business, benefit plan designs, provider reimbursement levels, processing system conversions and changes, claim inventory levels, claim processing patterns, claim submission patterns and operational changes resulting from business combinations
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable Developments
by Changes in Key Assumptions
|
|
2017
|
|
2016
|
|
2015
|
Assumed trend factors
|
$
|
(651.3
|
)
|
|
$
|
(591.3
|
)
|
|
$
|
(467.9
|
)
|
Assumed completion factors
|
(513.3
|
)
|
|
(259.1
|
)
|
|
(332.3
|
)
|
Total
|
$
|
(1,164.6
|
)
|
|
$
|
(850.4
|
)
|
|
$
|
(800.2
|
)
|
The favorable development recognized in
2017
resulted from trend and completion factors developing more favorably than originally expected. The favorable development recognized in
2016
and
2015
resulted primarily from trend factors in late
2015
and late
2014
, respectively, developing more favorably than originally expected as well as a smaller but significant contribution from completion factor development.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
The reconciliation of net incurred medical claims to benefit expense included in the consolidated statements of income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
2017
|
|
2016
|
|
2015
|
Net incurred medical claims:
|
|
|
|
|
|
|
Commercial & Specialty Business
|
|
$
|
29,259.4
|
|
|
$
|
27,330.8
|
|
|
$
|
26,318.2
|
|
Government Business
|
|
41,448.3
|
|
|
38,190.2
|
|
|
33,590.0
|
|
Total net incurred medical claims
|
|
70,707.7
|
|
|
65,521.0
|
|
|
59,908.2
|
|
Quality improvement and other claims expense
|
|
1,528.5
|
|
|
1,313.4
|
|
|
1,208.7
|
|
Benefit expense
|
|
$
|
72,236.2
|
|
|
$
|
66,834.4
|
|
|
$
|
61,116.9
|
|
Incurred claims development, net of reinsurance, for the Commercial & Specialty Business for the years ended
December 31, 2017
,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Specialty Business
|
|
Cumulative Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
|
Claim Year
|
|
2015
|
|
2016
|
|
2017
|
2015 & Prior
|
|
$
|
29,097.0
|
|
|
$
|
28,630.5
|
|
|
$
|
28,581.0
|
|
2016
|
|
|
|
27,797.3
|
|
|
27,384.1
|
|
2017
|
|
|
|
|
|
29,722.1
|
|
Total
|
|
|
|
|
|
$
|
85,687.2
|
|
Paid claims development, net of reinsurance, for the Commercial & Specialty Business for the years ended
December 31, 2017
,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Specialty Business
|
|
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
|
Claim Year
|
|
2015
|
|
2016
|
|
2017
|
2015 & Prior
|
|
$
|
26,336.7
|
|
|
$
|
28,562.8
|
|
|
$
|
28,546.9
|
|
2016
|
|
|
|
25,119.3
|
|
|
27,329.9
|
|
2017
|
|
|
|
|
|
26,481.8
|
|
Total
|
|
|
|
|
|
$
|
82,358.6
|
|
At
December 31, 2017
, the total of incurred but not reported liabilities plus expected development on reported claims for the Commercial & Specialty Business was
$34.1
,
$54.2
and
$3,240.3
for the claim years
2015
and prior,
2016
and
2017
, respectively.
At
December 31, 2017
, the cumulative number of reported claims for the Commercial & Specialty Business was
124.5
,
115.5
and
113.1
for the claims years
2015
and prior,
2016
and
2017
, respectively.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Incurred claims development, net of reinsurance, for the Government Business as of and for the years ended
December 31, 2017
,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Business
|
|
Cumulative Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
|
Claim Year
|
|
2015
|
|
2016
|
|
2017
|
2015 & Prior
|
|
$
|
37,026.7
|
|
|
$
|
36,642.9
|
|
|
$
|
36,594.3
|
|
2016
|
|
|
|
38,574.1
|
|
|
37,920.8
|
|
2017
|
|
|
|
|
|
42,226.0
|
|
Total
|
|
|
|
|
|
$
|
116,741.1
|
|
Paid claims development, net of reinsurance, for the Government Business as of and for the years ended
December 31, 2017
,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Business
|
|
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
|
Claim Year
|
|
2015
|
|
2016
|
|
2017
|
2015 & Prior
|
|
$
|
32,862.9
|
|
|
$
|
36,572.0
|
|
|
$
|
36,572.0
|
|
2016
|
|
|
|
34,037.3
|
|
|
37,843.2
|
|
2017
|
|
|
|
|
|
37,767.9
|
|
Total
|
|
|
|
|
|
$
|
112,183.1
|
|
At
December 31, 2017
, the total of incurred but not reported liabilities plus expected development on reported claims for the Government Business was
$22.3
,
$77.6
and
$4,458.1
for the claim years
2015
and prior,
2016
and
2017
, respectively.
At
December 31, 2017
, the cumulative number of reported claims for the Government Business was
198.9
,
204.0
and
202.8
for the claims years
2015
and prior,
2016
and
2017
, respectively.
The information about incurred and paid claims development for the years ended
December 31, 2015
and
2016
, for both the Commercial & Specialty Business and Government Business, is presented as supplementary information.
The cumulative number of reported claims for each claim year for both the Commercial & Specialty Business and Government Business have been developed using historical data captured by our claim payment systems. The provided claim amounts are not a precise tool for understanding utilization of medical services. They could be impacted by a variety of factors including changes in provider billing practices, provider reimbursement arrangements, mix of services, benefit design or processing systems. The cumulative number of reported claims has been provided to comply with FASB accounting standards and is not used by management in its claims analysis. Our cumulative number of reported claims may not be comparable to similar measures reported by other health benefits companies.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
The reconciliation of the Commercial & Specialty Business and Government Business incurred and paid claims development information for the three years ended
December 31, 2017
, reflected in the tables above, to the consolidated ending balance for medical claims payable, as of
December 31, 2017
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
& Specialty
Business
|
|
Government
Business
|
|
Total
|
Cumulative incurred claims and allocated claim adjustment expenses, net of reinsurance
|
$
|
85,687.2
|
|
|
$
|
116,741.1
|
|
|
$
|
202,428.3
|
|
Less: cumulative paid claims and allocated claim adjustment expenses, net of reinsurance
|
82,358.6
|
|
|
112,183.1
|
|
|
194,541.7
|
|
Net medical claims payable, end of year
|
3,328.6
|
|
|
4,558.0
|
|
|
7,886.6
|
|
Ceded medical claims payable, end of year
|
78.0
|
|
|
26.9
|
|
|
104.9
|
|
Gross medical claims payable, end of year
|
$
|
3,406.6
|
|
|
$
|
4,584.9
|
|
|
$
|
7,991.5
|
|
12. Debt
Short-term Borrowings
We are a member, through certain subsidiaries, of the Federal Home Loan Bank of Indianapolis, the Federal Home Loan Bank of Cincinnati and the Federal Home Loan Bank of Atlanta, or collectively, the FHLBs. As a member we have the ability to obtain short-term cash advances, subject to certain minimum collateral requirements. At
December 31, 2017
and
2016
,
$825.0
and
$440.0
, respectively, were outstanding under our short-term FHLB borrowings. These outstanding short-term FHLB borrowings at
December 31, 2017
and
2016
had fixed interest rates of
1.386%
and
0.643%
, respectively.
In August 2017, we entered into two separate 364-day lines of credit with separate lenders for general corporate purposes. The facilities provide combined credit up to
$450.0
. The interest rate on each line of credit is based on the LIBOR rate plus a predetermined rate. Our ability to borrow under the lines of credit is subject to compliance with certain covenants. We had
$450.0
outstanding under these lines of credit at December 31, 2017.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Long-term Debt
The carrying value of long-term debt at
December 31, 2017
and
2016
consists of the following:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Senior unsecured notes:
|
|
|
|
2.375%, due 2017
|
$
|
—
|
|
|
$
|
400.1
|
|
5.875%, due 2017
|
—
|
|
|
528.3
|
|
1.875%, due 2018
|
625.5
|
|
|
624.3
|
|
2.300%, due 2018
|
649.1
|
|
|
647.5
|
|
2.250%, due 2019
|
847.2
|
|
|
845.6
|
|
7.000%, due 2019
|
—
|
|
|
439.4
|
|
2.500%, due 2020
|
894.9
|
|
|
—
|
|
4.350%, due 2020
|
692.9
|
|
|
700.0
|
|
3.700%, due 2021
|
697.6
|
|
|
696.9
|
|
2.950%, due 2022
|
745.9
|
|
|
—
|
|
3.125%, due 2022
|
844.9
|
|
|
843.8
|
|
3.300%, due 2023
|
994.4
|
|
|
993.3
|
|
3.350%, due 2024
|
845.0
|
|
|
—
|
|
3.500%, due 2024
|
792.9
|
|
|
791.9
|
|
3.650%, due 2027
|
1,589.2
|
|
|
—
|
|
5.950%, due 2034
|
334.0
|
|
|
444.7
|
|
5.850%, due 2036
|
395.6
|
|
|
768.3
|
|
6.375%, due 2037
|
366.3
|
|
|
639.9
|
|
5.800%, due 2040
|
123.5
|
|
|
193.9
|
|
4.625%, due 2042
|
886.7
|
|
|
886.3
|
|
4.650%, due 2043
|
986.3
|
|
|
985.9
|
|
4.650%, due 2044
|
791.1
|
|
|
790.8
|
|
5.100%, due 2044
|
593.8
|
|
|
593.6
|
|
4.375%, due 2047
|
1,385.5
|
|
|
—
|
|
4.850%, due 2054
|
246.8
|
|
|
246.8
|
|
Remarketable subordinated notes:
|
|
|
|
1.900%, due 2028
|
1,238.7
|
|
|
1,237.6
|
|
Surplus note:
|
|
|
|
9.000%, due 2027
|
24.9
|
|
|
24.9
|
|
Senior convertible debentures:
|
|
|
|
2.750%, due 2042
|
260.5
|
|
|
334.1
|
|
Variable rate debt:
|
|
|
|
Commercial paper program
|
803.6
|
|
|
629.0
|
|
Total long-term debt
|
18,656.8
|
|
|
15,286.9
|
|
Current portion of long-term debt
|
(1,274.6
|
)
|
|
(928.4
|
)
|
Long-term debt, less current portion
|
$
|
17,382.2
|
|
|
$
|
14,358.5
|
|
All debt is a direct obligation of Anthem, Inc., except for the surplus note, the FHLB borrowings and the lines of credit.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
We generally issue senior unsecured notes, or Notes, for long-term borrowing purposes. Certain of these Notes may have a call feature that allows us to redeem the Notes at any time at our option and/or a put feature that allows a Note holder to redeem the Notes upon the occurrence of both a change in control event and a downgrade of the Notes below an investment grade rating.
On December 14, 2017, we redeemed the
$255.2
remaining outstanding principal balance of our 7.000% Notes due 2019, plus applicable premium for early redemption and accrued and unpaid interest to the redemption date, for cash totaling
$275.0
. We recognized a loss on extinguishment of debt of
$14.3
for the repurchase of these Notes.
On November 21, 2017, we issued
$900.0
aggregate principal amount of 2.500% Notes due 2020,
$750.0
aggregate principal amount of 2.950% Notes due 2022,
$850.0
aggregate principal amount of 3.350% Notes due 2024,
$1,600.0
aggregate principal amount of 3.650% Notes due 2027 and
$1,400.0
aggregate principal amount of 4.375% Notes due 2047 under our shelf registration statement. Interest on the 2020 Notes is payable semi-annually in arrears on May 21 and November 21 of each year, commencing on May 21, 2018. Interest on the 2022 Notes, the 2024 Notes, the 2027 Notes and the 2047 Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on June 1, 2018. The net proceeds were used to fund the acquisitions of HealthSun and America's 1st Choice; redemption of the 7.000% Notes due 2019, discussed above; and redemption of the Tender Notes, discussed below. We intend to use the remaining net proceeds for working capital and general corporate purposes.
On November 14, 2017, we initiated a cash tender offer to purchase any and all of our 7.000% Notes due 2019, or the Any and All Notes, and certain of our 5.950% Notes due 2034, 5.850% Notes due 2036, 6.375% Notes due 2037, 5.800% Notes due 2040 and 5.100% Notes due 2044, or the Maximum Tender Offer Notes, and collectively with the Any and All Notes, the Tender Notes. On November 21, 2017, we repurchased
$185.1
aggregate principal amount of the Any and All Notes, plus applicable premium and accrued and unpaid interest, for cash totaling
$199.4
. On November 30, 2017, we repurchased
$836.3
aggregate principal amount of the Maximum Tender Offer Notes, plus applicable premium and accrued and unpaid interest, for cash totaling
$1,095.4
. We recognized a loss on extinguishment of debt of
$265.6
for the repurchase of the Tender Notes.
On June 15, 2017 and February 15, 2017, we repaid, upon maturity, the
$528.8
outstanding balance of our 5.875% Notes and the
$400.0
outstanding balance of our 2.375% Notes, respectively.
On September 10, 2015, we repaid, upon maturity, the
$625.0
outstanding principal balance of our
1.250%
Notes due 2015. Additionally, during the year ended December 31, 2015, we repurchased
$13.0
of outstanding principal balance of certain Notes, plus applicable premium and accrued and unpaid interest, for cash totaling
$16.2
. We recognized a loss on extinguishment of debt of
$3.4
on the repurchase of these Notes.
On May 12, 2015, we issued
25.0
Equity Units, pursuant to an underwriting agreement dated May 6, 2015, in an aggregate principal amount of
$1,250.0
. Each Equity Unit has a stated amount of
$50
(whole dollars) and consists of a purchase contract obligating the holder to purchase a certain number of shares of our common stock on May 1, 2018, subject to earlier termination or settlement, for a price in cash of $50 (whole dollars); and a
5%
undivided beneficial ownership interest in $1,000 (whole dollars) principal amount of our
1.900%
remarketable subordinated notes, or RSNs, due 2028. We received
$1,228.8
in cash proceeds from the issuance of the Equity Units, net of underwriting discounts, commissions and offering expenses payable by us, and recorded $1,250.0 in long-term debt.
On May 1, 2018, if the applicable market value of our common stock is equal to or greater than $207.5898 per share, the settlement rate will be 0.2406 shares of our common stock. If the applicable market value of our common stock is less than $207.5898 per share but greater than $143.7160 per share, the settlement rate will be a number of shares of our common stock equal to $50 (whole dollars) divided by the applicable market value of our common stock. If the applicable market value of common stock is less than or equal to $143.7160 per share, the settlement rate will be 0.3480 shares of our common stock. Holders of the Equity Units may elect early settlement at a minimum settlement rate of 0.2406 shares of our common stock for each purchase contract being settled.
The RSNs are pledged as collateral to secure the purchase of common stock under the related stock purchase contracts. Quarterly interest payments on the RSNs commenced on August 1, 2015. The RSNs are scheduled to be remarketed during the five business day period ending on April 26, 2018 and may be remarketed earlier, at our election, during the period from January 30, 2018 through April 12, 2018. Following the remarketing, the interest rate on the RSNs will be set to current market rates and interest will be payable semi-annually. At
December 31, 2017
and
2016
, the stock purchase contract liability was
$20.9
and
$62.0
, respectively, and is included in other current liabilities and other noncurrent liabilities with a
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
corresponding offset to additional paid-in capital in our consolidated balance sheets. Contract adjustment payments commenced on August 1, 2015 at a rate of
3.350%
per annum on the stated amount per Equity Unit. Subject to certain specified terms and conditions, we have the right to defer payments on all or part of the contract adjustment payments but not beyond the contract settlement date, and we have the right to defer payment of interest on the RSNs but not beyond the purchase contract settlement date or maturity date.
The surplus note is an unsecured obligation of Anthem Insurance Companies, Inc., or Anthem Insurance, a wholly owned subsidiary, and is subordinate in right of payment to all of Anthem Insurance’s existing and future indebtedness. Any payment of interest or principal on the surplus note may be made only with the prior approval of the Indiana Department of Insurance, or IDOI, and only out of capital and surplus funds of Anthem Insurance that the IDOI determines to be available for the payment under Indiana insurance laws.
We have a senior revolving credit facility, or the Facility, with a group of lenders for general corporate purposes. The Facility provides credit up to
$3,500.0
and matures on
August 25, 2020
. The interest rate on the Facility is based on either the LIBOR rate or a base rate plus a predetermined rate based on our public debt rating at the date of utilization. Our ability to borrow under the Facility is subject to compliance with certain covenants. There were no amounts outstanding under the Facility at
December 31, 2017
or
2016
.
We have an authorized commercial paper program of up to
$2,500.0
, the proceeds of which may be used for general corporate purposes. At
December 31, 2017
, we had
$803.6
outstanding under our commercial paper program with a weighted-average interest rate of
1.8247%
. At
December 31, 2016
, we had
$629.0
outstanding under our commercial paper program with a weighted-average interest rate of
0.9715%
. Commercial paper borrowings have been classified as long-term debt at
December 31, 2017
and
2016
, as our general practice and intent is to replace short-term commercial paper outstanding at expiration with additional short-term commercial paper for an uninterrupted period extending for more than one year, and we have the ability to redeem our commercial paper with borrowings under the Facility described above.
During the year ended December 31, 2015, we entered into a bridge facility commitment letter and a joinder agreement, and a term loan facility, to finance a portion of the consideration under the now terminated Cigna Merger Agreement. In January 2017, we reduced the size of the bridge facility from
$22,500.0
to
$19,500.0
and extended the termination date under the Cigna Merger Agreement, as well as the availability of commitments under the bridge facility and term loan facility, to April 30, 2017. We recorded
$107.9
,
$104.0
and
$36.8
of interest expense related to the amortization of the bridge loan facility and other related fees during the years ended December 31, 2017, 2016 and 2015, respectively. The commitment of the lenders to provide the bridge facility and term loan facility expired on April 30, 2017.
Convertible Debentures
On October 9, 2012, we issued
$1,500.0
of senior convertible debentures, or the Debentures, in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, or the Securities Act. The Debentures are governed by an indenture dated as of October 9, 2012 between us and The Bank of New York Mellon Trust Company, N.A., as trustee, or the Indenture. The Debentures bear interest at a rate of
2.750%
per year, payable semi-annually in arrears in cash on April 15 and October 15 of each year, and mature on October 15, 2042, unless earlier redeemed, repurchased or converted into shares of common stock at the applicable conversion rate. The Debentures also have a contingent interest feature that will require us to pay additional interest based on certain thresholds and for certain events, as defined in the Indenture, beginning on October 15, 2022.
Holders may convert their Debentures at their option prior to the close of business on the business day immediately preceding April 15, 2042, only under the following circumstances: (1) during any fiscal quarter if the last reported sale price of our common stock for at least
20
trading days during a period of
30
consecutive trading days ending on the last trading day of the preceding fiscal quarter is greater than or equal to
130%
of the applicable conversion price on each applicable trading day; (2) during the
five
business day period after any
10
consecutive trading day period, or the measurement period, in which the trading price per
$1,000
(whole dollars) principal amount of Debentures for each trading day of that measurement period was less than
98%
of the product of the last reported sale price of our common stock and the applicable conversion rate on each such day; (3) if we call any or all of the Debentures for redemption, at any time prior to the close of business on the third scheduled trading day prior to the redemption date; or (4) upon the occurrence of specified corporate events, as defined in the Indenture. On and after
April 15, 2042
and until the close of business on the third scheduled trading day immediately
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
preceding the Debentures’ maturity date of
October 15, 2042
, holders may convert their Debentures into common stock at any time irrespective of the preceding circumstances. The Debentures are redeemable at our option at any time on or after
October 20, 2022
, upon the occurrence of certain events, as defined in the Indenture.
Upon conversion of the Debentures, we will deliver cash up to the aggregate principal amount of the Debentures converted. With respect to any conversion obligation in excess of the aggregate principal amount of the Debentures converted, we have the option to settle the excess with cash, shares of our common stock or a combination thereof based on a daily conversion value, determined in accordance with the Indenture. The initial conversion rate for the Debentures was
13.2319
shares of our common stock per Debenture, which represented a
25%
conversion premium based on the closing price of
$60.46
per share of our common stock on October 2, 2012 (the date the Debentures’ terms were finalized) and is equivalent to an initial conversion price of
$75.575
per share of our common stock.
During the year ended December 31, 2017,
$117.3
aggregate principal amount of the Debentures
were surrendered for conversion by certain holders in accordance with the terms and provisions of the Indenture. We elected to settle the excess of the principal amount of the conversions with cash for total payments of
$344.8
. We recognized a loss on the extinguishment of debt related to the Debentures of
$2.5
, based on the fair values of the debt on the conversion settlement dates. During the year ended December 31, 2015, we repurchased
$920.0
in aggregate principal amount of the Debentures. In addition,
$66.6
aggregate principal amount was surrendered for conversion. We elected to settle the excess of the principal amount of the repurchases and conversions with cash for total payments of
$2,055.7
and recognized a gain on the extinguishment of debt of
$12.7
. There were no repurchases or material conversions during the year ended December 31, 2016.
As of
December 31, 2017
, our common stock was last traded at a price of
$225.01
per share. If the remaining Debentures had been converted or matured at
December 31, 2017
, we would have been obligated to pay the principal of the Debentures plus an amount in cash or shares equal to
$829.1
. The Debentures and underlying shares of our common stock have not been and will not be registered under the Securities Act, or any state securities laws, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
We have accounted for the Debentures in accordance with the cash conversion guidance in FASB guidance for debt with conversion and other options. As a result, the value of the embedded conversion option, net of deferred taxes and equity issuance costs, has been bifurcated from its debt host and recorded as a component of additional paid-in capital in our consolidated balance sheets.
The following table summarizes, at
December 31, 2017
, the related balances, conversion rate and conversion price of the Debentures:
|
|
|
|
|
Outstanding principal amount
|
$
|
396.1
|
|
Unamortized debt discount
|
$
|
131.4
|
|
Net debt carrying amount
|
$
|
260.5
|
|
Equity component carrying amount
|
$
|
143.6
|
|
Conversion rate (shares of common stock per $1,000 of principal amount)
|
13.7467
|
|
Effective conversion price (per $1,000 of principal amount)
|
$
|
72.7441
|
|
The remaining amortization period of the unamortized debt discount as of
December 31, 2017
is approximately
25 years
. The unamortized discount will be amortized into interest expense using the effective interest method based on an effective interest rate of
5.130%
, which represents the market interest rate for a comparable debt instrument that does not have a conversion feature. During the years ended
December 31, 2017
,
2016
and 2015, we recognized
$16.7
,
$17.3
and
$32.5
, respectively, of interest expense related to the Debentures, of which
$13.4
,
$14.1
and
$26.6
, respectively, represented interest expense recognized at the stated interest rate of
2.750%
and
$3.3
,
$3.2
and
$5.9
, respectively, represented interest expense resulting from amortization of the debt discount.
Total interest paid during
2017
,
2016
and
2015
was $
777.6
,
$594.9
, and
$604.0
, respectively.
We were in compliance with all applicable covenants under all of our outstanding debt agreements at
December 31, 2017
and
2016
.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Future maturities of all long-term debt outstanding at
December 31, 2017
are as follows:
2018
,
$2,078.2
;
2019
,
$847.2
;
2020
,
$1,587.8
;
2021
,
$697.6
;
2022
,
$1,590.8
and thereafter,
$11,855.2
.
13. Commitments and Contingencies
Litigation
In the ordinary course of business, we are defendants in, or parties to, a number of pending or threatened legal actions or proceedings. To the extent a plaintiff or plaintiffs in the following cases have specified in their complaint or in other court filings the amount of damages being sought, we have noted those alleged damages in the descriptions below. With respect to the cases described below, we contest liability and/or the amount of damages in each matter and believe we have meritorious defenses.
We are a defendant in multiple lawsuits that were initially filed in 2012 against the BCBSA as well as Blue Cross and/or Blue Shield licensees across the country. The cases were consolidated into a single multi-district lawsuit called
In re Blue Cross Blue Shield Antitrust Litigation
that is pending in the United States District Court for the Northern District of Alabama, or the Court. Generally, the suits allege that the BCBSA and the Blue plans have engaged in a conspiracy to horizontally allocate geographic markets through license agreements, best efforts rules (which limit the percentage of non-Blue revenue of each plan), restrictions on acquisitions, rules governing the BlueCard and National Accounts programs and other arrangements in violation of the Sherman Antitrust Act and related state laws. The cases were brought by two putative nationwide classes of plaintiffs, health plan subscribers and providers. Subscriber and provider plaintiffs each filed consolidated amended complaints in July 2013. The consolidated amended subscriber complaint was also brought on behalf of putative state classes of health plan subscribers in Alabama, Arkansas, California, Florida, Hawaii, Illinois, Louisiana, Michigan, Mississippi, Missouri, New Hampshire, North Carolina, Pennsylvania, Rhode Island, South Carolina, Tennessee, and Texas. Defendants filed motions to dismiss in September 2013. In June 2014, the Court denied the majority of the motions, ruling that plaintiffs had alleged sufficient facts at that stage of the litigation to avoid dismissal of their claims. Following the subsequent filing of amended complaints by each of the subscriber and provider plaintiffs, we filed our answer and asserted our affirmative defenses in December 2014. Since January 2016, subscribers have filed additional actions asserting damage claims in Indiana, Kansas, Kansas City, Minnesota, Montana, Nebraska, North Dakota, Oklahoma, South Dakota, Vermont, and Virginia, all of which have been consolidated into the multi-district lawsuit. In November 2016 and April 2017, subscriber plaintiffs and provider plaintiffs filed new consolidated amended complaints adding new named plaintiffs and new factual allegations. We filed answers to the amended complaints in May 2017. In February 2017, the Court granted in part defendants' motion for summary judgment based on the filed rate doctrine finding that the damages claims of certain named Alabama subscribers are barred under federal law. Subscribers filed a motion to reconsider the Court's order, which was denied without prejudice to plaintiffs’ right to raise the issue at a later date. In April 2017, the Court of Appeals for the Eleventh Circuit affirmed a lower court ruling in a related declaratory judgment action,
Musselman v. Blue Cross and Blue Shield of Alabama, et al
., that the antitrust conspiracy claims being asserted by a subset of putative provider class members were released a decade ago by class action settlements in the
In re Managed Care Litigation
. In June 2017, the Court denied defendants’ motion to dismiss certain of the claims in provider plaintiffs’ latest consolidated complaint. Briefing on the relevant standard of review for the claims asserted under the Sherman Antitrust Act commenced in July 2017. Cross motions for partial summary judgment on the relevant standard of review were heard by the Court in October 2017, and they remain pending. In August 2017, provider plaintiffs moved for partial summary judgment against Anthem on the basis of collateral estoppel on several issues discussed in
United States v. Anthem, Inc
., 236 F. Supp. 3d 171 (D.D.C. 2017). That motion was heard in October 2017, and is pending. In January 2018, the Court issued an order suspending certain deadlines from the Court's third amended scheduling order. No dates have been set for either the pretrial conference or trials in these actions. We intend to vigorously defend these suits; however, their ultimate outcome cannot be presently determined.
In July 2013, our California affiliate Blue Cross of California doing business as Anthem Blue Cross, or BCC, was named as a defendant, along with an unaffiliated entity, in a California taxpayer action filed in Los Angeles County Superior Court, captioned as
Michael D. Myers v. State Board of Equalization, et al.
This action was brought under a California statute that permits an individual taxpayer to sue a governmental agency when the taxpayer believes the agency has failed to enforce governing law. Plaintiff contends that BCC, a licensed Health Care Service Plan, or HCSP, is an “insurer” for purposes of taxation despite acknowledging it is not an “insurer” under regulatory law. At the time, under California law, “insurers” were required to pay a gross premiums tax, or GPT, calculated as
2.35%
on gross premiums. As a licensed HCSP, BCC has paid the California Corporate Franchise Tax, or CFT, the tax paid by California businesses generally. Plaintiff contends that BCC
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
must pay the GPT rather than the CFT. Plaintiff seeks a writ of mandate directing the taxing agencies to collect the GPT, and seeks an order requiring BCC to pay GPT back taxes, interest, and penalties, for a period dating to eight years prior to the July 2013 filing of the complaint. In February 2014, the Superior Court sustained BCC’s demurrer to the complaint, without leave to amend, ruling that BCC is not an “insurer” for purposes of taxation. Plaintiff appealed. In September 2015, the Court of Appeal reversed the Superior Court’s ruling, and remanded. The Court of Appeal held that HCSP could be an insurer for purposes of taxation if it wrote predominantly “indemnity” products. In October 2015, BCC filed a petition for rehearing in the Court of Appeal, which was denied. In November 2015, BCC filed a petition for review with the California Supreme Court, which was denied in December 2015. This lawsuit is being coordinated with similar lawsuits filed against other entities. BCC has filed and served a motion for judgment on the pleadings based upon the 2016 Managed Care Organization tax bill, which became effective in 2016 and demonstrates the Legislature's clear intent that HCSPs such as BCC are not subject to the gross premium tax. BCC's motion was heard in January 2018 and taken under advisement. Because GPT is constitutionally imposed in lieu of certain other taxes, BCC has filed protective tax refund claims with the city of Los Angeles, the California Department of Health Care Services and the Franchise Tax Board to protect its rights to recover certain taxes previously paid, should BCC eventually be determined to be subject to GPT for the same tax periods. BCC intends to vigorously defend this suit; however, its ultimate outcome cannot be presently determined.
In March 2016, we filed a lawsuit against Express Scripts, Inc., or Express Scripts, our vendor for pharmacy benefit management, or PBM, services, captioned
Anthem, Inc. v. Express Scripts, Inc.
, in the U.S. District Court for the Southern District of New York. The lawsuit seeks to recover damages for pharmacy pricing that is higher than competitive benchmark pricing, damages related to operational breaches, as well as various declarations under the pharmacy benefit management agreement, or PBM Agreement, between the parties. Our suit asserts that Express Scripts' pricing exceeds the competitive benchmark pricing required by the PBM Agreement by approximately
$13,000.0
over the remaining term of the PBM Agreement, and by approximately
$1,800.0
through the post-termination transition period. Further, we assert that Express Scripts’ excessive pricing has caused us to lose existing customers and prevented us from gaining new business. In addition to the amounts associated with competitive benchmark pricing, we are seeking over
$158.0
in damages associated with operational breaches incurred, together with a declaratory judgment that Express Scripts: (i) breached its obligation to negotiate in good faith and to agree in writing to new pricing terms; (ii) is required to provide competitive benchmark pricing to us through the term of the PBM Agreement; (iii) has breached the PBM Agreement, and that we can terminate the PBM Agreement either due to Express Scripts’ breaches or because we have determined that Express Scripts’ performance with respect to the delegated Medicare Part D prescription drug plans, or Medicare Part D, functions has been unsatisfactory; and (iv) is required under the PBM Agreement to provide post-termination services, at competitive benchmark pricing, for one year following any termination. In April 2016, Express Scripts filed an answer to the lawsuit disputing our contractual claims and alleging various defenses and counterclaims. Express Scripts contends that we breached the PBM Agreement by failing to negotiate proposed new pricing terms in good faith and that we breached the implied covenant of good faith and fair dealing by disregarding the terms of the transaction. In addition, Express Scripts is seeking declaratory judgments: (i) regarding the timing of the periodic pricing review under the PBM Agreement; (ii) that it has no obligation to ensure that we receive any specific level of pricing, that we have no contractual right to any change in pricing under the PBM Agreement and that its sole obligation is to negotiate proposed pricing terms in good faith; and (iii) that we do not have the right to terminate the PBM Agreement. In the alternative, Express Scripts claims that we have been unjustly enriched by its payment of
$4,675.0
at the time of the PBM Agreement. We believe that Express Scripts’ defenses and counterclaims are without merit. We filed a motion to dismiss Express Scripts' counterclaims. In March 2017, the court granted our motion to dismiss Express Scripts’ counterclaims for (i) breach of the implied covenant of good faith and fair dealing, and (ii) unjust enrichment with prejudice. We intend to vigorously pursue our claims and defend against any counterclaims; however, the ultimate outcome cannot be presently determined.
Anthem, Inc. and Express Scripts were named as defendants in a purported class action lawsuit filed in June 2016 in the Southern District of New York by three members of ERISA plans alleging ERISA violations captioned
Karen Burnett, Brendan Farrell, and Robert Shullich, individually and on behalf of all others similarly situated v. Express Scripts, Inc. and Anthem, Inc.
The lawsuit was then consolidated with a similar lawsuit that was previously filed against Express Scripts. A first amended consolidated complaint was filed in the consolidated lawsuit, which is captioned
In Re Express Scripts/Anthem ERISA Litigation
. The first amended consolidated complaint was filed by six individual plaintiffs against Anthem and Express Scripts on behalf of all persons who are participants in or beneficiaries of any ERISA or non-ERISA healthcare plan from December 1, 2009 to the present in which Anthem provided prescription drug benefits through a PBM Agreement with Express Scripts and who paid a percentage based co-insurance payment in the course of using that prescription drug benefit.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
As to the ERISA members, the plaintiffs allege that Anthem breached its duties under ERISA (i) by failing to adequately monitor Express Scripts’ pricing under the PBM Agreement and (ii) by placing its own pecuniary interest above the best interests of Anthem insureds by allegedly agreeing to higher pricing in the PBM Agreement in exchange for the $4,675.0 purchase price for our NextRx PBM business. As to the non-ERISA members, the plaintiffs assert that Anthem breached the implied covenant of good faith and fair dealing implied in the health plans under which the non-ERISA members are covered by (i) negotiating and entering into the PBM Agreement with Express Scripts that was detrimental to the interests of such non-ERISA members, (ii) failing to adequately monitor the activities of Express Scripts, including failing to timely monitor and correct the prices charged by Express Scripts for prescription medications, and (iii) acting in Anthem’s self-interests instead of the interests of the non-ERISA members when it accepted the $4,675.0 purchase price for NextRx. Plaintiffs seek to hold Anthem and Express Scripts jointly and severally liable and to recover all losses suffered by the proposed class, equitable relief, disgorgement of alleged ill-gotten gains, injunctive relief, attorney’s fees and costs and interest. In November 2016, we filed a motion to dismiss all of the claims brought against Anthem. In response, in March 2017, the plaintiffs filed a second amended consolidated complaint adding two self-insured accounts as plaintiffs and asserting an additional purported class of self-insured accounts. In April 2017, we filed a motion to dismiss the claims brought against Anthem. Our motion was granted without prejudice in January 2018. Plaintiffs have filed a notice of appeal. We intend to vigorously defend this suit; however, its ultimate outcome cannot be presently determined.
In July 2015, we and Cigna announced that we entered into the Cigna Merger Agreement, pursuant to which we would acquire all outstanding shares of Cigna. In July 2016, the U.S. Department of Justice, or DOJ, along with certain state attorneys general, filed a civil antitrust lawsuit in the U.S. District Court for the District of Columbia, or District Court, seeking to block the merger. In February 2017, Cigna purported to terminate the Cigna Merger Agreement and commenced litigation against us in the Delaware Court of Chancery, or Delaware Court, seeking damages, including the
$1,850.0
termination fee pursuant to the terms of the Cigna Merger Agreement, and a declaratory judgment that its purported termination of the Cigna Merger Agreement was lawful, among other claims, which is captioned
Cigna Corp. v. Anthem Inc.
Also in February 2017, we initiated our own litigation against Cigna in the Delaware Court seeking a temporary restraining order to enjoin Cigna from terminating the Cigna Merger Agreement, specific performance compelling Cigna to comply with the Cigna Merger Agreement and damages, which is captioned
Anthem Inc. v. Cigna Corp
. In April 2017, the U.S. Circuit Court of Appeals for the District of Columbia affirmed the ruling of the District Court, which blocked the merger. In May 2017, after the Delaware Court denied our motion to enjoin Cigna from terminating the Cigna Merger Agreement, we delivered to Cigna a notice terminating the Cigna Merger Agreement. The litigation in Delaware is ongoing with trial scheduled to commence in February 2019. We believe Cigna’s allegations are without merit and we intend to vigorously pursue our claims and defend against Cigna's allegations; however, the ultimate outcome of our litigation with Cigna cannot be presently determined.
In December 2016, the DOJ issued a civil investigative demand to Anthem, Inc. to discover information about our chart review and risk adjustment programs under Parts C and D of the Medicare Program. We understand the DOJ is investigating the programs of other Medicare Advantage health plans, along with providers and vendors. We continue to cooperate with the DOJ’s investigation.
Where available information indicates that it is probable that a loss has been incurred as of the date of the consolidated financial statements and we can reasonably estimate the amount of that loss, we accrue the estimated loss by a charge to income. In many proceedings, however, it is difficult to determine whether any loss is probable or reasonably possible. In addition, even where loss is possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously identified loss contingency, it is not always possible to reasonably estimate the amount of the possible loss or range of loss.
With respect to many of the proceedings to which we are a party, we cannot provide an estimate of the possible losses, or the range of possible losses in excess of the amount, if any, accrued, for various reasons, including but not limited to some or all of the following: (i) there are novel or unsettled legal issues presented, (ii) the proceedings are in early stages, (iii) there is uncertainty as to the likelihood of a class being certified or decertified or the ultimate size and scope of the class, (iv) there is uncertainty as to the outcome of pending appeals or motions, (v) there are significant factual issues to be resolved, and/or (vi) in many cases, the plaintiffs have not specified damages in their complaint or in court filings. For those legal proceedings where a loss is probable, or reasonably possible, and for which it is possible to reasonably estimate the amount of the possible loss or range of losses, we currently believe that the range of possible losses, in excess of established reserves, for all of those proceedings is from
$0.0
to approximately
$250.0
at
December 31, 2017
. This estimated aggregate range of reasonably
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
possible losses is based upon currently available information taking into account our best estimate of such losses for which such an estimate can be made.
Cyber Attack Incident
In February 2015, we reported that we were the target of a sophisticated external cyber attack. The attackers gained unauthorized access to certain of our information technology systems and obtained personal information related to many individuals and employees, such as names, birth dates, healthcare identification/social security numbers, street addresses, email addresses, phone numbers and employment information, including income data. To date, there is no evidence that credit card or medical information, such as claims, test results or diagnostic codes, were targeted, accessed or obtained, although no assurance can be given that we will not identify additional information that was accessed or obtained.
Upon discovery of the cyber attack, we took immediate action to remediate the security vulnerability and retained a cybersecurity firm to evaluate our systems and identify solutions based on the evolving landscape. We have provided credit monitoring and identity protection services to those who have been affected by this cyber attack. We have continued to implement security enhancements since this incident. We have incurred expenses subsequent to the cyber attack to investigate and remediate this matter and expect to continue to incur expenses of this nature in the foreseeable future. We recognize these expenses in the periods in which they are incurred.
Actions have been filed in various federal and state courts and other claims have been or may be asserted against us on behalf of current or former members, current or former employees, other individuals, shareholders or others seeking damages or other related relief, allegedly arising out of the cyber attack. Federal and state agencies, including state insurance regulators, state attorneys general, the Health and Human Services Office of Civil Rights and the Federal Bureau of Investigation, are investigating events related to the cyber attack, including how it occurred, its consequences and our responses. In December 2016, the National Association of Insurance Commissioners, or NAIC, concluded its multistate targeted market conduct and financial exam. In connection with the resolution of the matter, the NAIC requested we provide, and we agreed to provide, a customized credit protection program, equivalent to a credit freeze, for our members who were under the age of eighteen on January 27, 2015. No fines or penalties were imposed on us. Although we are cooperating in these investigations, we may be subject to fines or other obligations, which may have an adverse effect on how we operate our business and an adverse effect on our results of operations and financial condition. With respect to the civil actions, a motion to transfer was filed with the Judicial Panel on Multidistrict Litigation, or the Panel, in February 2015 and was subsequently heard by the Panel in May 2015. In June 2015, the Panel entered its order transferring the consolidated matter to the U.S. District Court for the Northern District of California, or the U.S. District Court. The U.S. District Court entered its case management order in September 2015. We filed a motion to dismiss ten of the counts that were before the U.S. District Court. In February 2016, the U.S. District Court issued an order granting in part and denying in part our motion, dismissing three counts with prejudice, four counts without prejudice and allowing three counts to proceed. Plaintiffs filed a second amended complaint in March 2016, and we subsequently filed a second motion to dismiss. In May 2016, the U.S. District Court issued an order granting in part and denying in part our motion, dismissing one count with prejudice, dismissing certain counts asserted by specific named plaintiffs with or without prejudice depending on their individualized facts, and allowing the remaining counts to proceed. In July 2016, plaintiffs filed a third amended complaint, which we answered in August 2016. Fact discovery was completed in December 2016. Plaintiffs filed their motion for class certification and trial plan in March 2017. We filed our opposition to class certification, motions to strike the testimony of three of the plaintiffs' experts and trial plan in April 2017. Prior to those motions being heard, the parties agreed to settle plaintiffs' claims on a class-wide basis for a total settlement payment of
$115.0
and certain non-monetary relief. In June 2017, plaintiffs filed a motion for preliminary approval of the settlement and a motion to continue all case deadlines. In July 2017, the U.S. District Court granted the motion to continue all case deadlines. The U.S. District Court issued an order of preliminary approval in August 2017. The U.S. District Court held a hearing on plaintiffs' motion for final approval and class counsel's fee petition in February 2018. The U.S. District Court has appointed a special master to review class counsel's fee petition and has rescheduled the final fairness hearing for April 2018. Three state court cases related to the cyber attack are presently proceeding outside of this multidistrict litigation. Two of those cases have been stayed and a dispositive motion is pending with respect to the third. There remain open regulatory investigations into the incident that are not directly impacted by the multidistrict litigation settlement.
We have contingency plans and insurance coverage for certain expenses and potential liabilities of this nature and will pursue coverage for all applicable losses; however, the ultimate outcome of our pursuit of insurance coverage cannot be
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
presently determined. We intend to vigorously defend the remaining state court cases and regulatory actions related to the cyber attack; however, their ultimate outcome cannot be presently determined.
Other Contingencies
From time to time, we and certain of our subsidiaries are parties to various legal proceedings, many of which involve claims for coverage encountered in the ordinary course of business. We, like HMOs and health insurers generally, exclude certain healthcare and other services from coverage under our HMO, PPO and other plans. We are, in the ordinary course of business, subject to the claims of our enrollees arising out of decisions to restrict or deny reimbursement for uncovered services. The loss of even one such claim, if it results in a significant punitive damage award, could have a material adverse effect on us. In addition, the risk of potential liability under punitive damage theories may increase significantly the difficulty of obtaining reasonable settlements of coverage claims.
In addition to the lawsuits described above, we are also involved in other pending and threatened litigation of the character incidental to our business, and are from time to time involved as a party in various governmental investigations, audits, reviews and administrative proceedings. These investigations, audits, reviews and administrative proceedings include routine and special inquiries by state insurance departments, state attorneys general, the U.S. Attorney General and subcommittees of the U.S. Congress. Such investigations, audits, reviews and administrative proceedings could result in the imposition of civil or criminal fines, penalties, other sanctions and additional rules, regulations or other restrictions on our business operations. Any liability that may result from any one of these actions, or in the aggregate, could have a material adverse effect on our consolidated financial position or results of operations.
The National Organization of Life & Health Insurance Guaranty Associations, or NOLHGA, is a voluntary organization consisting of the state life and health insurance guaranty associations located throughout the U.S. Such associations, working together with NOLHGA, provide a safety net for their state’s policyholders, ensuring that they continue to receive coverage, subject to state maximum limits, even if their insurer is declared insolvent. In March 2017, long term care insurance writers Penn Treaty Network America Insurance Company and its subsidiary, American Network Insurance Company (collectively, Penn Treaty), were ordered to be liquidated by the Pennsylvania state court, which had jurisdiction over the Penn Treaty rehabilitation proceeding. We and other insurers will be obligated to pay a portion of their policyholder claims through state guaranty association assessments in future periods. We estimated our portion of these net assessments for the insolvency of Penn Treaty to be approximately
$253.8
and recorded the estimate as a general and administrative expense. Payment of the assessments will be largely recovered through premium billing surcharges and premium tax credits over future years.
Contractual Obligations and Commitments
Express Scripts, through our PBM Agreement, is the exclusive provider of certain PBM services to our plans, excluding our HealthSun and America's 1st Choice subsidiaries, our CareMore operations in the state of Arizona and certain self-insured members, who have exclusive agreements with different PBM service providers. The initial term of this PBM Agreement expires on December 31, 2019. Under the PBM Agreement, the Express Scripts PBM services include, but are not limited to, pharmacy network management, mail order and specialty drug fulfillment, claims processing, rebate management and specialty pharmaceutical management services. Accordingly, the PBM Agreement contains certain financial and operational requirements obligating both Express Scripts and us. Express Scripts’ primary obligations relate to the performance of such services in a compliant manner and meeting certain pricing guarantees and performance standards. Our primary responsibilities relate to formulary management, product and benefit design, provision of data, payment for services, certain minimum volume requirements and oversight. The failure by either party to meet the respective requirements could potentially serve as a basis for financial penalties or early termination of the PBM Agreement. In March 2016, we filed a lawsuit against Express Scripts seeking to recover damages for pharmacy pricing that is higher than competitive benchmark pricing, damages related to operational breaches, as well as various declarations under the PBM Agreement between the parties. For additional information regarding this lawsuit, refer to the
Litigation
section above. We believe we have appropriately recognized all rights and obligations under this PBM Agreement at
December 31, 2017
.
Vulnerability from Concentrations
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, investment securities, premium receivables and instruments held through hedging activities. All investment securities are
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
managed by professional investment managers within policies authorized by our Board of Directors. Such policies limit the amounts that may be invested in any one issuer and prescribe certain investee company criteria. Concentrations of credit risk with respect to premium receivables are limited due to the large number of employer groups that constitute our customer base in the states in which we conduct business. As of
December 31, 2017
, there were no significant concentrations of financial instruments in a single investee, industry or geographic location.
14. Capital Stock
Stock Incentive Plan
s
Our Board of Directors has adopted the 2017 Anthem Incentive Compensation Plan, or 2017 Incentive Plan, which has been approved by our shareholders. The term of the 2017 Incentive Plan is such that no awards may be granted on or after May 18, 2027. The 2017 Incentive Plan gives authority to the Compensation Committee of the Board of Directors to make incentive awards to our non-employee directors, employees and consultants, consisting of stock options, stock, restricted stock, restricted stock units, cash-based awards, stock appreciation rights, performance shares and performance units. The 2017 Incentive Plan limits the number of available shares for issuance to
37.5
shares, subject to adjustment as set forth in the 2017 Incentive Plan.
Stock options are granted for a fixed number of shares with an exercise price at least equal to the fair value of the shares at the grant date. Stock options vest over
three
years in equal semi-annual installments and generally have a term of
ten
years from the grant date.
Certain option grants contain provisions whereby the employee continues to vest in the award subsequent to termination due to retirement. Our attribution method for newly granted awards considers all vesting and other provisions, including retirement eligibility, in determining the requisite service period over which the fair value of the awards will be recognized.
Awards of restricted stock or restricted stock units are issued at the fair value of the stock on the grant date and may also include one or more performance measures that must be met for the award to vest. The restrictions lapse in three equal annual installments. Performance units issued in 2017 will vest in 2020, based on earnings targets over the three year period of 2017 to 2019. Performance units issued in 2016 will vest in 2019, based on earnings targets over the three year period of 2016 to 2018. Performance units issued in 2015 will vest in 2018, based on earnings targets over the three year period of 2015 to 2017.
For the years ended
December 31, 2017
,
2016
and
2015
, we recognized share-based compensation expense of
$169.6
,
$164.6
and
$148.2
, respectively, as well as related tax benefits of
$67.8
,
$60.5
and
$53.7
, respectively.
A summary of stock option activity for the year ended
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-Average
Option Price per
Share
|
|
Weighted-Average
Remaining
Contractual Life
(Years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding at January 1, 2017
|
5.6
|
|
|
$
|
102.80
|
|
|
|
|
|
Granted
|
1.1
|
|
|
167.57
|
|
|
|
|
|
Exercised
|
(2.2
|
)
|
|
89.88
|
|
|
|
|
|
Forfeited or expired
|
(0.2
|
)
|
|
142.51
|
|
|
|
|
|
Outstanding at December 31, 2017
|
4.3
|
|
|
124.31
|
|
|
6.15
|
|
$
|
433.0
|
|
Exercisable at December 31, 2017
|
2.6
|
|
|
107.07
|
|
|
4.72
|
|
$
|
312.3
|
|
The intrinsic value of options exercised during the years ended
December 31, 2017
,
2016
and
2015
amounted to
$192.3
,
$103.0
and
$188.1
, respectively. We recognized tax benefits of
$75.9
,
$37.9
and
$68.0
in
2017
,
2016
and
2015
, respectively, from option exercises and disqualifying dispositions. During the years ended
December 31, 2017
,
2016
and
2015
, we received cash of
$200.0
,
$95.4
and
$162.2
, respectively, from exercises of stock options.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
The total fair value of restricted stock awards that vested during the years ended
December 31, 2017
,
2016
and
2015
was
$127.2
,
$184.9
and
$257.2
, respectively.
A summary of the status of nonvested restricted stock activity, including restricted stock units, for the year ended
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
Restricted
Stock Shares
and Units
|
|
Weighted-Average
Grant Date
Fair Value
per Share
|
Nonvested at January 1, 2017
|
2.1
|
|
|
$
|
127.68
|
|
Granted
|
0.8
|
|
|
174.44
|
|
Vested
|
(0.8
|
)
|
|
110.39
|
|
Forfeited
|
(0.1
|
)
|
|
148.77
|
|
Nonvested at December 31, 2017
|
2.0
|
|
|
152.20
|
|
During the year ended
December 31, 2017
, we granted approximately
0.4
restricted stock units that are contingent upon us achieving earning targets over the three year period of
2017
to
2019
. These grants have been included in the activity shown above, but will be subject to adjustment at the end of
2019
, based on results in the three year period.
As of
December 31, 2017
, the total remaining unrecognized compensation expense related to nonvested stock options and restricted stock, including restricted stock units, amounted to
$17.6
and
$127.2
, respectively, which will be amortized over the weighted-average remaining requisite service periods of
10 months
and
14 months
, respectively.
As of
December 31, 2017
, there were approximately
29.3
shares of common stock available for future grants under the 2017 Incentive Plan.
Fair Value
We use a binomial lattice valuation model to estimate the fair value of all stock options granted. Expected volatility assumptions used in the binomial lattice model are based on an analysis of implied volatilities of publicly traded options on our stock and historical volatility of our stock price. The risk-free interest rate is derived from the U.S. Treasury strip rates at the time of the grant. The expected term of the options was derived from the outputs of the binomial lattice model, which incorporates post-vesting forfeiture assumptions based on an analysis of historical data. The dividend yield was based on our estimate of future dividend yields. Similar groups of employees that have dissimilar exercise behavior are considered separately for valuation purposes. We utilize the multiple-grant approach for recognizing compensation expense associated with each separately vesting portion of the share-based award.
The following weighted-average assumptions were used to estimate the fair values of options granted during the years ended
December 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Risk-free interest rate
|
2.31
|
%
|
|
1.76
|
%
|
|
1.96
|
%
|
Volatility factor
|
32.00
|
%
|
|
32.00
|
%
|
|
31.00
|
%
|
Dividend yield (annual)
|
1.60
|
%
|
|
2.00
|
%
|
|
1.70
|
%
|
Weighted-average expected life (years)
|
4.00
|
|
|
4.10
|
|
|
4.00
|
|
The following weighted-average fair values were determined for the years ending
December 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Options granted during the year
|
$
|
40.88
|
|
|
$
|
30.56
|
|
|
$
|
33.97
|
|
Restricted stock awards granted during the year
|
174.44
|
|
|
131.81
|
|
|
147.00
|
|
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
The binomial lattice option-pricing model requires the input of highly subjective assumptions including the expected stock price volatility. Because our stock option grants have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in our opinion, existing models do not necessarily provide a reliable single measure of the fair value of our stock option grants.
Employee Stock Purchase Plan
We have registered
14.0
shares of common stock for the Employee Stock Purchase Plan, or the Stock Purchase Plan, which is intended to provide a means to encourage and assist employees in acquiring a stock ownership interest in Anthem. Pursuant to the terms of the Stock Purchase Plan, an employee is permitted to purchase no more than
$25,000
(actual dollars) worth of stock in any calendar year, based on the fair value of the stock at the end of each plan quarter. Employees become participants by electing payroll deductions from
1%
to
15%
of gross compensation. Once purchased, the stock is accumulated in the employee's investment account. The Stock Purchase Plan allows participants to purchase shares of our common stock at a price per share of
95%
of the fair value of a share of common stock on the last trading day of the plan quarter. The employee stock purchase plan discount is not recognized as compensation expense based on GAAP guidance. There were
0.2
shares issued during the year ended
December 31, 2017
. As of
December 31, 2017
,
5.2
shares were available for issuance under the Stock Purchase Plan.
Use of Capital and Stock Repurchase Program
We regularly review the appropriate use of capital, including acquisitions, common stock and debt security repurchases and dividends to shareholders. The declaration and payment of any dividends or repurchases of our common stock or debt is at the discretion of our Board of Directors and depends upon our financial condition, results of operations, future liquidity needs, regulatory and capital requirements and other factors deemed relevant by our Board of Directors.
A summary of the cash dividend activity for the years ended
December 31, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Cash Dividend per
Share
|
|
Total
|
Year ended December 31, 2017
|
|
|
|
|
|
|
February 22, 2017
|
|
March 10, 2017
|
|
March 24, 2017
|
|
$
|
0.65
|
|
|
$
|
172.2
|
|
April 27, 2017
|
|
June 9, 2017
|
|
June 23, 2017
|
|
0.65
|
|
|
171.8
|
|
July 25, 2017
|
|
September 8, 2017
|
|
September 25, 2017
|
|
0.70
|
|
|
181.4
|
|
October 24, 2017
|
|
December 5, 2017
|
|
December 21, 2017
|
|
0.70
|
|
|
179.5
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
February 18, 2016
|
|
March 10, 2016
|
|
March 25, 2016
|
|
$
|
0.65
|
|
|
$
|
170.7
|
|
April 26, 2016
|
|
June 10, 2016
|
|
June 24, 2016
|
|
0.65
|
|
|
170.9
|
|
July 26, 2016
|
|
September 9, 2016
|
|
September 26, 2016
|
|
0.65
|
|
|
171.1
|
|
November 1, 2016
|
|
December 5, 2016
|
|
December 21, 2016
|
|
0.65
|
|
|
171.3
|
|
On
January 30, 2018
, our Board of Directors declared a quarterly cash dividend to shareholders of
$0.75
per share on the outstanding shares of our common stock. This quarterly dividend is payable on
March 23, 2018
to the shareholders of record as of
March 9, 2018
.
Under our Board of Directors’ authorization, we maintain a common stock repurchase program. On December 7, 2017, the Board of Directors authorized a
$5,000.0
increase to the common stock repurchase program. Repurchases may be made from time to time at prevailing market prices, subject to certain restrictions on volume, pricing and timing. The repurchases are effected from time to time in the open market, through negotiated transactions, including accelerated share repurchase agreements, and through plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. Our stock repurchase program is discretionary as we are under no obligation to repurchase shares. We repurchase shares under the program when we believe it is a prudent use of capital. The excess cost of the repurchased shares over par value is charged on a pro rata basis to additional paid-in capital and retained earnings.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
A summary of common stock repurchases for the period January 1, 2018 through February 9, 2018 (subsequent to
December 31, 2017
) and for the year ended
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
January 1, 2018
through
February 9, 2018
|
|
Year Ended December 31, 2017
|
|
Shares repurchased
|
0.7
|
|
|
10.5
|
|
Average price per share
|
$
|
237.35
|
|
|
$
|
189.93
|
|
Aggregate cost
|
$
|
156.6
|
|
|
$
|
1,997.7
|
|
Authorization remaining at end of year
|
$
|
7,021.5
|
|
|
$
|
7,178.1
|
|
There were no common stock repurchases in 2016.
We expect to utilize the remaining authorized amount over a multi-year period, subject to market and industry conditions.
For additional information regarding the use of capital for debt security repurchases, see Note 12, "Debt."
Equity Units
On May 12, 2015, we issued
25.0
Equity Units, pursuant to an underwriting agreement dated May 6, 2015, in an aggregate principal amount of
$1,250.0
. For additional information relating to the Equity Units, see Note 12, “Debt.”
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
15. Accumulated Other Comprehensive Loss
A reconciliation of the components of accumulated other comprehensive loss at
December 31, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Investments:
|
|
|
|
Gross unrealized gains
|
$
|
939.7
|
|
|
$
|
748.6
|
|
Gross unrealized losses
|
(104.9
|
)
|
|
(180.9
|
)
|
Net pretax unrealized gains
|
834.8
|
|
|
567.7
|
|
Deferred tax liability
|
(301.1
|
)
|
|
(206.5
|
)
|
Net unrealized gains on investments
|
533.7
|
|
|
361.2
|
|
Non-credit components of OTTI on investments:
|
|
|
|
Gross unrealized losses
|
(0.3
|
)
|
|
(7.2
|
)
|
Deferred tax asset
|
0.1
|
|
|
2.6
|
|
Net unrealized non-credit component of OTTI on investments
|
(0.2
|
)
|
|
(4.6
|
)
|
Cash flow hedges:
|
|
|
|
Gross unrealized losses
|
(358.6
|
)
|
|
(259.1
|
)
|
Deferred tax asset
|
125.6
|
|
|
90.7
|
|
Net unrealized losses on cash flow hedges
|
(233.0
|
)
|
|
(168.4
|
)
|
Defined benefit pension plans:
|
|
|
|
Deferred net actuarial loss
|
(624.7
|
)
|
|
(655.8
|
)
|
Deferred prior service cost
|
(1.0
|
)
|
|
(0.5
|
)
|
Deferred tax asset
|
244.1
|
|
|
257.2
|
|
Net unrecognized periodic benefit costs for defined benefit pension plans
|
(381.6
|
)
|
|
(399.1
|
)
|
Postretirement benefit plans:
|
|
|
|
Deferred net actuarial loss
|
(77.5
|
)
|
|
(146.6
|
)
|
Deferred prior service credits
|
46.1
|
|
|
59.7
|
|
Deferred tax asset
|
12.3
|
|
|
34.0
|
|
Net unrecognized periodic benefit costs for postretirement benefit plans
|
(19.1
|
)
|
|
(52.9
|
)
|
Foreign currency translation adjustments:
|
|
|
|
Gross unrealized losses
|
(2.1
|
)
|
|
(6.3
|
)
|
Deferred tax asset
|
0.8
|
|
|
2.2
|
|
Net unrealized losses on foreign currency translation adjustments
|
(1.3
|
)
|
|
(4.1
|
)
|
Accumulated other comprehensive loss
|
$
|
(101.5
|
)
|
|
$
|
(267.9
|
)
|
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Other comprehensive income (loss) reclassification adjustments for the years ended
December 31, 2017
,
2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Investments:
|
|
|
|
|
|
Net holding gain (loss) on investment securities arising during the period, net of tax (expense) benefit of ($152.6), ($118.9), and $180.4, respectively
|
$
|
280.1
|
|
|
$
|
186.0
|
|
|
$
|
(336.1
|
)
|
Reclassification adjustment for net realized gain on investment securities, net of tax expense of $58.0, $36.6, and $25.9, respectively
|
(107.6
|
)
|
|
(68.1
|
)
|
|
(48.2
|
)
|
Total reclassification adjustment on investments
|
172.5
|
|
|
117.9
|
|
|
(384.3
|
)
|
Non-credit component of OTTI on investments:
|
|
|
|
|
|
Non-credit component of OTTI on investments, net of tax (expense) benefit of ($2.8), ($2.8), and $3.0, respectively
|
4.4
|
|
|
5.4
|
|
|
(5.6
|
)
|
Cash flow hedges:
|
|
|
|
|
|
Holding loss, net of tax benefit of $34.9, $47.0, and $24.4, respectively
|
(64.6
|
)
|
|
(87.3
|
)
|
|
(45.2
|
)
|
Other:
|
|
|
|
|
|
Net change in unrecognized periodic benefit costs for defined benefit pension and postretirement benefit plans, net of tax (expense) benefit of ($34.8), $5.7, and $13.4, respectively
|
51.3
|
|
|
(13.4
|
)
|
|
(26.0
|
)
|
Foreign currency translation adjustment, net of tax (expense) benefit of ($1.4), ($1.1), and $1.8, respectively
|
2.8
|
|
|
2.1
|
|
|
(3.4
|
)
|
Net gain (loss) recognized in other comprehensive loss, net of tax (expense) benefit of ($98.7), ($33.5), and $248.9, respectively
|
$
|
166.4
|
|
|
$
|
24.7
|
|
|
$
|
(464.5
|
)
|
16. Reinsurance
We reinsure certain risks with other companies and assume risk from other companies. We remain primarily liable to policyholders under ceded insurance contracts and are contingently liable for amounts recoverable from reinsurers in the event that such reinsurers do not meet their contractual obligations. We evaluate the financial condition of our reinsurers and monitor concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize our exposure to significant losses from reinsurer insolvencies. In conjunction with the ACA temporary reinsurance premium stabilization program that was effective for 2014 through 2016, we recognized assessments upon our fully-insured non-grandfathered individual market plans that were eligible for reinsurance recoveries as ceded premiums and estimated reinsurance recoveries as a reduction to benefit expense. Assessments upon all other lines of business that were not eligible for reinsurance recoveries were recognized in general and administrative expense.
A summary of direct, assumed and ceded premiums written and earned for the years ended
December 31, 2017
,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Written
|
|
Earned
|
|
Written
|
|
Earned
|
|
Written
|
|
Earned
|
Direct
|
$
|
83,974.3
|
|
|
$
|
83,417.8
|
|
|
$
|
78,200.4
|
|
|
$
|
78,726.2
|
|
|
$
|
72,925.5
|
|
|
$
|
73,259.2
|
|
Assumed
|
274.6
|
|
|
274.6
|
|
|
217.4
|
|
|
217.3
|
|
|
221.8
|
|
|
221.9
|
|
Ceded
|
(43.7
|
)
|
|
(44.7
|
)
|
|
(79.8
|
)
|
|
(83.4
|
)
|
|
(95.8
|
)
|
|
(96.0
|
)
|
Net premiums
|
$
|
84,205.2
|
|
|
$
|
83,647.7
|
|
|
$
|
78,338.0
|
|
|
$
|
78,860.1
|
|
|
$
|
73,051.5
|
|
|
$
|
73,385.1
|
|
Percentage—assumed to net premiums
|
0.3
|
%
|
|
0.3
|
%
|
|
0.3
|
%
|
|
0.3
|
%
|
|
0.3
|
%
|
|
0.3
|
%
|
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
A summary of net premiums written and earned by segment (see Note 19, “Segment Information”) for the years ended
December 31, 2017
,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Written
|
|
Earned
|
|
Written
|
|
Earned
|
|
Written
|
|
Earned
|
Reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Specialty Business
|
$
|
35,683.1
|
|
|
$
|
35,804.3
|
|
|
$
|
33,355.6
|
|
|
$
|
33,831.5
|
|
|
$
|
33,016.9
|
|
|
$
|
33,078.0
|
|
Government Business
|
48,522.1
|
|
|
47,843.4
|
|
|
44,982.4
|
|
|
45,028.6
|
|
|
40,034.6
|
|
|
40,307.1
|
|
Net premiums
|
$
|
84,205.2
|
|
|
$
|
83,647.7
|
|
|
$
|
78,338.0
|
|
|
$
|
78,860.1
|
|
|
$
|
73,051.5
|
|
|
$
|
73,385.1
|
|
The effect of reinsurance on benefit expense for the years ended
December 31, 2017
,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Direct
|
$
|
72,135.0
|
|
|
$
|
67,221.7
|
|
|
$
|
61,674.0
|
|
Assumed
|
216.7
|
|
|
184.9
|
|
|
192.2
|
|
Ceded
|
(115.5
|
)
|
|
(572.2
|
)
|
|
(749.3
|
)
|
Net benefit expense
|
$
|
72,236.2
|
|
|
$
|
66,834.4
|
|
|
$
|
61,116.9
|
|
The effect of reinsurance on certain assets and liabilities at
December 31, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Policy liabilities, assumed
|
$
|
54.3
|
|
|
$
|
47.2
|
|
Unearned income, assumed
|
0.6
|
|
|
0.6
|
|
Premiums payable, ceded
|
9.3
|
|
|
5.2
|
|
Premiums receivable, assumed
|
32.9
|
|
|
25.9
|
|
17. Leases
We lease office space and certain computer and related equipment using noncancelable operating leases. At
December 31, 2017
, future lease payments for operating leases with initial or remaining noncancelable terms of one year or more consisted of the following:
|
|
|
|
|
2018
|
$
|
154.5
|
|
2019
|
145.5
|
|
2020
|
123.9
|
|
2021
|
100.4
|
|
2022
|
88.2
|
|
Thereafter
|
286.0
|
|
Total minimum payments required
|
$
|
898.5
|
|
We have certain lease agreements that contain contingent payment provisions. Under these provisions, we pay contingent amounts in addition to base rent, primarily based upon annual changes in the consumer price index. The schedule above contains estimated amounts for potential future increases in lease payments based on the contingent payment provisions.
Lease expense for
2017
,
2016
and
2015
was
$204.6
,
$207.5
and
$212.9
, respectively.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
18. Earnings per Share
The denominator for basic and diluted earnings per share at
December 31, 2017
,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Denominator for basic earnings per share—weighted-average shares
|
261.5
|
|
|
262.9
|
|
|
263.0
|
|
Effect of dilutive securities—employee stock options, non-vested restricted stock awards and convertible debentures
|
6.3
|
|
|
5.2
|
|
|
9.9
|
|
Denominator for diluted earnings per share
|
267.8
|
|
|
268.1
|
|
|
272.9
|
|
During the years ended
December 31, 2017
,
2016
and
2015
, weighted-average shares related to certain stock options of
0.4
,
2.2
and
1.0
, respectively, were excluded from the denominator for diluted earnings per share because the stock options were anti-dilutive.
During the years ended
December 31, 2017
,
2016
and
2015
, we issued approximately
0.4
,
0.5
and
0.4
restricted stock units, respectively, of which vesting was contingent upon us meeting certain earnings targets. Contingent restricted stock units are excluded from the denominator for diluted earnings per share and are included only if and when the contingency is met. The
2017
contingent restricted stock units are being measured over the three year period of 2017 through 2019, the
2016
contingent restricted stock units are being measured over the three year period of 2016 through 2018 and the 2015 contingent restricted stock units are being measured over the three year period of 2015 through 2017. Contingent restricted stock units vest in March of the year following each measurement period.
The Equity Units are dilutive securities when the market value of our common stock exceeds a certain threshold price. The Equity Units were excluded from the denominator for diluted earnings per share for each of the years presented as the dilutive stock price threshold was not met until December 2017 and the dilution impact was not material. For additional information relating to the Equity Units, see Note 12, “Debt.”
19. Segment Information
Our organizational structure is comprised of
three
reportable segments: Commercial & Specialty Business; Government Business; and Other.
Our Commercial & Specialty Business segment includes our Local Group, National Accounts, Individual and Specialty businesses. Business units in the Commercial & Specialty Business segment offer fully-insured health products; provide a broad array of managed care services to self-funded customers including claims processing, underwriting, stop loss insurance, actuarial services, provider network access, medical cost management, disease management, wellness programs and other administrative services; and 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 healthcare guidance.
Our Government Business segment includes our Medicare and Medicaid businesses, National Government Services, or NGS, and services provided to the federal government in connection with
FEP
®
. Medicare business includes services such as Medicare Supplement plans; Medicare Advantage, including Special Needs Plans; Medicare Part D; and dual-eligible programs through Medicare-Medicaid Plans. Medicaid business includes our managed care alternatives through publicly funded healthcare programs, including Medicaid, ACA-related Medicaid expansion programs, Temporary Assistance for Needy Families programs, programs for seniors and people with disabilities, Children’s Health Insurance Programs, and specialty programs such as those focused on long-term services and support, HIV/AIDS, foster care, behavioral health and/or substance abuse disorders, and intellectual disabilities or developmental disabilities. NGS acts as a Medicare contractor for the federal government in several regions across the nation.
Our Other segment includes other businesses that do not individually meet the quantitative thresholds for an operating segment as defined by
FASB
guidance, as well as corporate expenses not allocated to either of our other reportable segments.
We define operating revenues to include premium income, administrative fees and other revenues. Operating revenues are derived from premiums and fees received, primarily from the sale and administration of health benefit products.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Operating gain, a non-GAAP measure, is calculated as total operating revenue less benefit expense and selling, general and administrative expense.
Through our participation in various federal government programs, we generated approximately
17.8%
,
18.2%
and
18.8%
of our total consolidated revenues from agencies of the U.S. government for the years ended
December 31, 2017
,
2016
, and
2015
, respectively. These revenues are contained in the Government Business segment.
The accounting policies of the segments are consistent with those described in the summary of significant accounting policies in Note 2, “Basis of Presentation and Significant Accounting Policies,” except that certain shared administrative expenses for each segment are recognized on a pro rata allocated basis, which in the aggregate approximates the consolidated expense. Any difference between the allocated expenses and actual consolidated expense is included in other expenses not allocated to reportable segments. Intersegment sales and expenses are recorded at cost and eliminated in the consolidated financial statements. We evaluate performance of the reportable segments based on operating gain or loss as defined above. We evaluate net investment income, net realized gains on financial instruments, OTTI losses recognized in income, interest expense, amortization expense, gain or loss on extinguishment of debt, income taxes, assets and liabilities on a consolidated basis as these items are managed in a corporate shared service environment and are not the responsibility of segment operating management.
Financial data by reportable segment for the years ended
December 31, 2017
,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Specialty Business
|
|
Government Business
|
|
Other
|
|
Total
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
Operating revenue
|
$
|
40,754.1
|
|
|
$
|
48,276.2
|
|
|
$
|
30.9
|
|
|
$
|
89,061.2
|
|
Operating gain (loss)
|
2,876.1
|
|
|
1,430.2
|
|
|
(130.9
|
)
|
|
4,175.4
|
|
Depreciation and amortization of property and equipment
|
—
|
|
|
—
|
|
|
601.0
|
|
|
601.0
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
Operating revenue
|
$
|
38,692.1
|
|
|
$
|
45,477.7
|
|
|
$
|
24.2
|
|
|
$
|
84,194.0
|
|
Operating gain (loss)
|
3,195.2
|
|
|
1,784.3
|
|
|
(177.8
|
)
|
|
4,801.7
|
|
Depreciation and amortization of property and equipment
|
—
|
|
|
—
|
|
|
576.0
|
|
|
576.0
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
Operating revenue
|
$
|
37,570.8
|
|
|
$
|
40,813.0
|
|
|
$
|
21.0
|
|
|
$
|
78,404.8
|
|
Operating gain (loss)
|
2,854.0
|
|
|
1,978.5
|
|
|
(79.4
|
)
|
|
4,753.1
|
|
Depreciation and amortization of property and equipment
|
—
|
|
|
—
|
|
|
515.6
|
|
|
515.6
|
|
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
The major product revenues for each of the reportable segments for the years ended
December 31, 2017
,
2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Commercial & Specialty Business
|
|
|
|
|
|
Managed care products
|
$
|
34,272.1
|
|
|
$
|
32,369.8
|
|
|
$
|
31,676.9
|
|
Managed care services
|
4,821.0
|
|
|
4,710.1
|
|
|
4,344.8
|
|
Dental/Vision products and services
|
1,218.1
|
|
|
1,182.3
|
|
|
1,111.7
|
|
Other
|
442.9
|
|
|
429.9
|
|
|
437.4
|
|
Total Commercial & Specialty Business
|
40,754.1
|
|
|
38,692.1
|
|
|
37,570.8
|
|
Government Business
|
|
|
|
|
|
Managed care products
|
47,843.4
|
|
|
45,028.5
|
|
|
40,307.0
|
|
Managed care services
|
432.8
|
|
|
449.2
|
|
|
506.0
|
|
Total Government Business
|
48,276.2
|
|
|
45,477.7
|
|
|
40,813.0
|
|
Other
|
|
|
|
|
|
Other
|
30.9
|
|
|
24.2
|
|
|
21.0
|
|
Total product revenues
|
$
|
89,061.2
|
|
|
$
|
84,194.0
|
|
|
$
|
78,404.8
|
|
The classification between managed care products and managed care services in the above table primarily distinguishes between the levels of risk assumed. Managed care products represent insurance products where we bear the insurance risk, whereas managed care services represent product offerings where we provide claims adjudication and other administrative services to the customer, but the customer principally bears the insurance risk.
Asset, liability and equity details by reportable segment have not been disclosed, as we do not internally report such information.
A reconciliation of reportable segment operating revenues to the amounts of total revenues included in the consolidated statements of income for the years ended
December 31, 2017
,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Reportable segments operating revenues
|
$
|
89,061.2
|
|
|
$
|
84,194.0
|
|
|
$
|
78,404.8
|
|
Net investment income
|
866.5
|
|
|
779.5
|
|
|
677.6
|
|
Net realized gains on financial instruments
|
144.8
|
|
|
4.9
|
|
|
157.5
|
|
Other-than-temporary impairment losses recognized in income
|
(33.1
|
)
|
|
(115.4
|
)
|
|
(83.4
|
)
|
Total revenues
|
$
|
90,039.4
|
|
|
$
|
84,863.0
|
|
|
$
|
79,156.5
|
|
A reconciliation of reportable segment operating gain to income before income tax expense included in the consolidated statements of income for the years ended
December 31, 2017
,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Reportable segments operating gain
|
$
|
4,175.4
|
|
|
$
|
4,801.7
|
|
|
$
|
4,753.1
|
|
Net investment income
|
866.5
|
|
|
779.5
|
|
|
677.6
|
|
Net realized gains on financial instruments
|
144.8
|
|
|
4.9
|
|
|
157.5
|
|
Other-than-temporary impairment losses recognized in income
|
(33.1
|
)
|
|
(115.4
|
)
|
|
(83.4
|
)
|
Interest expense
|
(739.0
|
)
|
|
(723.0
|
)
|
|
(653.0
|
)
|
Amortization of other intangible assets
|
(168.4
|
)
|
|
(192.3
|
)
|
|
(230.1
|
)
|
(Loss) gain on extinguishment of debt
|
(282.4
|
)
|
|
—
|
|
|
9.3
|
|
Income before income tax expense
|
$
|
3,963.8
|
|
|
$
|
4,555.4
|
|
|
$
|
4,631.0
|
|
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
20. Related Party Transactions
We have a
19.50%
equity investment in National Accounts Service Company, LLC, or NASCO, which processes National Accounts claims and provides other administrative services for us and certain other Blue Cross Blue Shield plans. Administrative expenses incurred related to NASCO services totaled
$73.0
,
$79.7
and
$83.6
, for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Amounts due to NASCO were
$5.7
and
$6.2
at
December 31, 2017
and
2016
, respectively.
21. Statutory Information
The majority of our insurance and HMO subsidiaries report their accounts in conformity with accounting practices prescribed or permitted by state insurance regulatory authorities, commonly referred to as statutory accounting, which vary in certain respects from GAAP. However, certain of our insurance and HMO subsidiaries, including BCC, Blue Cross of California Partnership Plan, Inc., Golden West Health Plan, Inc. and CareMore Health Plan are regulated by the California Department of Managed Health Care, or DMHC, and report their accounts in conformity with GAAP (these entities are collectively referred to as the “DMHC regulated entities”). Typical differences of GAAP reporting as compared to statutory reporting are the inclusion of unrealized gains or losses relating to fixed maturity securities in shareholders’ equity, recognition of all assets including those that are non-admitted for statutory purposes and recognition of all deferred tax assets without regard to statutory limits. The National Association of Insurance Commissioners, or NAIC, developed a codified version of the statutory accounting principles, designed to foster more consistency among the states for accounting guidelines and reporting. Prescribed statutory accounting practices are set forth in a variety of publications of the NAIC as well as state laws, regulations and general administrative rules.
Our ability to pay dividends and credit obligations is significantly dependent on receipt of dividends from our subsidiaries. The payment of dividends to us by our insurance and HMO subsidiaries without prior approval of the insurance departments of each subsidiary’s domiciliary jurisdiction is limited by formula. Dividends in excess of these amounts are subject to prior approval by the respective state insurance departments or the DMHC.
Our statutory basis insurance and HMO subsidiaries are subject to risk-based capital, or RBC, requirements. RBC is a method developed by the NAIC to determine the minimum amount of statutory capital appropriate for an insurance company or HMO to support its overall business operations in consideration of its size and risk profile. The formula for determining the amount of RBC specifies various factors, weighted based on the perceived degree of risk, which are applied to certain financial balances and financial activity. Below minimum RBC requirements are classified within certain levels, each of which requires specified corrective action. Additionally, the DMHC regulated entities are subject to capital and solvency requirements as prescribed by the DMHC. As of
December 31, 2017
and
2016
, all of our regulated subsidiaries exceeded the minimum RBC requirements and/or capital and solvency requirements of their applicable governmental regulator. The statutory RBC necessary to satisfy regulatory requirements of our statutory basis insurance and HMO subsidiaries was approximately
$4,700.0
and
$4,300.0
as of
December 31, 2017
and
2016
, respectively. The tangible net equity required for the DMHC regulated entities was approximately
$670.0
and
$650.0
as of
December 31, 2017
and
2016
, respectively.
Statutory-basis capital and surplus of our insurance and HMO subsidiaries and capital and surplus of our other regulated subsidiaries, excluding the DMHC regulated entities, was
$11,665.9
and
$10,580.2
at
December 31, 2017
and
2016
, respectively. Statutory-basis net income of our insurance and HMO subsidiaries and net income of our other regulated subsidiaries, excluding the DMHC regulated entities, was
$2,673.6
,
$2,613.2
and
$2,359.9
for
2017
,
2016
and
2015
, respectively. GAAP equity of the DMHC regulated entities was
$2,917.3
and
$2,225.7
at
December 31, 2017
and
2016
, respectively. GAAP net income of the DMHC regulated entities was
$1,046.6
,
$774.5
and
$477.5
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
22. Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
2017
|
|
|
|
|
|
|
|
Total revenues
|
$
|
22,525.9
|
|
|
$
|
22,407.2
|
|
|
$
|
22,426.0
|
|
|
$
|
22,680.3
|
|
Income before income tax expense
|
1,515.0
|
|
|
1,205.7
|
|
|
1,118.9
|
|
|
124.2
|
|
Net income
|
1,009.9
|
|
|
855.3
|
|
|
746.9
|
|
|
1,230.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
$
|
3.82
|
|
|
$
|
3.23
|
|
|
$
|
2.87
|
|
|
$
|
4.80
|
|
Diluted net income per share
|
3.73
|
|
|
3.16
|
|
|
2.80
|
|
|
4.67
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
Total revenues
|
$
|
20,288.5
|
|
|
$
|
21,456.2
|
|
|
$
|
21,403.9
|
|
|
$
|
21,714.4
|
|
Income before income tax expense
|
1,312.0
|
|
|
1,448.3
|
|
|
1,136.5
|
|
|
658.6
|
|
Net income
|
703.0
|
|
|
780.6
|
|
|
617.8
|
|
|
368.4
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
$
|
2.69
|
|
|
$
|
2.97
|
|
|
$
|
2.35
|
|
|
$
|
1.40
|
|
Diluted net income per share
|
2.63
|
|
|
2.91
|
|
|
2.30
|
|
|
1.37
|
|