filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ANTHEM, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2014, 2013 and 2012
Contents
| Report of Independent Registered Public Accounting Firm | 80 |
| Audited Consolidated Financial Statements: | |
| Consolidated Balance Sheets | 81 |
| Consolidated Statements of Income | 82 |
| Consolidated Statements of Comprehensive Income | 83 |
| Consolidated Statements of Cash Flows | 84 |
| Consolidated Statements of Shareholders’ Equity | 85 |
| Notes to Consolidated Financial Statements | 86 |
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Report of Independent Registered
Public Accounting Firm
The Board of Directors and Shareholders of Anthem, Inc.
We have audited the accompanying consolidated balance sheets of Anthem, Inc. (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Anthem, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Anthem, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 24, 2015 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Indianapolis, Indiana
February 24, 2015
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Anthem, Inc.
Consolidated Balance Sheets
| December 31, 2014 | December 31, 2013 | ||||||
| (In millions, except share data) | |||||||
| Assets | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 2,151.7 | $ | 1,582.1 | |||
| Investments available-for-sale, at fair value: | |||||||
| Fixed maturity securities (amortized cost of $17,120.4 and $16,826.7) | 17,467.4 | 17,038.2 | |||||
| Equity securities (cost of $1,303.7 and $1,168.5) | 1,906.6 | 1,735.5 | |||||
| Other invested assets, current | 20.2 | 16.3 | |||||
| Accrued investment income | 161.4 | 168.8 | |||||
| Premium and self-funded receivables | 4,825.5 | 3,968.7 | |||||
| Other receivables | 2,117.0 | 1,063.3 | |||||
| Income taxes receivable | 308.9 | 235.7 | |||||
| Securities lending collateral | 1,515.2 | 969.8 | |||||
| Deferred tax assets, net | 280.4 | 383.0 | |||||
| Other current assets | 1,474.6 | 1,677.5 | |||||
| Assets held for sale | — | 906.9 | |||||
| Total current assets | 32,228.9 | 29,745.8 | |||||
| Long-term investments available-for-sale, at fair value: | |||||||
| Fixed maturity securities (amortized cost of $500.7 and $455.9) | 504.4 | 449.9 | |||||
| Equity securities (cost of $27.0 and $27.4) | 31.5 | 31.3 | |||||
| Other invested assets, long-term | 1,695.9 | 1,542.6 | |||||
| Property and equipment, net | 1,944.3 | 1,801.5 | |||||
| Goodwill | 17,082.0 | 16,917.2 | |||||
| Other intangible assets | 7,958.1 | 8,441.0 | |||||
| Other noncurrent assets | 619.9 | 645.2 | |||||
| Total assets | $ | 62,065.0 | $ | 59,574.5 | |||
| Liabilities and shareholders’ equity | |||||||
| Liabilities | |||||||
| Current liabilities: | |||||||
| Policy liabilities: | |||||||
| Medical claims payable | $ | 6,861.2 | $ | 6,127.2 | |||
| Reserves for future policy benefits | 68.1 | 63.1 | |||||
| Other policyholder liabilities | 2,626.5 | 2,073.2 | |||||
| Total policy liabilities | 9,555.8 | 8,263.5 | |||||
| Unearned income | 1,078.1 | 822.7 | |||||
| Accounts payable and accrued expenses | 3,651.8 | 3,426.3 | |||||
| Security trades pending payable | 66.2 | 95.2 | |||||
| Securities lending payable | 1,515.3 | 969.7 | |||||
| Short-term borrowings | 400.0 | 400.0 | |||||
| Current portion of long-term debt | 625.0 | 518.0 | |||||
| Other current liabilities | 1,861.2 | 1,674.7 | |||||
| Liabilities held for sale | — | 181.4 | |||||
| Total current liabilities | 18,753.4 | 16,351.5 | |||||
| Long-term debt, less current portion | 14,127.2 | 13,573.6 | |||||
| Reserves for future policy benefits, noncurrent | 671.3 | 723.0 | |||||
| Deferred tax liabilities, net | 3,226.0 | 3,325.2 | |||||
| Other noncurrent liabilities | 1,035.8 | 836.0 | |||||
| Total liabilities | 37,813.7 | 34,809.3 | |||||
| Commitments and contingencies—Note 13 | |||||||
| Shareholders’ equity | |||||||
| Preferred stock, without par value, shares authorized - 100,000,000; shares issued and outstanding - none | — | — | |||||
| Common stock, par value $0.01, shares authorized - 900,000,000; shares issued and outstanding - 268,109,932 and 293,273,830 | 2.7 | 2.9 | |||||
| Additional paid-in capital | 10,062.3 | 10,765.2 | |||||
| Retained earnings | 14,014.4 | 13,813.9 | |||||
| Accumulated other comprehensive income | 171.9 | 183.2 | |||||
| Total shareholders’ equity | 24,251.3 | 24,765.2 | |||||
| Total liabilities and shareholders’ equity | $ | 62,065.0 | $ | 59,574.5 |
See accompanying notes.
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Anthem, Inc.
Consolidated Statements of Income
| Years Ended December 31 | |||||||||||
| 2014 | 2013 | 2012 | |||||||||
| (In millions, except per share data) | |||||||||||
| Revenues | |||||||||||
| Premiums | $ | 68,389.8 | $ | 66,119.1 | $ | 56,496.7 | |||||
| Administrative fees | 4,590.6 | 4,031.9 | 3,934.1 | ||||||||
| Other revenue | 41.3 | 40.4 | 83.2 | ||||||||
| Total operating revenue | 73,021.7 | 70,191.4 | 60,514.0 | ||||||||
| Net investment income | 724.4 | 659.1 | 686.1 | ||||||||
| Net realized gains on investments | 177.0 | 271.9 | 334.9 | ||||||||
| Other-than-temporary impairment losses on investments: | |||||||||||
| Total other-than-temporary impairment losses on investments | (56.2 | ) | (100.6 | ) | (41.2 | ) | |||||
| Portion of other-than-temporary impairment losses recognized in other comprehensive income | 7.2 | 1.7 | 3.4 | ||||||||
| Other-than-temporary impairment losses recognized in income | (49.0 | ) | (98.9 | ) | (37.8 | ) | |||||
| Total revenues | 73,874.1 | 71,023.5 | 61,497.2 | ||||||||
| Expenses | |||||||||||
| Benefit expense | 56,854.9 | 56,237.1 | 48,213.6 | ||||||||
| Selling, general and administrative expense: | |||||||||||
| Selling expense | 1,490.1 | 1,526.9 | 1,586.9 | ||||||||
| General and administrative expense | 10,258.3 | 8,426.0 | 7,093.6 | ||||||||
| Total selling, general and administrative expense | 11,748.4 | 9,952.9 | 8,680.5 | ||||||||
| Interest expense | 600.7 | 602.7 | 511.8 | ||||||||
| Amortization of other intangible assets | 220.9 | 245.3 | 233.0 | ||||||||
| Loss on extinguishment of debt | 81.1 | 145.3 | — | ||||||||
| Total expenses | 69,506.0 | 67,183.3 | 57,638.9 | ||||||||
| Income from continuing operations before income tax expense | 4,368.1 | 3,840.2 | 3,858.3 | ||||||||
| Income tax expense | 1,808.0 | 1,205.9 | 1,207.3 | ||||||||
| Income from continuing operations | 2,560.1 | 2,634.3 | 2,651.0 | ||||||||
| Income (loss) from discontinued operations, net of tax | 9.6 | (144.6 | ) | 4.5 | |||||||
| Net income | $ | 2,569.7 | $ | 2,489.7 | $ | 2,655.5 | |||||
| Basic net income (loss) per share: | |||||||||||
| Basic - continuing operations | $ | 9.28 | $ | 8.83 | $ | 8.25 | |||||
| Basic - discontinued operations | 0.03 | (0.49 | ) | 0.01 | |||||||
| Basic net income per share | $ | 9.31 | $ | 8.34 | $ | 8.26 | |||||
| Diluted net income (loss) per share: | |||||||||||
| Diluted - continuing operations | $ | 8.96 | $ | 8.67 | $ | 8.17 | |||||
| Diluted - discontinued operations | 0.03 | (0.47 | ) | 0.01 | |||||||
| Diluted net income per share | $ | 8.99 | $ | 8.20 | $ | 8.18 | |||||
| Dividends per share | $ | 1.75 | $ | 1.50 | $ | 1.15 |
See accompanying notes.
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Anthem, Inc.
Consolidated Statements of Comprehensive Income
| Years Ended December 31 | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In millions) | ||||||||||||
| Net income | $ | 2,569.7 | $ | 2,489.7 | $ | 2,655.5 | ||||||
| Other comprehensive (loss) income, net of tax: | ||||||||||||
| Change in net unrealized gains/losses on investments | 118.6 | (294.7 | ) | 189.9 | ||||||||
| Change in non-credit component of other-than-temporary impairment losses on investments | (3.9 | ) | 1.7 | 4.5 | ||||||||
| Change in net unrealized gains/losses on cash flow hedges | (3.6 | ) | 3.0 | 0.1 | ||||||||
| Change in net periodic pension and postretirement costs | (118.1 | ) | 172.7 | (10.9 | ) | |||||||
| Foreign currency translation adjustments | (4.3 | ) | 1.4 | 0.6 | ||||||||
| Other comprehensive (loss) income | (11.3 | ) | (115.9 | ) | 184.2 | |||||||
| Total comprehensive income | $ | 2,558.4 | $ | 2,373.8 | $ | 2,839.7 |
See accompanying notes.
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Anthem, Inc.
Consolidated Statements of Cash Flows
| Years Ended December 31 | |||||||||||
| 2014 | 2013 | 2012 | |||||||||
| (In millions) | |||||||||||
| Operating activities | |||||||||||
| Net income | $ | 2,569.7 | $ | 2,489.7 | $ | 2,655.5 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Net realized gains on investments | (177.0 | ) | (271.9 | ) | (334.9 | ) | |||||
| Other-than-temporary impairment losses recognized in income | 49.0 | 98.9 | 37.8 | ||||||||
| Loss on extinguishment of debt | 81.1 | 145.3 | — | ||||||||
| (Gain) loss on disposal from discontinued operations | (3.2 | ) | 221.8 | — | |||||||
| (Gain) loss on disposal of assets | (1.7 | ) | 3.9 | 4.7 | |||||||
| Deferred income taxes | 30.7 | 59.1 | 127.5 | ||||||||
| Amortization, net of accretion | 744.5 | 800.9 | 633.6 | ||||||||
| Depreciation expense | 106.5 | 107.9 | 107.1 | ||||||||
| Impairment of property and equipment | 7.9 | 47.7 | 66.8 | ||||||||
| Share-based compensation | 168.9 | 146.0 | 146.5 | ||||||||
| Excess tax benefits from share-based compensation | (46.4 | ) | (30.1 | ) | (28.8 | ) | |||||
| Changes in operating assets and liabilities: | |||||||||||
| Receivables, net | (1,899.7 | ) | (418.3 | ) | 189.9 | ||||||
| Other invested assets | (21.7 | ) | (15.1 | ) | (38.9 | ) | |||||
| Other assets | 405.5 | (33.6 | ) | 79.2 | |||||||
| Policy liabilities | 1,240.6 | (345.8 | ) | (53.7 | ) | ||||||
| Unearned income | 255.1 | (73.8 | ) | (193.7 | ) | ||||||
| Accounts payable and accrued expenses | (14.4 | ) | 303.6 | (406.5 | ) | ||||||
| Other liabilities | (7.9 | ) | (154.6 | ) | (132.8 | ) | |||||
| Income taxes | (34.0 | ) | 9.3 | (73.9 | ) | ||||||
| Other, net | (84.2 | ) | (38.6 | ) | (40.8 | ) | |||||
| Net cash provided by operating activities | 3,369.3 | 3,052.3 | 2,744.6 | ||||||||
| Investing activities | |||||||||||
| Purchases of fixed maturity securities | (9,613.4 | ) | (13,704.5 | ) | (15,040.4 | ) | |||||
| Proceeds from fixed maturity securities: | |||||||||||
| Sales | 8,066.0 | 10,977.9 | 13,675.9 | ||||||||
| Maturities, calls and redemptions | 1,318.7 | 1,836.8 | 1,781.5 | ||||||||
| Purchases of equity securities | (912.0 | ) | (820.3 | ) | (232.8 | ) | |||||
| Proceeds from sales of equity securities | 746.5 | 721.0 | 422.7 | ||||||||
| Purchases of other invested assets | (205.7 | ) | (251.5 | ) | (303.7 | ) | |||||
| Proceeds from sales of other invested assets | 124.7 | 127.1 | 35.5 | ||||||||
| Settlement of non-hedging derivatives | (67.4 | ) | (109.8 | ) | (59.8 | ) | |||||
| Changes in securities lending collateral | (545.6 | ) | (405.1 | ) | 307.9 | ||||||
| Purchases of subsidiaries, net of cash acquired | — | — | (4,597.0 | ) | |||||||
| Proceeds from sale of subsidiary, net of cash sold | 740.0 | — | — | ||||||||
| Purchases of property and equipment | (714.6 | ) | (646.5 | ) | (544.9 | ) | |||||
| Proceeds from sales of property and equipment | 88.0 | 39.2 | 0.4 | ||||||||
| Other, net | (0.1 | ) | 1.3 | 3.1 | |||||||
| Net cash used in investing activities | (974.9 | ) | (2,234.4 | ) | (4,551.6 | ) | |||||
| Financing activities | |||||||||||
| Net repayments of commercial paper borrowings | (379.2 | ) | (191.7 | ) | (229.0 | ) | |||||
| Proceeds from long-term borrowings | 2,700.0 | 1,250.0 | 6,468.9 | ||||||||
| Repayments of long-term borrowings | (1,730.1 | ) | (1,801.9 | ) | (1,251.3 | ) | |||||
| Proceeds from short-term borrowings | 2,050.0 | 1,100.0 | 642.0 | ||||||||
| Repayments of short-term borrowings | (2,050.0 | ) | (950.0 | ) | (492.0 | ) | |||||
| Changes in securities lending payable | 545.6 | 405.0 | (307.8 | ) | |||||||
| Changes in bank overdrafts | 173.0 | 9.9 | (17.6 | ) | |||||||
| Premiums paid on equity options | — | (25.8 | ) | — | |||||||
| Repurchase and retirement of common stock | (2,998.8 | ) | (1,620.1 | ) | (2,496.8 | ) | |||||
| Cash dividends | (480.7 | ) | (448.0 | ) | (367.1 | ) | |||||
| Proceeds from issuance of common stock under employee stock plans | 301.3 | 524.7 | 110.8 | ||||||||
| Excess tax benefits from share-based compensation | 46.4 | 30.1 | 28.8 | ||||||||
| Net cash (used in) provided by financing activities | (1,822.5 | ) | (1,717.8 | ) | 2,088.9 | ||||||
| Effect of foreign exchange rates on cash and cash equivalents | (7.1 | ) | 2.2 | 1.1 | |||||||
| Change in cash and cash equivalents | 564.8 | (897.7 | ) | 283.0 | |||||||
| Cash and cash equivalents at beginning of year | 1,586.9 | 2,484.6 | 2,201.6 | ||||||||
| Cash and cash equivalents at end of year | 2,151.7 | 1,586.9 | 2,484.6 | ||||||||
| Less cash and cash equivalents of discontinued operations at end of year | — | (4.8 | ) | (9.3 | ) | ||||||
| Cash and cash equivalents of continuing operations at end of year | $ | 2,151.7 | $ | 1,582.1 | $ | 2,475.3 |
See accompanying notes.
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Anthem, Inc.
Consolidated Statements of Shareholders’ Equity
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Total Shareholders’ Equity | |||||||||||||||||||
| Number of Shares | Par Value | Retained Earnings | ||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||
| January 1, 2012 | 339.4 | $ | 3.4 | $ | 11,679.2 | $ | 11,490.7 | $ | 114.9 | $ | 23,288.2 | |||||||||||
| Net income | — | — | — | 2,655.5 | — | 2,655.5 | ||||||||||||||||
| Other comprehensive income | — | — | — | — | 184.2 | 184.2 | ||||||||||||||||
| Repurchase and retirement of common stock | (39.7 | ) | (0.4 | ) | (1,368.5 | ) | (1,127.9 | ) | — | (2,496.8 | ) | |||||||||||
| Dividends and dividend equivalents | — | — | — | (371.2 | ) | — | (371.2 | ) | ||||||||||||||
| Issuance of convertible debentures | — | — | 331.5 | — | — | 331.5 | ||||||||||||||||
| Conversion of stock awards in connection with AMERIGROUP Corporation acquisition | — | — | 19.7 | — | — | 19.7 | ||||||||||||||||
| Issuance of common stock under employee stock plans, net of related tax benefits | 5.0 | — | 191.6 | — | — | 191.6 | ||||||||||||||||
| December 31, 2012 | 304.7 | $ | 3.0 | $ | 10,853.5 | $ | 12,647.1 | $ | 299.1 | $ | 23,802.7 | |||||||||||
| Net income | — | — | — | 2,489.7 | — | 2,489.7 | ||||||||||||||||
| Other comprehensive loss | — | — | — | — | (115.9 | ) | (115.9 | ) | ||||||||||||||
| Premiums paid on equity options | — | — | (7.9 | ) | — | — | (7.9 | ) | ||||||||||||||
| Repurchase and retirement of common stock | (20.7 | ) | (0.1 | ) | (749.5 | ) | (870.5 | ) | — | (1,620.1 | ) | |||||||||||
| Convertible debentures tax adjustment | — | — | (3.3 | ) | — | — | (3.3 | ) | ||||||||||||||
| Dividends and dividend equivalents | — | — | — | (452.4 | ) | — | (452.4 | ) | ||||||||||||||
| Issuance of common stock under employee stock plans, net of related tax benefits | 9.3 | — | 672.4 | — | — | 672.4 | ||||||||||||||||
| December 31, 2013 | 293.3 | $ | 2.9 | $ | 10,765.2 | $ | 13,813.9 | $ | 183.2 | $ | 24,765.2 | |||||||||||
| Net income | — | — | — | 2,569.7 | — | 2,569.7 | ||||||||||||||||
| Other comprehensive loss | — | — | — | — | (11.3 | ) | (11.3 | ) | ||||||||||||||
| Settlement of equity options | — | — | (31.4 | ) | — | — | (31.4 | ) | ||||||||||||||
| Repurchase and retirement of common stock | (30.4 | ) | (0.2 | ) | (1,115.5 | ) | (1,883.1 | ) | — | (2,998.8 | ) | |||||||||||
| Dividends and dividend equivalents | — | — | — | (486.1 | ) | — | (486.1 | ) | ||||||||||||||
| Issuance of common stock under employee stock plans, net of related tax benefits | 5.2 | — | 444.0 | — | — | 444.0 | ||||||||||||||||
| December 31, 2014 | 268.1 | $ | 2.7 | $ | 10,062.3 | $ | 14,014.4 | $ | 171.9 | $ | 24,251.3 |
See accompanying notes.
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Anthem, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
(In Millions, Except Per Share Data or As Otherwise Stated Herein)
- Organization
On November 5, 2014, the shareholders of the Company approved a proposal to amend our articles of incorporation to change our name to Anthem, Inc. from WellPoint, Inc. The name change was effective December 2, 2014. References to the terms “we”, “our”, “us”, “Anthem” or the “Company” 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 terms of medical membership in the United States, serving 37.5 medical members through our affiliated health plans as of December 31, 2014. We offer a broad spectrum of network-based managed care plans to large and small employer, 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 health care. We also provide services to the federal government in connection with the Federal Employee Program, or FEP. We also sold contact lenses, eyeglasses and other ocular products through our 1-800 CONTACTS, Inc., or 1-800 CONTACTS, business which was divested on January 31, 2014.
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 (as BCBS in 10 New York City metropolitan and surrounding counties, and as Blue Cross or BCBS in selected upstate counties only), 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 the states of South Carolina and Texas. We conduct business through our AMERIGROUP Corporation, or Amerigroup, subsidiary, in Florida, Georgia, Kansas, Louisiana, Maryland, Nevada, New Jersey, New Mexico, New York, Tennessee, Texas and Washington. We also serve customers throughout the country as HealthLink, UniCare (including a non-risk arrangement with the state of Massachusetts), and in certain Arizona, California, Nevada, New York and Virginia markets through our CareMore Health Group, Inc., or CareMore, subsidiary. We are licensed to conduct insurance operations in all 50 states through our subsidiaries.
- 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 shareholders’ equity.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Reclassifications: Certain prior year amounts have been reclassified to conform to the current year presentation. In addition, certain other immaterial reclassifications have been made in the current year.
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 Equivalents: All highly liquid investments with maturities of three months or less when purchased are classified as cash equivalents.
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 income, or AOCI.
The credit component of an OTTI is determined 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 debt 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 income 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 with 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 with net investment income.
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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 based on, among other things, their creditworthiness in exchange for cash and securities collateral initially equal to at least 102% of the market value of the securities on loan and is thereafter maintained at a minimum of 100% of the market value of the securities loaned (calculated as the ratio of the market value of collateral to the market value of the securities on loan). Accordingly, the market value of the securities on loan to each borrower is monitored daily and the borrower is required to deliver additional collateral if the market value of the securities on loan exceeds the market value of collateral delivered. The fair value of the collateral received at the time of the transactions amounted to $1,515.3 and $969.7 at December 31, 2014 and 2013, respectively. The value of the collateral represented 103% and 102% of the market value of the securities on loan at December 31, 2014 and 2013, respectively. 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 the consolidated balance sheets. Unrealized gains or losses on securities lending collateral are included in accumulated other comprehensive income as a separate component of shareholders’ equity.
Premium and Self-Funded Receivables: Premium and self-funded receivables include the uncollected amounts from fully-insured and self-funded groups, and are reported net of an allowance for doubtful accounts of $213.6 and $223.6 at December 31, 2014 and 2013, 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, government programs, proceeds due from brokers on investment trades and other miscellaneous amounts due to us. These receivables are reported net of an allowance for doubtful accounts of $142.2 and $115.0 at December 31, 2014 and 2013, respectively, which is based on historical collection trends and our judgment regarding the ability to collect specific amounts.
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 bases 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. 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 seven years for data processing equipment, furniture and other equipment, and three to five years for computer software. 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.
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 subscriber bases, 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.
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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 a projected income and market valuation approach. 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 are based on observed multiples of certain measures including membership, revenue, EBITDA (earnings before interest, taxes, depreciation and amortization) and net income as well as market capitalization analyses of Anthem and other comparable companies. 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, forward contracts, put and call options, credit default swaps, embedded derivatives, warrants and swaptions. 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
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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 income 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, 2014, 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 counterparty. At December 31, 2014 we had posted collateral of $127.8 and received collateral of $105.0 related to our derivative financial instruments.
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.
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 aggregate by 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 entails using both historical claim payment patterns as well as emerging medical cost trends to project our best estimate of claim liabilities.
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 our assumptions regarding cost trends and utilization are significantly 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
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
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, 2014 or 2013.
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 the 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, or ACA, and related Health Care and Education Reconciliation Act of 2010, or collectively, Health Care Reform. If we do not meet or exceed the minimum MLR thresholds specified by Health Care Reform, we are required to pay rebates to certain customers. Minimum MLR rebates are calculated by applicable line of business (Large Group, Small Group and Individual) 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 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 minimum MLR rebates and the Health Care Reform risk adjustment, reinsurance and risk corridor premium stabilization programs. 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 ultimate 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.
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
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
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. Effective January 1, 2014, 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 exceeding deferred tax benefits previously recognized based on grant date fair value, are recognized as additional paid-in-capital and are reclassified from operating cash flows to financing cash flows in the consolidated statements of cash flows. Our share-based employee compensation plans and assumptions are described in Note 14, “Capital Stock.”
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. Federal premium subsidies are available only for certain public exchange products. The cost of advertising and marketing for product promotion is expensed as incurred while advertising and marketing costs associated with corporate image is expensed when first aired. Total advertising and marketing expense was $337.0, $350.9 and $285.4 for the years ended December 31, 2014, 2013 and 2012, respectively.
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 includes the dilutive effect of stock options, restricted stock and convertible debentures, using the treasury stock method. 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 November 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force). This ASU provides an acquired entity, or any subsidiaries of the acquired entity, with the option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The election to apply pushdown accounting can be made either in the period in which the change-in-control event occurs, or in a subsequent period. An election to apply pushdown accounting in a reporting period after the reporting period in which the change-in-control event occurred would be considered a change in accounting principle. If pushdown accounting is applied to an individual change-in-control event, that election is irrevocable. The adoption of the provisions of this ASU upon its effective date of November 18, 2014 did not have a material impact on our consolidated financial position, results of operations, cash flows or financial statement disclosures.
Effective January 1, 2014, we adopted the provisions of ASU No. 2011-06, Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers (a consensus of the FASB Emerging Issues Task Force), or ASU 2011-06. Health Care Reform imposes a mandatory 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. The HIP Fee is non-deductible for federal income tax purposes. The total amount to be collected from allocations to health insurers in 2014 was $8,000.0, and our portion of the HIP Fee for 2014 was $893.3. The final calculation and payment of the HIP Fee occurred in the third quarter of 2014. ASU 2011-06 addresses how the HIP Fee should be recognized and classified in the financial statements of health insurers. In accordance with ASU 2011-06, we recorded our estimated liability for the HIP Fee in full at the beginning of the year with a corresponding deferred asset that was amortized to expense on a straight-line basis throughout the year.
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Notes to Consolidated Financial Statements (continued)
Recent Accounting Guidance Not Yet Adopted: In May 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09. Upon the effective date, ASU 2014-09 will supersede almost all existing revenue recognition guidance under GAAP, with certain exceptions, including an exception for revenue accounted for in accordance with the provisions of Accounting Standards Codification Topic 944, Financial Services - Insurance, or Topic 944. ASU 2014-09 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. ASU 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. An entity has the option to apply the provisions of ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the new guidance recognized at the date of initial application. We are currently evaluating the effects the adoption of ASU 2014-09 will have on our financial statements and related disclosures for revenue transactions outside the scope of Topic 944.
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, or ASU 2014-08. ASU 2014-08 changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component of an entity or a group of components of an entity that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. ASU 2014-08 is effective prospectively to new disposals and new classifications of disposal groups as held for sale in interim and annual periods beginning on or after December 15, 2014, with early adoption permitted. The adoption of ASU 2014-08 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
There were no other new accounting pronouncements that were issued or became effective during the year ended December 31, 2014 that had, or are expected to have, a material impact on our financial position, results of operations, cash flows or financial statement disclosures.
- Business Acquisitions and Divestitures
Amerigroup
In December 2012, we completed our acquisition of Amerigroup, one of the nation’s leading managed care companies focused on meeting the health care needs of financially vulnerable Americans. This acquisition furthers our goal of creating better health care quality at more affordable prices for our customers. Amerigroup also advances our capabilities in effectively and efficiently serving the growing Medicaid population, including the expanding dual eligible population, seniors, persons with disabilities and long-term services and support markets.
We paid $92.00 per share in cash to acquire all of the outstanding shares of Amerigroup for total cash consideration of $4,755.8. In addition, 0.5 shares of Amerigroup restricted stock converted to 0.7 shares of Anthem restricted stock, valued at $17.1, and 0.1 shares underlying Amerigroup stock options converted to 0.2 shares underlying Anthem stock options, valued at $2.6. We also incurred $24.0 of transaction costs, which were recorded to general and administrative expense during the year ended December 31, 2012.
In accordance with FASB accounting guidance for business combinations, the consideration transferred was allocated to the fair value of Amerigroup’s assets acquired and liabilities assumed, including identifiable intangible assets. In 2013, we finalized our purchase accounting and made a measurement period adjustment to the fair value of certain assets acquired and liabilities assumed at the date of acquisition. The effect of these adjustments on the preliminary purchase price allocation recorded at December 31, 2012 was an increase to goodwill of $28.9, an increase in other intangible assets of $20.0, a decrease in current liabilities of $1.6, and an increase in noncurrent liabilities of $50.5. The below table and the accompanying consolidated balance sheets reflect the impact of these adjustments.
The excess of the consideration transferred over the estimated fair value of net assets acquired resulted in non-tax-deductible goodwill of $3,062.0, all of which was allocated to our Government Business segment. Goodwill recognized from the acquisition of Amerigroup primarily relates to the future economic benefits arising from expected synergies and is consistent with our stated intentions to strengthen our position and expand operations in the government sector to serve Medicaid and Medicare enrollees.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
The following table summarizes the estimated fair values of Amerigroup assets acquired and liabilities assumed as of the date of acquisition:
| Current assets | $ | 2,716.5 | |
| Goodwill | 3,062.0 | ||
| Other intangible assets | 975.0 | ||
| Other noncurrent assets | 406.1 | ||
| Total assets acquired | 7,159.6 | ||
| Current liabilities | 1,416.6 | ||
| Noncurrent liabilities | 967.5 | ||
| Total liabilities assumed | 2,384.1 | ||
| Net assets acquired | $ | 4,775.5 |
Of the $975.0 of total other intangible assets acquired, $65.0 represents finite-lived customer relationships with an amortization period of three years, $30.0 represents provider and hospital networks with an amortization period of twenty years and $880.0 represents indefinite-lived state Medicaid licenses and trade names.
The results of operations of Amerigroup for the period following December 24, 2012 are included in our consolidated financial statements within our Government Business segment and represented $219.0 of our operating revenue and an offset to net income of $6.1 for the year ended December 31, 2012. The pro-forma effects of this acquisition for periods prior to acquisition were not considered material to our consolidated results of operations.
1-800 CONTACTS
In December 2013, we entered into a definitive agreement to sell our 1-800 CONTACTS business to the private equity firm Thomas H. Lee Partners, L.P. Additionally, we entered into an asset purchase agreement with Luxottica Group to sell our glasses.com related assets (collectively, 1-800 CONTACTS). The operating results for 1-800 CONTACTS are reported as discontinued operations in the accompanying consolidated statements of income. These results were previously reported in the Commercial and Specialty Business segment. Additionally, the assets and liabilities of 1-800 CONTACTS are reported as held for sale in the accompanying consolidated balance sheets as of December 31, 2013.
The sales were completed on January 31, 2014 and did not result in any material difference to the loss on disposal from discontinued operations recorded during the year ended December 31, 2013. Prior to the sales, 2014 income from discontinued operations, net of tax, was $9.6. Summarized financial information for the 1-800 CONTACTS discontinued operations for the years ended December 31, 2013 and 2012 is as follows:
| 2013 | 2012 | ||||||||
| Revenues | $ | 434.7 | $ | 214.5 | |||||
| Income from discontinued operations before tax | $ | 17.3 | $ | 7.2 | |||||
| Income tax (benefit) expense | (2.6 | ) | 2.7 | ||||||
| Income from discontinued operations | 19.9 | 4.5 | |||||||
| Loss on disposal from discontinued operations, net of tax | (164.5 | ) | — | ||||||
| (Loss) income from discontinued operations, net of tax | $ | (144.6 | ) | $ | 4.5 |
In connection with the sale of 1-800 CONTACTS, we recognized a loss on disposal of $221.8, net of an income tax benefit of $57.3 for the year ended December 31, 2013. The loss on disposal was calculated as the difference between the fair value, as determined by the sales agreements less costs to sell, and the carrying value of the held for sale assets at December 31, 2013.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
The assets and liabilities of 1-800 CONTACTS are reported as held for sale in the accompanying consolidated balance sheets at December 31, 2013 and consist of the following:
| Assets | ||||||
| Cash and cash equivalents | $ | 4.8 | ||||
| Property and equipment | 27.6 | |||||
| Goodwill | 409.9 | |||||
| Other intangibles | 415.4 | |||||
| Other assets | 49.2 | |||||
| Total assets | $ | 906.9 | ||||
| Liabilities | ||||||
| Accounts payable and other accrued expenses | $ | 34.2 | ||||
| Deferred income taxes | 142.5 | |||||
| Other liabilities | 4.7 | |||||
| Total liabilities | $ | 181.4 |
Acquisition of Simply Healthcare Holdings, Inc.
On February 17, 2015, we completed our acquisition of Simply Healthcare Holdings, Inc., a leading managed care company for people enrolled in Medicaid and Medicare programs in the state of Florida. This acquisition, which was originally announced on December 22, 2014, aligns with our strategy for continued growth in our Government Business segment. As a result, we will, through our affiliated Medicaid and Medicare plans, serve more than half a million members in the state of Florida.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
- Investments
A summary of current and long-term investments, available-for-sale, at December 31, 2014 and 2013 is as follows:
| Non-Credit Component of Other-Than- Temporary Impairments Recognized in AOCI | |||||||||||||||||||||||
| Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||
| Less than 12 Months | 12 Months or Greater | ||||||||||||||||||||||
| December 31, 2014 | |||||||||||||||||||||||
| Fixed maturity securities: | |||||||||||||||||||||||
| United States Government securities | $ | 315.7 | $ | 4.6 | $ | (0.3 | ) | $ | — | $ | 320.0 | $ | — | ||||||||||
| Government sponsored securities | 94.6 | 0.8 | — | (0.4 | ) | 95.0 | — | ||||||||||||||||
| States, municipalities and political subdivisions, tax-exempt | 5,451.4 | 287.0 | (1.8 | ) | (3.0 | ) | 5,733.6 | — | |||||||||||||||
| Corporate securities | 8,335.9 | 162.9 | (123.1 | ) | (43.2 | ) | 8,332.5 | (6.8 | ) | ||||||||||||||
| Options embedded in convertible securities | 98.7 | — | — | — | 98.7 | — | |||||||||||||||||
| Residential mortgage-backed securities | 2,099.7 | 68.9 | (1.0 | ) | (8.6 | ) | 2,159.0 | — | |||||||||||||||
| Commercial mortgage-backed securities | 504.8 | 6.1 | (0.6 | ) | (0.4 | ) | 509.9 | — | |||||||||||||||
| Other debt securities | 720.3 | 6.1 | (1.7 | ) | (1.6 | ) | 723.1 | — | |||||||||||||||
| Total fixed maturity securities | 17,621.1 | 536.4 | (128.5 | ) | (57.2 | ) | 17,971.8 | $ | (6.8 | ) | |||||||||||||
| Equity securities | 1,330.7 | 618.5 | (11.1 | ) | — | 1,938.1 | |||||||||||||||||
| Total investments, available-for-sale | $ | 18,951.8 | $ | 1,154.9 | $ | (139.6 | ) | $ | (57.2 | ) | $ | 19,909.9 | |||||||||||
| December 31, 2013 | |||||||||||||||||||||||
| Fixed maturity securities: | |||||||||||||||||||||||
| United States Government securities | $ | 300.8 | $ | 2.5 | $ | (3.4 | ) | $ | — | $ | 299.9 | $ | — | ||||||||||
| Government sponsored securities | 174.4 | 0.4 | (1.3 | ) | — | 173.5 | — | ||||||||||||||||
| States, municipalities and political subdivisions, tax-exempt | 5,899.5 | 202.9 | (90.1 | ) | (9.6 | ) | 6,002.7 | (0.6 | ) | ||||||||||||||
| Corporate securities | 7,614.1 | 205.2 | (95.2 | ) | (15.5 | ) | 7,708.6 | (0.1 | ) | ||||||||||||||
| Options embedded in convertible securities | 89.2 | — | — | — | 89.2 | — | |||||||||||||||||
| Residential mortgage-backed securities | 2,269.4 | 48.0 | (41.4 | ) | (7.1 | ) | 2,268.9 | — | |||||||||||||||
| Commercial mortgage-backed securities | 479.0 | 10.5 | (2.6 | ) | (0.3 | ) | 486.6 | — | |||||||||||||||
| Other debt securities | 456.2 | 5.8 | (2.5 | ) | (0.8 | ) | 458.7 | (0.1 | ) | ||||||||||||||
| Total fixed maturity securities | 17,282.6 | 475.3 | (236.5 | ) | (33.3 | ) | 17,488.1 | $ | (0.8 | ) | |||||||||||||
| Equity securities | 1,195.9 | 578.9 | (8.0 | ) | — | 1,766.8 | |||||||||||||||||
| Total investments, available-for-sale | $ | 18,478.5 | $ | 1,054.2 | $ | (244.5 | ) | $ | (33.3 | ) | $ | 19,254.9 |
At December 31, 2014, we owned $2,668.9 of mortgage-backed securities and $633.8 of asset-backed securities out of a total available-for-sale investment portfolio of $19,909.9. These securities included sub-prime and Alt-A securities with fair values of $37.5 and $81.0, respectively. These sub-prime and Alt-A securities had accumulated net unrealized gains of $1.5 and $5.3, respectively. The average credit rating of the sub-prime and Alt-A securities was “CCC” and “CC”, respectively.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
The following tables summarize for available-for-sale fixed maturity securities and available-for-sale equity securities in an unrealized loss position at December 31, 2014 and 2013, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously 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, 2014 | |||||||||||||||||||||
| Fixed maturity securities: | |||||||||||||||||||||
| United States Government securities | 17 | $ | 145.3 | $ | (0.3 | ) | 2 | $ | 0.9 | $ | — | ||||||||||
| Government sponsored securities | 2 | 0.3 | — | 16 | 29.3 | (0.4 | ) | ||||||||||||||
| States, municipalities and political subdivisions, tax-exempt | 136 | 315.6 | (1.8 | ) | 80 | 174.3 | (3.0 | ) | |||||||||||||
| Corporate securities | 1,802 | 3,213.3 | (123.1 | ) | 314 | 514.6 | (43.2 | ) | |||||||||||||
| Residential mortgage-backed securities | 78 | 155.0 | (1.0 | ) | 186 | 398.3 | (8.6 | ) | |||||||||||||
| Commercial mortgage-backed securities | 43 | 156.2 | (0.6 | ) | 10 | 33.2 | (0.4 | ) | |||||||||||||
| Other debt securities | 79 | 270.6 | (1.7 | ) | 21 | 65.0 | (1.6 | ) | |||||||||||||
| Total fixed maturity securities | 2,157 | 4,256.3 | (128.5 | ) | 629 | 1,215.6 | (57.2 | ) | |||||||||||||
| Equity securities | 407 | 125.4 | (11.1 | ) | — | — | — | ||||||||||||||
| Total fixed maturity and equity securities | 2,564 | $ | 4,381.7 | $ | (139.6 | ) | 629 | $ | 1,215.6 | $ | (57.2 | ) | |||||||||
| December 31, 2013 | |||||||||||||||||||||
| Fixed maturity securities: | |||||||||||||||||||||
| United States Government securities | 27 | $ | 179.2 | $ | (3.4 | ) | — | $ | — | $ | — | ||||||||||
| Government sponsored securities | 22 | 73.4 | (1.3 | ) | — | — | — | ||||||||||||||
| States, municipalities and political subdivisions, tax-exempt | 806 | 2,070.9 | (90.1 | ) | 42 | 82.4 | (9.6 | ) | |||||||||||||
| Corporate securities | 1,448 | 2,586.6 | (95.2 | ) | 107 | 81.3 | (15.5 | ) | |||||||||||||
| Residential mortgage-backed securities | 605 | 1,243.0 | (41.4 | ) | 80 | 116.2 | (7.1 | ) | |||||||||||||
| Commercial mortgage-backed securities | 52 | 177.7 | (2.6 | ) | 4 | 5.6 | (0.3 | ) | |||||||||||||
| Other debt securities | 65 | 185.3 | (2.5 | ) | 17 | 16.2 | (0.8 | ) | |||||||||||||
| Total fixed maturity securities | 3,025 | 6,516.1 | (236.5 | ) | 250 | 301.7 | (33.3 | ) | |||||||||||||
| Equity securities | 426 | 120.8 | (8.0 | ) | — | — | — | ||||||||||||||
| Total fixed maturity and equity securities | 3,451 | $ | 6,636.9 | $ | (244.5 | ) | 250 | $ | 301.7 | $ | (33.3 | ) |
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
The amortized cost and fair value of available-for-sale fixed maturity securities at December 31, 2014, 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 | $ | 507.3 | $ | 510.8 | |||
| Due after one year through five years | 4,649.6 | 4,702.9 | |||||
| Due after five years through ten years | 5,227.9 | 5,360.8 | |||||
| Due after ten years | 4,631.8 | 4,728.4 | |||||
| Mortgage-backed securities | 2,604.5 | 2,668.9 | |||||
| Total available-for-sale fixed maturity securities | $ | 17,621.1 | $ | 17,971.8 |
The major categories of net investment income for the years ended December 31 are as follows:
| 2014 | 2013 | 2012 | |||||||||
| Fixed maturity securities | $ | 644.1 | $ | 638.9 | $ | 671.2 | |||||
| Equity securities | 57.7 | 45.9 | 38.4 | ||||||||
| Cash and cash equivalents | 0.8 | 1.0 | 2.5 | ||||||||
| Other | 66.3 | 19.8 | 16.2 | ||||||||
| Investment income | 768.9 | 705.6 | 728.3 | ||||||||
| Investment expense | (44.5 | ) | (46.5 | ) | (42.2 | ) | |||||
| Net investment income | $ | 724.4 | $ | 659.1 | $ | 686.1 |
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Net realized investment gains/losses and net change in unrealized appreciation/depreciation in investments for the years ended December 31 are as follows:
| 2014 | 2013 | 2012 | |||||||||
| Net realized gains (losses) on investments: | |||||||||||
| Fixed maturity securities: | |||||||||||
| Gross realized gains from sales | $ | 198.2 | $ | 225.9 | $ | 401.0 | |||||
| Gross realized losses from sales | (50.6 | ) | (125.7 | ) | (54.8 | ) | |||||
| Net realized gains from sales of fixed maturity securities | 147.6 | 100.2 | 346.2 | ||||||||
| Equity securities: | |||||||||||
| Gross realized gains from sales | 106.5 | 224.1 | 82.0 | ||||||||
| Gross realized losses from sales | (90.2 | ) | (100.5 | ) | (93.8 | ) | |||||
| Net realized gains (losses) from sales of equity securities | 16.3 | 123.6 | (11.8 | ) | |||||||
| Other realized gains on investments | 13.1 | 48.1 | 0.5 | ||||||||
| Net realized gains on investments | 177.0 | 271.9 | 334.9 | ||||||||
| Other-than-temporary impairment losses recognized in income: | |||||||||||
| Fixed maturity securities | (22.3 | ) | (42.5 | ) | (11.8 | ) | |||||
| Equity securities | (13.5 | ) | (13.9 | ) | (17.5 | ) | |||||
| Other invested assets, long-term | (13.2 | ) | (42.5 | ) | (8.5 | ) | |||||
| Other-than-temporary impairment losses recognized in income | (49.0 | ) | (98.9 | ) | (37.8 | ) | |||||
| Change in net unrealized gains (losses) on investments: | |||||||||||
| Fixed maturity securities | 145.2 | (679.8 | ) | 199.8 | |||||||
| Equity securities | 36.5 | 225.4 | 94.7 | ||||||||
| Total change in net unrealized gains (losses) on investments | 181.7 | (454.4 | ) | 294.5 | |||||||
| Deferred income tax (expense) benefit | (63.1 | ) | 159.7 | (104.6 | ) | ||||||
| Net change in net unrealized gains (losses) on investments | 118.6 | (294.7 | ) | 189.9 | |||||||
| Net realized gains on investments, other-than-temporary impairment losses recognized in income and net change in net unrealized gains (losses) on investments | $ | 246.6 | $ | (121.7 | ) | $ | 487.0 |
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.
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:
| 2014 | 2013 | 2012 | |||||||||
| Proceeds | $ | 10,255.9 | $ | 13,662.8 | $ | 15,915.6 | |||||
| Gross realized gains | 317.8 | 498.1 | 483.5 | ||||||||
| Gross realized losses | (140.8 | ) | (226.2 | ) | (148.6 | ) |
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
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 equity security 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 2014, 2013 and 2012 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 2014, 2013 or 2012.
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, 2014, 2013 or 2012.
At December 31, 2014 and 2013, no investments exceeded 10% of shareholders’ equity.
At December 31, 2014, the carrying value of fixed maturity investments that did not produce income during 2014 was $9.2. At December 31, 2013, we did not hold any fixed maturity investments that did not produce income during 2013.
As of December 31, 2014 we had committed approximately $555.0 to future capital calls from various third-party investments in exchange for an ownership interest in the related entities.
At December 31, 2014 and 2013, securities with carrying values of approximately $504.4 and $449.9, respectively, were deposited by our insurance subsidiaries under requirements of regulatory authorities.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
- Derivative Financial Instruments
A summary of the aggregate contractual or notional amounts and estimated fair values related to derivative financial instruments at December 31, 2014 and 2013 is as follows:
| Contractual/ Notional Amount | Balance Sheet Location | Estimated Fair Value | |||||||||||
| Asset | (Liability) | ||||||||||||
| December 31, 2014 | |||||||||||||
| Hedging instruments | |||||||||||||
| Interest rate swaps | $ | 1,185.0 | Other assets/other liabilities | $ | 2.6 | $ | (7.8 | ) | |||||
| Non-hedging instruments | |||||||||||||
| Derivatives embedded in convertible fixed maturity securities | 287.0 | Fixed maturity securities | 98.7 | — | |||||||||
| Interest rate swaps | 97.9 | Equity securities | — | (9.4 | ) | ||||||||
| Options | 12,208.5 | Other assets/other liabilities | 428.0 | (458.4 | ) | ||||||||
| Futures | — | Equity securities | 0.5 | (1.5 | ) | ||||||||
| Subtotal non-hedging | 12,593.4 | Subtotal non-hedging | 527.2 | (469.3 | ) | ||||||||
| Total derivatives | $ | 13,778.4 | Total derivatives | 529.8 | (477.1 | ) | |||||||
| Amounts netted | (216.7 | ) | 216.7 | ||||||||||
| Net derivatives | $ | 313.1 | $ | (260.4 | ) | ||||||||
| December 31, 2013 | |||||||||||||
| Hedging instruments | |||||||||||||
| Interest rate swaps | $ | 1,660.0 | Other assets/other liabilities | $ | 30.9 | $ | (20.7 | ) | |||||
| Non-hedging instruments | |||||||||||||
| Derivatives embedded in convertible fixed maturity securities | 295.0 | Fixed maturity securities | 89.2 | — | |||||||||
| Credit default and interest rate swaps | 72.6 | Equity securities | 1.8 | (2.5 | ) | ||||||||
| Options | 14,912.4 | Equity securities/other assets | 776.5 | (787.7 | ) | ||||||||
| Futures | — | Equity securities | 3.5 | (1.6 | ) | ||||||||
| Subtotal non-hedging | 15,280.0 | Subtotal non-hedging | 871.0 | (791.8 | ) | ||||||||
| Total derivatives | $ | 16,940.0 | Total derivatives | 901.9 | (812.5 | ) | |||||||
| Amounts netted | (791.8 | ) | 791.8 | ||||||||||
| Net derivatives | $ | 110.1 | $ | (20.7 | ) |
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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, 2014 and 2013 is as follows:
| Type of Fair Value Hedges | Year Entered Into | Outstanding Notional Amount | Interest Rate Received | Expiration Date | ||||||||||||
| 2014 | 2013 | |||||||||||||||
| Interest rate swap | 2014 | $ | 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 | 200.0 | 2.375 | February 15, 2017 | |||||||||||
| Interest rate swap | 2011 | — | 200.0 | 5.250 | — | |||||||||||
| Interest rate swap | 2010 | — | 25.0 | 5.250 | — | |||||||||||
| Interest rate swap | 2006 | — | 200.0 | 5.000 | — | |||||||||||
| Interest rate swap | 2005 | — | 200.0 | 5.000 | — | |||||||||||
| Total notional amount outstanding | $ | 1,185.0 | $ | 1,660.0 |
A summary of the effect of fair value hedges on our income statement for the years ended December 31, 2014, 2013 and 2012 is as follows:
| Type of Fair Value Hedges | Income Statement Location of Hedge Gain | Hedge Gain Recognized | Hedged Item | Income Statement Location of Hedged Item Loss | Hedged Item Loss Recognized | |||||||||
| Year ended December 31, 2014 | ||||||||||||||
| Interest rate swaps | Interest expense | $ | 25.5 | Fixed rate debt | Interest expense | $ | (25.5 | ) | ||||||
| Year ended December 31, 2013 | ||||||||||||||
| Interest rate swaps | Interest expense | $ | 31.5 | Fixed rate debt | Interest expense | $ | (31.5 | ) | ||||||
| Year ended December 31, 2012 | ||||||||||||||
| Interest rate swaps | Interest expense | $ | 38.2 | Fixed rate debt | Interest expense | $ | (38.2 | ) |
Cash Flow Hedges
We have historically entered into forward starting pay fixed interest rate swaps, with the objective of eliminating the variability of cash flows in the interest payments on various debt issuances. These swaps have all terminated and no amounts were outstanding at December 31, 2014 or 2013. The unrecognized loss for all terminated cash flow hedges included in accumulated other comprehensive income was $35.9 and $32.3 at December 31, 2014 and 2013. As of December 31, 2014, the total amount of amortization over the next twelve months for all cash flow hedges will increase interest expense by approximately $5.5.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
A summary of the effect of cash flow hedges on our financial statements for the years ended December 31, 2014, 2013 and 2012 is as follows:
| Effective Portion | ||||||||||||||||
| Pretax Hedge Loss Recognized in Other Comprehensive (Loss) Income | Income Statement Location of Loss Reclassification from Accumulated Other Comprehensive Income | Hedge Loss Reclassified from Accumulated Other Comprehensive Income | Ineffective Portion | |||||||||||||
| Type of Cash Flow Hedge | Income Statement Location of Loss Recognized | Hedge Loss Recognized | ||||||||||||||
| Year ended December 31, 2014 | ||||||||||||||||
| Forward starting pay fixed swaps | $ | — | Interest expense | $ | (5.0 | ) | None | $ | — | |||||||
| Year ended December 31, 2013 | ||||||||||||||||
| Forward starting pay fixed swaps | $ | — | Interest expense | $ | (4.6 | ) | None | $ | — | |||||||
| Year ended December 31, 2012 | ||||||||||||||||
| Forward starting pay fixed swaps | $ | (4.0 | ) | Interest expense | $ | (4.2 | ) | Interest expense | $ | (0.1 | ) |
We test for cash flow hedge effectiveness at hedge inception and re-assess at the end of each reporting period. No amounts were excluded from the assessment of hedge effectiveness.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Non-Hedging Derivatives
A summary of the effect of non-hedging derivatives on our income statement for the years ended December 31, 2014, 2013 and 2012 is as follows:
| Type of Non-hedging Derivatives | Income Statement Location of Gain (Loss) Recognized | Derivative Gain (Loss) Recognized | ||||
| Year ended December 31, 2014 | ||||||
| Derivatives embedded in convertible fixed maturity securities | Net realized gains on investments | $ | 11.6 | |||
| Interest rate swaps | Net realized gains on investments | (11.6 | ) | |||
| Options | Net realized gains on investments | (54.6 | ) | |||
| Futures | Net realized gains on investments | (10.0 | ) | |||
| Swaptions | Net realized gains on investments | 1.3 | ||||
| Total | $ | (63.3 | ) | |||
| Year ended December 31, 2013 | ||||||
| Derivatives embedded in convertible fixed maturity securities | Net realized gains on investments | $ | 31.5 | |||
| Interest rate swaps | Net realized gains on investments | 2.2 | ||||
| Options | Net realized gains on investments | (111.7 | ) | |||
| Futures | Net realized gains on investments | 22.3 | ||||
| Swaptions | Net realized gains on investments | 3.0 | ||||
| Total | $ | (52.7 | ) | |||
| Year ended December 31, 2012 | ||||||
| Derivatives embedded in convertible fixed maturity securities | Net realized gains on investments | $ | (2.4 | ) | ||
| Credit default and interest rate swaps | Net realized gains on investments | (3.9 | ) | |||
| Options | Net realized gains on investments | (66.0 | ) | |||
| Futures | Net realized gains on investments | (6.7 | ) | |||
| Total | $ | (79.0 | ) |
- 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.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
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 securities, while Level II securities primarily include corporate securities, securities from states, municipalities and political subdivisions and mortgage-backed securities. For securities not actively traded, the pricing services may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. We have controls in place to review the pricing services’ qualifications and procedures used to determine fair values. In addition, we periodically review the pricing services’ pricing methodologies, data sources and pricing inputs to ensure the fair values obtained are reasonable. Inputs that are often used in the valuation methodologies include, but are not limited to, broker quotes, benchmark yields, credit spreads, default rates and prepayment speeds. We also have certain fixed maturity securities, primarily corporate debt securities, 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 earnings before interest, taxes, depreciation and amortization, or 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. 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.
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 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
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
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.
-106-
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, 2014 and 2013 is as follows:
| Level I | Level II | Level III | Total | ||||||||||||
| December 31, 2014 | |||||||||||||||
| Assets: | |||||||||||||||
| Cash equivalents | $ | 573.2 | $ | — | $ | — | $ | 573.2 | |||||||
| Investments available-for-sale: | |||||||||||||||
| Fixed maturity securities: | |||||||||||||||
| United States Government securities | 320.0 | — | — | 320.0 | |||||||||||
| Government sponsored securities | — | 95.0 | — | 95.0 | |||||||||||
| States, municipalities and political subdivisions, tax-exempt | — | 5,733.6 | — | 5,733.6 | |||||||||||
| Corporate securities | 7.1 | 8,180.8 | 144.6 | 8,332.5 | |||||||||||
| Options embedded in convertible securities | — | 98.7 | — | 98.7 | |||||||||||
| Residential mortgage-backed securities | — | 2,159.0 | — | 2,159.0 | |||||||||||
| Commercial mortgage-backed securities | — | 506.6 | 3.3 | 509.9 | |||||||||||
| Other debt securities | 89.2 | 627.3 | 6.6 | 723.1 | |||||||||||
| Total fixed maturity securities | 416.3 | 17,401.0 | 154.5 | 17,971.8 | |||||||||||
| Equity securities | 1,696.9 | 192.9 | 48.3 | 1,938.1 | |||||||||||
| Other invested assets, current | 20.2 | — | — | 20.2 | |||||||||||
| Securities lending collateral | 808.3 | 706.9 | — | 1,515.2 | |||||||||||
| Derivatives excluding embedded options (reported with other assets) | — | 224.8 | — | 224.8 | |||||||||||
| Total assets | $ | 3,514.9 | $ | 18,525.6 | $ | 202.8 | $ | 22,243.3 | |||||||
| Liabilities: | |||||||||||||||
| Derivatives excluding embedded options (reported with other liabilities) | $ | — | $ | (260.4 | ) | $ | — | $ | (260.4 | ) | |||||
| Total liabilities | $ | — | $ | (260.4 | ) | $ | — | $ | (260.4 | ) | |||||
| December 31, 2013 | |||||||||||||||
| Assets: | |||||||||||||||
| Cash equivalents | $ | 632.3 | $ | — | $ | — | $ | 632.3 | |||||||
| Investments available-for-sale: | |||||||||||||||
| Fixed maturity securities: | |||||||||||||||
| United States Government securities | 299.9 | — | — | 299.9 | |||||||||||
| Government sponsored securities | — | 173.5 | — | 173.5 | |||||||||||
| States, municipalities and political subdivisions, tax-exempt | — | 6,002.7 | — | 6,002.7 | |||||||||||
| Corporate securities | — | 7,593.4 | 115.2 | 7,708.6 | |||||||||||
| Options embedded in convertible securities | — | 89.2 | — | 89.2 | |||||||||||
| Residential mortgage-backed securities | — | 2,268.9 | — | 2,268.9 | |||||||||||
| Commercial mortgage-backed securities | — | 480.1 | 6.5 | 486.6 | |||||||||||
| Other debt securities | 35.6 | 408.3 | 14.8 | 458.7 | |||||||||||
| Total fixed maturity securities | 335.5 | 17,016.1 | 136.5 | 17,488.1 | |||||||||||
| Equity securities | 1,475.7 | 249.7 | 41.4 | 1,766.8 | |||||||||||
| Other invested assets, current | 16.3 | — | — | 16.3 | |||||||||||
| Securities lending collateral | 408.5 | 561.3 | — | 969.8 | |||||||||||
| Derivatives excluding embedded options (reported with other assets) | — | 58.4 | — | 58.4 | |||||||||||
| Total assets | $ | 2,868.3 | $ | 17,885.5 | $ | 177.9 | $ | 20,931.7 | |||||||
| Liabilities: | |||||||||||||||
| Derivatives excluding embedded options (reported with other liabilities) | $ | — | $ | (20.7 | ) | $ | — | $ | (20.7 | ) | |||||
| Total liabilities | $ | — | $ | (20.7 | ) | $ | — | $ | (20.7 | ) |
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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, 2014, 2013 and 2012 is as follows:
| Corporate Securities | Residential Mortgage- backed Securities | Commercial Mortgage- backed Securities | Other Debt Securities | Equity Securities | Total | ||||||||||||||||||
| Year ended December 31, 2014 | |||||||||||||||||||||||
| Beginning balance at January 1, 2014 | $ | 115.2 | $ | — | $ | 6.5 | $ | 14.8 | $ | 41.4 | $ | 177.9 | |||||||||||
| Total (losses) gains: | |||||||||||||||||||||||
| Recognized in net income | (4.4 | ) | — | — | — | (0.7 | ) | (5.1 | ) | ||||||||||||||
| Recognized in accumulated other comprehensive income | 8.5 | — | — | 0.4 | 2.8 | 11.7 | |||||||||||||||||
| Purchases | 68.9 | — | 3.6 | 6.5 | 15.9 | 94.9 | |||||||||||||||||
| Sales | (48.0 | ) | — | — | (3.6 | ) | (10.6 | ) | (62.2 | ) | |||||||||||||
| Settlements | (11.0 | ) | — | (3.7 | ) | (0.4 | ) | — | (15.1 | ) | |||||||||||||
| Transfers into Level III | 24.8 | — | — | — | — | 24.8 | |||||||||||||||||
| Transfers out of Level III | (9.4 | ) | — | (3.1 | ) | (11.1 | ) | (0.5 | ) | (24.1 | ) | ||||||||||||
| Ending balance at December 31, 2014 | $ | 144.6 | $ | — | $ | 3.3 | $ | 6.6 | $ | 48.3 | $ | 202.8 | |||||||||||
| Change in unrealized losses included in net income related to assets still held for the year ended December 31, 2014 | $ | (11.1 | ) | $ | — | $ | — | $ | — | $ | (0.7 | ) | $ | (11.8 | ) | ||||||||
| Year ended December 31, 2013 | |||||||||||||||||||||||
| Beginning balance at January 1, 2013 | $ | 121.1 | $ | 4.3 | $ | — | $ | 3.9 | $ | 26.2 | $ | 155.5 | |||||||||||
| Total (losses) gains: | |||||||||||||||||||||||
| Recognized in net income | (30.3 | ) | — | — | (0.1 | ) | (4.8 | ) | (35.2 | ) | |||||||||||||
| Recognized in accumulated other comprehensive income | (3.5 | ) | — | — | 0.6 | 9.5 | 6.6 | ||||||||||||||||
| Purchases | 51.9 | — | — | 1.6 | 17.6 | 71.1 | |||||||||||||||||
| Sales | (4.8 | ) | — | — | — | (7.1 | ) | (11.9 | ) | ||||||||||||||
| Settlements | (15.5 | ) | (1.9 | ) | (6.1 | ) | (0.7 | ) | — | (24.2 | ) | ||||||||||||
| Transfers into Level III | 3.0 | 13.1 | 12.6 | 9.8 | — | 38.5 | |||||||||||||||||
| Transfers out of Level III | (6.7 | ) | (15.5 | ) | — | (0.3 | ) | — | (22.5 | ) | |||||||||||||
| Ending balance at December 31, 2013 | $ | 115.2 | $ | — | $ | 6.5 | $ | 14.8 | $ | 41.4 | $ | 177.9 | |||||||||||
| Change in unrealized losses included in net income related to assets still held for the year ended December 31, 2013 | $ | (30.8 | ) | $ | — | $ | — | $ | (0.1 | ) | $ | (6.5 | ) | $ | (37.4 | ) | |||||||
| Year Ended December 31, 2012 | |||||||||||||||||||||||
| Beginning balance at January 1, 2012 | $ | 195.1 | $ | — | $ | 6.3 | $ | 59.0 | $ | 24.4 | $ | 284.8 | |||||||||||
| Total gains (losses): | |||||||||||||||||||||||
| Recognized in net income | 15.2 | — | — | 0.1 | (0.9 | ) | 14.4 | ||||||||||||||||
| Recognized in accumulated other comprehensive income | (19.7 | ) | — | 0.1 | 0.7 | (14.2 | ) | (33.1 | ) | ||||||||||||||
| Purchases | 77.8 | 3.0 | 3.4 | — | 4.9 | 89.1 | |||||||||||||||||
| Business combinations | 2.6 | — | — | — | — | 2.6 | |||||||||||||||||
| Sales | (29.8 | ) | — | — | (16.6 | ) | (0.5 | ) | (46.9 | ) | |||||||||||||
| Settlements | (67.8 | ) | (0.1 | ) | (0.1 | ) | (1.3 | ) | — | (69.3 | ) | ||||||||||||
| Transfers into Level III | 2.9 | 1.4 | 1.9 | 12.0 | 12.5 | 30.7 | |||||||||||||||||
| Transfers out of Level III | (55.2 | ) | — | (11.6 | ) | (50.0 | ) | — | (116.8 | ) | |||||||||||||
| Ending balance at December 31, 2012 | $ | 121.1 | $ | 4.3 | $ | — | $ | 3.9 | $ | 26.2 | $ | 155.5 | |||||||||||
| Change in unrealized losses included in net income related to assets still held for the year ended December 31, 2012 | $ | — | $ | — | $ | — | $ | — | $ | (0.7 | ) | $ | (0.7 | ) |
Transfers between levels, if any, are recorded as of the beginning of the reporting period. There were no material transfers into or out of Level III during the years ended December 31, 2014 or 2013 and no material transfers into Level III
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
during the year ended December 31, 2012. During the year ended December 31, 2012, the transfers out of Level III of corporate securities were for certain sub-prime securities transferred from Level III to Level II as a result of inputs that were previously unobservable becoming observable due to increased volume and level of trading in active markets. In addition, the transfers out of Level III of other debt securities were for certain inverse floating rate securities transferred from Level III to Level II as a result of those securities’ impending maturity and settlement and recent trading activity of similar securities in observable markets.
During the years ended December 31, 2014, 2013 or 2012, there were no material transfers from Level I to Level II or from Level II to Level I.
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. There were no material assets or liabilities measured at fair value on a nonrecurring basis during the years ended December 31, 2014 or 2013.
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, 2014, 2013 or 2012.
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, 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:
Other invested assets, long-term: Other invested assets, long-term include primarily 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.
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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 - 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 carrying value and fair value by level of financial instruments not recorded at fair value on our consolidated balance sheets at December 31, 2014 and 2013 are as follows:
| Carrying Value | Fair Value | ||||||||||||||||||
| Level I | Level II | Level III | Total | ||||||||||||||||
| December 31, 2014 | |||||||||||||||||||
| Assets: | |||||||||||||||||||
| Other invested assets, long-term | $ | 1,695.9 | $ | — | $ | — | $ | 1,695.9 | $ | 1,695.9 | |||||||||
| Liabilities: | |||||||||||||||||||
| Debt: | |||||||||||||||||||
| Short-term borrowings | 400.0 | — | 400.0 | — | 400.0 | ||||||||||||||
| Notes | 13,777.8 | — | 14,794.8 | — | 14,794.8 | ||||||||||||||
| Convertible debentures | 974.4 | — | 2,581.9 | — | 2,581.9 | ||||||||||||||
| December 31, 2013 | |||||||||||||||||||
| Assets: | |||||||||||||||||||
| Other invested assets, long-term | $ | 1,542.6 | $ | — | $ | — | $ | 1,542.6 | $ | 1,542.6 | |||||||||
| Liabilities: | |||||||||||||||||||
| Debt: | |||||||||||||||||||
| Short-term borrowings | 400.0 | — | 400.0 | — | 400.0 | ||||||||||||||
| Commercial paper | 379.2 | — | 379.2 | — | 379.2 | ||||||||||||||
| Notes | 12,746.4 | — | 13,014.3 | — | 13,014.3 | ||||||||||||||
| Convertible debentures | 966.0 | — | 2,030.6 | — | 2,030.6 |
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
- Income Taxes
The components of deferred income taxes at December 31 are as follows:
| 2014 | 2013 | ||||||
| Deferred tax assets relating to: | |||||||
| Retirement benefits | $ | 357.7 | $ | 287.8 | |||
| Accrued expenses | 329.9 | 342.8 | |||||
| Insurance reserves | 209.7 | 213.1 | |||||
| Net operating loss carryforwards | 14.8 | 17.2 | |||||
| Bad debt reserves | 132.9 | 124.8 | |||||
| State income tax | 40.6 | 32.9 | |||||
| Deferred compensation | 46.6 | 52.0 | |||||
| Investment basis difference | 88.2 | 166.3 | |||||
| Other | 34.2 | 84.0 | |||||
| Total deferred tax assets | 1,254.6 | 1,320.9 | |||||
| Valuation allowance | (2.6 | ) | (24.1 | ) | |||
| Total deferred tax assets, net of valuation allowance | 1,252.0 | 1,296.8 | |||||
| Deferred tax liabilities relating to: | |||||||
| Unrealized gains on securities | 331.4 | 266.5 | |||||
| Acquisition related: | |||||||
| Trademarks and other non-amortizable intangible assets | 2,200.5 | 2,200.5 | |||||
| Subscriber base, provider and hospital networks | 301.1 | 370.9 | |||||
| Internally developed software and other amortization differences | 654.9 | 703.9 | |||||
| Retirement benefits | 241.1 | 231.5 | |||||
| Debt discount | 184.0 | 186.9 | |||||
| State deferred tax | 49.1 | 55.3 | |||||
| Depreciation and amortization | 29.6 | 33.1 | |||||
| Other | 205.9 | 190.4 | |||||
| Total deferred tax liabilities | 4,197.6 | 4,239.0 | |||||
| Net deferred tax liability | $ | (2,945.6 | ) | $ | (2,942.2 | ) | |
| Deferred tax asset-current | $ | 280.4 | $ | 383.0 | |||
| Deferred tax liability-noncurrent | (3,226.0 | ) | (3,325.2 | ) | |||
| Net deferred tax liability | $ | (2,945.6 | ) | $ | (2,942.2 | ) |
Changes in the valuation allowance during 2014 included a decrease of $9.8 related to reduction in statutory state income tax rates, a decrease of $16.2 related to utilization of state net operating losses, and an increase of $4.5 related to the sale of 1-800 CONTACTS, for a net decrease of $21.5.
Changes in the valuation allowance during 2013 included an increase of $12.1 impacting tax expense related to additional state operating losses and a reduction of $6.1 impacting goodwill related to acquisition goodwill adjustments for a net increase of $6.0.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Significant components of the provision for income taxes for the years ended December 31 consist of the following:
| 2014 | 2013 | 2012 | |||||||||
| Current tax expense (benefit): | |||||||||||
| Federal | $ | 1,629.4 | $ | 1,226.4 | $ | 1,060.2 | |||||
| State and local | 65.8 | (42.6 | ) | 95.7 | |||||||
| Total current tax expense | 1,695.2 | 1,183.8 | 1,155.9 | ||||||||
| Deferred tax expense | 112.8 | 22.1 | 51.4 | ||||||||
| Total income tax expense | $ | 1,808.0 | $ | 1,205.9 | $ | 1,207.3 |
State and local current tax expense is reported gross of federal benefit, and includes amounts related to true up of prior years’ tax, audit settlements, uncertain tax positions and state tax credits. Such items are included in multiple lines in the following rate reconciliation table on a net of federal tax basis.
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 is as follows:
| 2014 | 2013 | 2012 | ||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||
| Amount at statutory rate | $ | 1,528.8 | 35.0 | % | $ | 1,344.1 | 35.0 | % | $ | 1,350.4 | 35.0 | % | ||||||||
| State and local income taxes net of federal tax benefit | 49.0 | 1.1 | 24.4 | 0.6 | 25.5 | 0.6 | ||||||||||||||
| Tax exempt interest and dividends received deduction | (65.9 | ) | (1.5 | ) | (64.9 | ) | (1.7 | ) | (59.3 | ) | (1.5 | ) | ||||||||
| Health Insurance Provider fee | 312.6 | 7.2 | — | — | — | — | ||||||||||||||
| Audit settlements | — | — | — | — | (200.5 | ) | (5.2 | ) | ||||||||||||
| Other, net | (16.5 | ) | (0.4 | ) | (97.7 | ) | (2.5 | ) | 91.2 | 2.4 | ||||||||||
| Total income tax expense | $ | 1,808.0 | 41.4 | % | $ | 1,205.9 | 31.4 | % | $ | 1,207.3 | 31.3 | % |
During the year ended December 31, 2014, we recognized income tax expense of $312.6, or $1.09 per diluted share, as a result of the non-tax deductibility of the Health Insurance Provider fee payments.
During the year ended December 31, 2013, we recognized income tax benefits of $65.0, or $0.21 per diluted share, resulting from a favorable tax election made subsequent to the Amerigroup acquisition. This benefit is included in Other, net above.
During the year ended December 31, 2012, we recognized income tax benefits of $200.5, or $0.62 per diluted share, for settlement of certain of our open tax issues with the Internal Revenue Service, or IRS, following approval by the Joint Committee on Taxation. This included amounts related to not-for-profit conversion and corporate reorganizations in prior years, as well as amounts associated with issues related to certain of our acquired companies. This income tax benefit includes the release of gross unrecognized tax benefits from uncertain tax positions, release of a valuation allowance and recognition of interest income. This income tax benefit, and resulting decrease in the effective tax rate, was partially offset due to the non-tax deductibility of litigation settlement expenses associated with the settlement of a class action lawsuit in June 2012 and an increase in our state deferred tax asset valuation allowance attributable to the uncertainty associated with some of our state net operating loss carryforwards.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
The change in the carrying amount of gross unrecognized tax benefits from uncertain tax positions for the years ended December 31 is as follows:
| 2014 | 2013 | ||||||
| Balance at January 1 | $ | 103.2 | $ | 143.5 | |||
| Additions for tax positions related to: | |||||||
| Current year | 10.9 | 5.0 | |||||
| Prior years | 31.3 | — | |||||
| Reductions related to: | |||||||
| Tax positions of prior years | (24.5 | ) | (45.3 | ) | |||
| Settlements with taxing authorities | (5.1 | ) | — | ||||
| Balance at December 31 | $ | 115.8 | $ | 103.2 |
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.
As of December 31, 2014, $68.3 of unrecognized tax benefits would impact our effective tax rate in future periods, if recognized. Also included in the table above is $10.9 that would be recognized as an adjustment to additional paid-in capital and $8.7 that would be recognized as an adjustment to goodwill, neither of which would affect our effective tax rate. The December 31, 2014 balance also includes $0.3 of tax positions for which ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Excluding the impact of interest and penalties, the disallowance of the shorter deductibility period would not affect our effective tax rate, but would accelerate the payment of cash to the taxing authority to an earlier period.
For the years ended December 31, 2014, 2013 and 2012, we recognized approximately $(4.2), $2.6 and $(9.0) in interest, respectively. We had accrued approximately $14.1 and $18.3 for the payment of interest at December 31, 2014 and 2013, respectively.
As of December 31, 2014, as further described below, certain tax years remain open to examination by the 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 $9.4 to $(92.0).
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, 2014, the examinations of our 2014 and 2013 tax years continue to be in process. During 2014, the Joint Committee on Taxation approved our 2010 settlement. Also during 2014, a hearing with IRS Appeals was held and settlement was reached on our 2011 and 2012 tax years.
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, 2014, we had unused federal tax net operating loss carryforwards of approximately $35.1 to offset future taxable income. The loss carryforwards expire in the years 2017 through 2024. During 2014, 2013 and 2012 federal income taxes paid totaled $1,659.0, $1,172.0 and $1,188.2, respectively.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
- Property and Equipment
A summary of property and equipment at December 31 is as follows:
| 2014 | 2013 | ||||||
| Land and improvements | $ | 25.8 | $ | 35.4 | |||
| Building and components | 279.9 | 384.0 | |||||
| Data processing equipment, furniture and other equipment | 940.3 | 861.5 | |||||
| Computer software, purchased and internally developed | 2,162.4 | 1,879.0 | |||||
| Leasehold improvements | 356.4 | 325.1 | |||||
| Property and equipment, gross | 3,764.8 | 3,485.0 | |||||
| Accumulated depreciation and amortization | (1,820.5 | ) | (1,683.5 | ) | |||
| Property and equipment, net | $ | 1,944.3 | $ | 1,801.5 |
Depreciation expense for 2014, 2013 and 2012 was $106.5, $105.3 and $102.9, respectively. Amortization expense on computer software and leasehold improvements for 2014, 2013 and 2012 was $367.8, $351.8 and $260.6, respectively, which includes amortization expense on computer software, both purchased and internally developed, for 2014, 2013 and 2012 of $329.2, $313.6 and $239.5, respectively. Capitalized costs related to the internal development of software of $1,844.2 and $1,561.0 at December 31, 2014 and 2013, respectively, are reported with computer software.
During the years ended December 31, 2014, 2013 and 2012, we recognized $7.9, $47.7 and $66.8, respectively, of impairments related to computer software (primarily internally developed) 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-Health Care Reform environment.
- Goodwill and Other Intangible Assets
No goodwill is allocated to our Other segment. A summary of the change in the carrying amount of goodwill for our Commercial and Specialty Business segment and Government Business segment (see Note 19, “Segment Information”) for 2014 and 2013 is as follows:
| Commercial and Specialty Business | Government Business | Total | |||||||||
| Balance as of January 1, 2013 | $ | 11,555.3 | $ | 5,334.5 | $ | 16,889.8 | |||||
| Measurement period adjustments | (1.3 | ) | 28.7 | 27.4 | |||||||
| Balance as of December 31, 2013 | $ | 11,554.0 | $ | 5,363.2 | $ | 16,917.2 | |||||
| Measurement period adjustments | (1.6 | ) | (0.2 | ) | (1.8 | ) | |||||
| Other adjustments | 266.5 | (99.9 | ) | 166.6 | |||||||
| Balance as of December 31, 2014 | $ | 11,818.9 | $ | 5,263.1 | $ | 17,082.0 | |||||
| Accumulated impairment as of December 31, 2014 | $ | (41.0 | ) | $ | — | $ | (41.0 | ) |
Measurement period adjustments incurred during 2014 included a reduction of $1.8 related to the tax benefit on the exercise of stock options issued as part of various acquisitions. Other adjustments incurred during 2014 included transfers between business segments and reclassification to goodwill of the indefinite-lived provider network intangible asset, net of deferred taxes, presented in the other intangible asset table below. Measurement period adjustments incurred during 2013 included a reduction of $1.5 related to the tax benefit on the exercise of stock options issued as part of various acquisitions and an increase of $28.9 related to other measurement period adjustments.
As required by FASB guidance, we completed annual impairment tests of existing goodwill and other intangible assets with indefinite lives during 2014, 2013 and 2012. 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
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
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 income and market value valuation methods, 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 2014, 2013 or 2012 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 are as follows:
| 2014 | 2013 | ||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
| Intangible assets with finite lives: | |||||||||||||||||||||||
| Customer relationships | $ | 3,318.4 | $ | (2,473.4 | ) | $ | 845.0 | $ | 3,308.9 | $ | (2,264.2 | ) | $ | 1,044.7 | |||||||||
| Provider and hospital relationships | 140.9 | (51.4 | ) | 89.5 | 140.5 | (44.7 | ) | 95.8 | |||||||||||||||
| Other | 61.6 | (33.3 | ) | 28.3 | 61.7 | (28.3 | ) | 33.4 | |||||||||||||||
| Total | 3,520.9 | (2,558.1 | ) | 962.8 | 3,511.1 | (2,337.2 | ) | 1,173.9 | |||||||||||||||
| 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 | |||||||||||||||||
| Provider network | — | — | — | 271.8 | — | 271.8 | |||||||||||||||||
| State Medicaid licenses | 696.6 | — | 696.6 | 696.6 | — | 696.6 | |||||||||||||||||
| Total | 6,995.3 | — | 6,995.3 | 7,267.1 | — | 7,267.1 | |||||||||||||||||
| Other intangible assets | $ | 10,516.2 | $ | (2,558.1 | ) | $ | 7,958.1 | $ | 10,778.2 | $ | (2,337.2 | ) | $ | 8,441.0 |
As of December 31, 2014, the estimated amortization expense for each of the five succeeding years is as follows: 2015, $184.2; 2016, $153.5; 2017, $133.5; 2018, $113.8; and 2019, $94.1.
- 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 and certain other employees who met grandfathering rules continue to accrue benefits.
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
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
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 | ||||||||||||||
| 2014 | 2013 | 2014 | 2013 | ||||||||||||
| Benefit obligation at beginning of year | $ | 1,764.7 | $ | 1,948.5 | $ | 607.5 | $ | 623.0 | |||||||
| Service cost | 13.0 | 14.2 | 3.2 | 6.7 | |||||||||||
| Interest cost | 74.1 | 67.8 | 26.3 | 22.4 | |||||||||||
| Actuarial loss (gain) | 185.4 | (129.9 | ) | 45.3 | 4.8 | ||||||||||
| Benefits paid | (122.8 | ) | (135.9 | ) | (35.7 | ) | (49.4 | ) | |||||||
| Benefit obligation at end of year | $ | 1,914.4 | $ | 1,764.7 | $ | 646.6 | $ | 607.5 |
The changes in the fair value of plan assets are as follows:
| Pension Benefits | Other Benefits | ||||||||||||||
| 2014 | 2013 | 2014 | 2013 | ||||||||||||
| Fair value of plan assets at beginning of year | $ | 1,944.0 | $ | 1,817.9 | $ | 349.8 | $ | 320.3 | |||||||
| Actual return on plan assets | 160.2 | 223.4 | 17.7 | 37.0 | |||||||||||
| Employer contributions | 3.6 | 38.6 | 16.1 | 31.3 | |||||||||||
| Benefits paid | (122.8 | ) | (135.9 | ) | (35.7 | ) | (38.8 | ) | |||||||
| Fair value of plan assets at end of year | $ | 1,985.0 | $ | 1,944.0 | $ | 347.9 | $ | 349.8 |
The net amount included in the consolidated balance sheets is as follows:
| Pension Benefits | Other Benefits | ||||||||||||||
| 2014 | 2013 | 2014 | 2013 | ||||||||||||
| Noncurrent assets | $ | 146.3 | $ | 240.8 | $ | — | $ | — | |||||||
| Current liabilities | (4.3 | ) | (3.5 | ) | — | — | |||||||||
| Noncurrent liabilities | (71.4 | ) | (58.0 | ) | (298.7 | ) | (257.7 | ) | |||||||
| Net amount at December 31 | $ | 70.6 | $ | 179.3 | $ | (298.7 | ) | $ | (257.7 | ) |
The net amounts included in accumulated other comprehensive loss (income) that have not been recognized as components of net periodic benefit costs are as follows:
| Pension Benefits | Other Benefits | ||||||||||||||
| 2014 | 2013 | 2014 | 2013 | ||||||||||||
| Net actuarial loss | $ | 563.7 | $ | 427.2 | $ | 211.2 | $ | 169.6 | |||||||
| Prior service credit | (2.2 | ) | (3.0 | ) | (88.0 | ) | (102.4 | ) | |||||||
| Net amount before tax at December 31 | $ | 561.5 | $ | 424.2 | $ | 123.2 | $ | 67.2 |
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
The estimated net actuarial loss and prior service credit 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 $23.8 and $0.8, 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 $15.3 and $14.4, respectively.
The accumulated benefit obligation for the defined benefit pension plans was $1,908.1 and $1,758.2 at December 31, 2014 and 2013, respectively.
As of December 31, 2014, 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 $111.9, $109.4 and $36.9, respectively.
The weighted-average assumptions used in calculating the benefit obligations for all plans are as follows:
| Pension Benefits | Other Benefits | ||||||||||
| 2014 | 2013 | 2014 | 2013 | ||||||||
| Discount rate | 3.66 | % | 4.39 | % | 3.74 | % | 4.48 | % | |||
| Rate of compensation increase | 3.00 | % | 3.00 | % | 3.00 | % | 3.00 | % | |||
| Expected rate of return on plan assets | 7.62 | % | 7.66 | % | 7.00 | % | 7.00 | % |
The components of net periodic (credit) benefit cost included in the consolidated statements of income are as follows:
| 2014 | 2013 | 2012 | |||||||||
| Pension Benefits | |||||||||||
| Service cost | $ | 13.0 | $ | 14.2 | $ | 16.4 | |||||
| Interest cost | 74.1 | 67.8 | 76.4 | ||||||||
| Expected return on assets | (137.5 | ) | (133.1 | ) | (134.7 | ) | |||||
| Recognized actuarial loss | 21.0 | 28.3 | 30.5 | ||||||||
| Amortization of prior service credit | (0.8 | ) | (0.8 | ) | (0.8 | ) | |||||
| Settlement loss | 5.2 | 11.0 | 13.8 | ||||||||
| Net periodic (credit) benefit cost | $ | (25.0 | ) | $ | (12.6 | ) | $ | 1.6 | |||
| Other Benefits | |||||||||||
| Service cost | $ | 3.2 | $ | 6.7 | $ | 6.8 | |||||
| Interest cost | 26.3 | 22.4 | 27.5 | ||||||||
| Expected return on assets | (23.4 | ) | (22.1 | ) | (21.0 | ) | |||||
| Recognized actuarial loss | 9.4 | 11.2 | 14.1 | ||||||||
| Amortization of prior service credit | (14.4 | ) | (13.3 | ) | (13.3 | ) | |||||
| Net periodic benefit cost | $ | 1.1 | $ | 4.9 | $ | 14.1 |
During the years ended December 31, 2014, 2013 and 2012 we incurred total settlement losses of $5.2, $11.0 and $13.8, respectively, as lump-sum payments exceeded the service cost and interest cost components of net periodic benefit cost for certain of our plans.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
The weighted-average assumptions used in calculating the net periodic benefit cost for all plans are as follows:
| 2014 | 2013 | 2012 | ||||||
| Pension Benefits | ||||||||
| Discount rate | 4.39 | % | 3.60 | % | 4.29 | % | ||
| Rate of compensation increase | 3.00 | % | 3.50 | % | 3.50 | % | ||
| Expected rate of return on plan assets | 7.66 | % | 7.91 | % | 8.00 | % | ||
| Other Benefits | ||||||||
| Discount rate | 4.48 | % | 3.71 | % | 4.36 | % | ||
| Rate of compensation increase | 3.00 | % | 3.50 | % | 3.50 | % | ||
| Expected rate of return on plan assets | 7.00 | % | 7.00 | % | 7.00 | % |
The assumed health care 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, 2014 measurement date was 8.00% for 2015 with a gradual decline to 4.50% by the year 2025. The assumed health care 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, 2014 measurement date was 6.00% for 2015 with a gradual decline to 4.50% by the year 2021. These estimated trend rates are subject to change in the future. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, an increase in the assumed health care cost trend rate of one percentage point would increase the postretirement benefit obligation as of December 31, 2014 by $56.7 and would increase service and interest costs by $2.0. Conversely, a decrease in the assumed health care cost trend rate of one percentage point would decrease the postretirement benefit obligation by $47.6 as of December 31, 2014 and would decrease service and interest costs by $1.8.
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 include partnership interests, collective trusts that replicate money market funds and insurance contracts designed specifically for employee benefit plans. As of December 31, 2014, 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.
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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, 2014, excluding cash, investment income receivable and amounts due to/from brokers, resulting in a net liability of $0.2, 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, 2014 | |||||||||||||||
| Pension Benefit Assets: | |||||||||||||||
| Equity securities: | |||||||||||||||
| U.S. securities | $ | 591.2 | $ | 4.5 | $ | — | $ | 595.7 | |||||||
| Foreign securities | 246.2 | — | — | 246.2 | |||||||||||
| Mutual funds | 36.8 | — | — | 36.8 | |||||||||||
| Fixed maturity securities: | |||||||||||||||
| Government securities | 206.5 | 11.5 | — | 218.0 | |||||||||||
| Corporate securities | — | 373.6 | — | 373.6 | |||||||||||
| Asset-backed securities | — | 170.0 | — | 170.0 | |||||||||||
| Other types of investments: | |||||||||||||||
| Common and collective trusts | — | 37.1 | — | 37.1 | |||||||||||
| Partnership interests | — | — | 120.7 | 120.7 | |||||||||||
| Insurance company contracts | — | — | 187.7 | 187.7 | |||||||||||
| Treasury futures contracts | (0.9 | ) | — | — | (0.9 | ) | |||||||||
| Total pension benefit assets | $ | 1,079.8 | $ | 596.7 | $ | 308.4 | $ | 1,984.9 | |||||||
| Other Benefit Assets: | |||||||||||||||
| Equity securities: | |||||||||||||||
| U.S. securities | $ | 22.0 | $ | 0.3 | $ | — | $ | 22.3 | |||||||
| Foreign securities | 9.5 | — | — | 9.5 | |||||||||||
| Mutual funds | 33.6 | — | — | 33.6 | |||||||||||
| Fixed maturity securities: | |||||||||||||||
| Government securities | 6.2 | — | — | 6.2 | |||||||||||
| Corporate securities | — | 10.0 | — | 10.0 | |||||||||||
| Asset-backed securities | — | 10.5 | — | 10.5 | |||||||||||
| Other types of investments: | |||||||||||||||
| Common and collective trusts | — | 1.4 | — | 1.4 | |||||||||||
| Partnership interests | — | — | 1.5 | 1.5 | |||||||||||
| Life insurance contracts | — | — | 238.4 | 238.4 | |||||||||||
| Investment in DOL 103-12 trust | — | 14.8 | — | 14.8 | |||||||||||
| Total other benefit assets | $ | 71.3 | $ | 37.0 | $ | 239.9 | $ | 348.2 |
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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, 2013, excluding cash, investment income receivable and amounts due to/from brokers, resulting in a net asset of $3.9, 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, 2013 | |||||||||||||||
| Pension Benefit Assets: | |||||||||||||||
| Equity securities: | |||||||||||||||
| U.S. securities | $ | 613.8 | $ | — | $ | — | $ | 613.8 | |||||||
| Foreign securities | 296.8 | — | — | 296.8 | |||||||||||
| Mutual funds | 37.4 | — | — | 37.4 | |||||||||||
| Fixed maturity securities: | |||||||||||||||
| Government securities | 177.9 | 11.5 | — | 189.4 | |||||||||||
| Corporate securities | — | 272.1 | — | 272.1 | |||||||||||
| Asset-backed securities | — | 127.0 | — | 127.0 | |||||||||||
| Other types of investments: | |||||||||||||||
| Common and collective trusts | — | 46.6 | — | 46.6 | |||||||||||
| Partnership interests | — | — | 159.1 | 159.1 | |||||||||||
| Insurance company contracts | — | — | 197.4 | 197.4 | |||||||||||
| Treasury futures contracts | 0.7 | — | — | 0.7 | |||||||||||
| Total pension benefit assets | $ | 1,126.6 | $ | 457.2 | $ | 356.5 | $ | 1,940.3 | |||||||
| Other Benefit Assets: | |||||||||||||||
| Equity securities: | |||||||||||||||
| U.S. securities | $ | 39.0 | $ | — | $ | — | $ | 39.0 | |||||||
| Foreign securities | 18.6 | — | — | 18.6 | |||||||||||
| Mutual funds | 4.7 | — | — | 4.7 | |||||||||||
| Fixed maturity securities: | |||||||||||||||
| Government securities | 14.3 | — | — | 14.3 | |||||||||||
| Corporate securities | 4.3 | 9.9 | — | 14.2 | |||||||||||
| Asset-backed securities | — | 11.2 | — | 11.2 | |||||||||||
| Other types of investments: | |||||||||||||||
| Common and collective trusts | — | 2.2 | — | 2.2 | |||||||||||
| Partnership interests | — | — | 1.2 | 1.2 | |||||||||||
| Life insurance contracts | — | — | 230.0 | 230.0 | |||||||||||
| Investment in DOL 103-12 trust | — | 14.2 | — | 14.2 | |||||||||||
| Total other benefit assets | $ | 80.9 | $ | 37.5 | $ | 231.2 | $ | 349.6 |
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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, 2014, 2013 and 2012 is as follows:
| U.S. Equity Securities | Partnership Interests | Insurance Company Contracts | Life Insurance Contracts | Total | |||||||||||||||
| Year ended December 31, 2014 | |||||||||||||||||||
| Beginning balance at January 1, 2014 | $ | — | $ | 160.3 | $ | 197.4 | $ | 230.0 | $ | 587.7 | |||||||||
| Actual return on plan assets: | |||||||||||||||||||
| Relating to assets still held at the reporting date | — | (5.4 | ) | 1.4 | 8.4 | 4.4 | |||||||||||||
| Purchases | — | 8.4 | 11.6 | — | 20.0 | ||||||||||||||
| Sales | — | (41.1 | ) | (22.7 | ) | — | (63.8 | ) | |||||||||||
| Ending balance at December 31, 2014 | $ | — | $ | 122.2 | $ | 187.7 | $ | 238.4 | $ | 548.3 | |||||||||
| Year ended December 31, 2013 | |||||||||||||||||||
| Beginning balance at January 1, 2013 | $ | — | $ | 177.7 | $ | 202.5 | $ | 203.7 | $ | 583.9 | |||||||||
| Actual return on plan assets: | |||||||||||||||||||
| Relating to assets still held at the reporting date | — | 2.2 | (5.6 | ) | 26.3 | 22.9 | |||||||||||||
| Purchases | — | 15.6 | 9.5 | — | 25.1 | ||||||||||||||
| Sales | — | (35.2 | ) | (9.0 | ) | — | (44.2 | ) | |||||||||||
| Ending balance at December 31, 2013 | $ | — | $ | 160.3 | $ | 197.4 | $ | 230.0 | $ | 587.7 | |||||||||
| Year ended December 31, 2012 | |||||||||||||||||||
| Beginning balance at January 1, 2012 | $ | 317.6 | $ | 166.1 | $ | 195.5 | $ | 95.7 | $ | 774.9 | |||||||||
| Actual return on plan assets: | |||||||||||||||||||
| Relating to assets still held at the reporting date | — | 4.5 | 5.5 | 13.2 | 23.2 | ||||||||||||||
| Purchases | — | 14.1 | 8.8 | 94.8 | 117.7 | ||||||||||||||
| Sales | (317.6 | ) | (7.0 | ) | (7.3 | ) | — | (331.9 | ) | ||||||||||
| Ending balance at December 31, 2012 | $ | — | $ | 177.7 | $ | 202.5 | $ | 203.7 | $ | 583.9 |
There were no transfers between Levels I, II and III during the years ended December 31, 2014, 2013 and 2012. The significant decline in plan assets measured using Level III inputs as of December 31, 2012 was primarily due to the sale of an equity partnership.
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, 2014, 2013 and 2012, no material contributions were necessary to meet ERISA required funding levels. However, during the years ended December 31, 2014, 2013 and 2012, we made tax deductible discretionary contributions to the pension benefit plans of $3.6, $38.6 and $34.5, respectively. Employer contributions to other benefit plans represent discretionary contributions and do not include payments to retirees for current benefits.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Our estimated future payments for pension benefits and postretirement benefits, which reflect expected future service, as appropriate, are as follows:
| Pension Benefits | Other Benefits | ||||||
| 2015 | $ | 148.8 | $ | 40.8 | |||
| 2016 | 152.6 | 41.4 | |||||
| 2017 | 146.7 | 42.4 | |||||
| 2018 | 143.4 | 43.3 | |||||
| 2019 | 142.8 | 43.8 | |||||
| 2020 – 2024 | 619.3 | 213.5 |
In addition to the defined benefit plans, we maintain the Anthem 401(k) Plan and CareMore 401(k) Pension Plan which are qualified defined contribution plans covering substantially all employees. Voluntary employee contributions are matched by us subject to certain limitations. Contributions made by us totaled $111.1, $102.5 and $91.0 during 2014, 2013 and 2012, respectively.
- Medical Claims Payable
A reconciliation of the beginning and ending balances for medical claims payable for the years ended December 31 is as follows:
| Years Ended December 31 | |||||||||||
| 2014 | 2013 | 2012 | |||||||||
| Gross medical claims payable, beginning of year | $ | 6,127.2 | $ | 6,174.5 | $ | 5,489.0 | |||||
| Ceded medical claims payable, beginning of year | (23.4 | ) | (27.2 | ) | (16.4 | ) | |||||
| Net medical claims payable, beginning of year | 6,103.8 | 6,147.3 | 5,472.6 | ||||||||
| Business combinations and purchase adjustments | — | — | 804.4 | ||||||||
| Net incurred medical claims: | |||||||||||
| Current year | 56,305.8 | 55,894.3 | 48,080.1 | ||||||||
| Prior years redundancies | (541.9 | ) | (599.1 | ) | (513.6 | ) | |||||
| Total net incurred medical claims | 55,763.9 | 55,295.2 | 47,566.5 | ||||||||
| Net payments attributable to: | |||||||||||
| Current year medical claims | 50,353.9 | 49,887.2 | 42,832.4 | ||||||||
| Prior years medical claims | 5,420.0 | 5,451.5 | 4,863.8 | ||||||||
| Total net payments | 55,773.9 | 55,338.7 | 47,696.2 | ||||||||
| Net medical claims payable, end of year | 6,093.8 | 6,103.8 | 6,147.3 | ||||||||
| Ceded medical claims payable, end of year | 767.4 | 23.4 | 27.2 | ||||||||
| Gross medical claims payable, end of year | $ | 6,861.2 | $ | 6,127.2 | $ | 6,174.5 |
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 $541.9 shown above for the year ended December 31, 2014 represents an estimate based on paid claim activity from January 1, 2014 to December 31, 2014. 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 $541.9 redundancy relates to claims incurred in calendar year 2013.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
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, 2014, 2013 and 2012, 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 | |||||||||||
| 2014 | 2013 | 2012 | |||||||||
| Assumed trend factors | $ | (399.5 | ) | $ | (428.4 | ) | $ | (394.4 | ) | ||
| Assumed completion factors | (142.4 | ) | (170.7 | ) | (119.2 | ) | |||||
| Total | $ | (541.9 | ) | $ | (599.1 | ) | $ | (513.6 | ) |
The favorable development recognized in 2014 and 2013 resulted primarily from trend factors in late 2013 and late 2012, respectively, developing more favorably than originally expected as well as a smaller but significant contribution from completion factor development. The favorable development recognized in 2012 was driven by trend factors in late 2011 developing more favorably than originally expected.
- 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, collectively, the FHLBs, and as a member we have the ability to obtain short-term cash advances subject to certain minimum collateral requirements. At December 31, 2014 and 2013, $400.0 was outstanding under our short-term FHLBs borrowings. These outstanding short-term FHLBs borrowings at December 31, 2014 and 2013 had fixed interest rates of 0.195% and 0.170%, respectively.
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Notes to Consolidated Financial Statements (continued)
Long-term Debt
The carrying value of long-term debt at December 31 consists of the following:
| 2014 | 2013 | ||||||
| Senior unsecured notes: | |||||||
| 5.000%, due 2014 | $ | — | $ | 518.0 | |||
| 1.250%, due 2015 | 625.0 | 624.9 | |||||
| 5.250%, due 2016 | — | 1,109.6 | |||||
| 2.375%, due 2017 | 400.1 | 399.6 | |||||
| 5.875%, due 2017 | 527.7 | 545.1 | |||||
| 1.875%, due 2018 | 619.0 | 614.5 | |||||
| 2.300%, due 2018 | 648.0 | 647.5 | |||||
| 2.250%, due 2019 | 848.2 | — | |||||
| 7.000%, due 2019 | 440.0 | 452.9 | |||||
| 4.350%, due 2020 | 698.6 | 688.9 | |||||
| 3.700%, due 2021 | 699.4 | 699.4 | |||||
| 3.125%, due 2022 | 846.7 | 846.3 | |||||
| 3.300%, due 2023 | 997.2 | 996.9 | |||||
| 3.500%, due 2024 | 796.1 | — | |||||
| 5.950%, due 2034 | 447.3 | 447.3 | |||||
| 5.850%, due 2036 | 772.0 | 775.6 | |||||
| 6.375%, due 2037 | 644.1 | 651.4 | |||||
| 5.800%, due 2040 | 208.3 | 216.2 | |||||
| 4.625%, due 2042 | 893.9 | 893.9 | |||||
| 4.650%, due 2043 | 994.4 | 994.4 | |||||
| 4.650%, due 2044 | 798.3 | — | |||||
| 5.100%, due 2044 | 599.2 | 599.1 | |||||
| 4.850%, due 2054 | 249.4 | — | |||||
| Senior convertible debentures: | |||||||
| 2.750%, due 2042 | 974.4 | 966.0 | |||||
| Surplus notes: | |||||||
| 9.000%, due 2027 | 24.9 | 24.9 | |||||
| Variable rate debt: | |||||||
| Commercial paper program | — | 379.2 | |||||
| Total long-term debt | 14,752.2 | 14,091.6 | |||||
| Current portion of long-term debt | (625.0 | ) | (518.0 | ) | |||
| Long-term debt, less current portion | $ | 14,127.2 | $ | 13,573.6 |
All long-term debt shown above is a direct obligation of Anthem, Inc., except for the surplus notes.
On September 15, 2014, we redeemed the $500.0 outstanding principal balance of our 5.000% senior unsecured notes due 2014, plus applicable premium for early redemption and accrued and unpaid interest to the redemption date, for cash totaling $512.3. We recognized a loss on extinguishment of debt of $2.3 for the redemption of these notes.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
On September 11, 2014, we redeemed the $1,097.9 outstanding principal balance of our 5.250% senior unsecured notes due 2016, plus applicable premium for early redemption and accrued and unpaid interest to the redemption date, for cash totaling $1,178.2. We recognized a loss on extinguishment of debt of $67.6 for the redemption of these notes.
Additionally, during the year ended December 31, 2014, we repurchased $52.0 of outstanding principal amount of certain other senior unsecured notes, plus applicable premium for early redemption plus accrued and unpaid interest, for cash totaling $61.0. We recognized a loss on extinguishment of debt of $11.2 for the repurchase of these notes.
On August 12, 2014, we issued $850.0 of 2.250% notes due 2019, $800.0 of 3.500% notes due 2024, $800.0 of 4.650% notes due 2044, and $250.0 of 4.850% notes due 2054 under our shelf registration statement. We used the proceeds from this offering in part to fund the purchase price of the 5.000% and 5.250% senior unsecured notes discussed above, and the remaining net proceeds are being used for general corporate purposes. Interest on the notes is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2015. The notes have a call feature that allows us to repurchase the notes at any time at our option and a put feature that allows a note holder to require us to repurchase the notes upon the occurrence of both a change in control event and a downgrade of the notes below an investment grade rating.
On September 5, 2013, we redeemed the $400.0 outstanding principal balance of our 6.000% senior unsecured notes due 2014, plus applicable premium for early redemption and accrued and unpaid interest to the redemption date, for cash totaling $411.0. We recognized a loss on extinguishment of debt of $10.0 for the redemption of these notes.
On July 30, 2013, we initiated a cash tender offer and consent solicitation to purchase up to $300.0 aggregate principal amount of our outstanding 5.875% notes due 2017 and 7.000% notes due 2019 (the “First Tranche Offer”) and to purchase up to $300.0 aggregate principal amount of our outstanding 5.950% notes due 2034, 5.850% notes due 2036, 6.375% notes due 2037 and 5.800% notes due 2040 (the “Second Tranche Offer”), collectively, the “Tender Offers”. The Tender Offers were each subject to increase up to an additional $100.0 at our election. On August 12, 2013, we increased the Second Tranche Offer to $400.0 and on August 13, 2013 we repurchased $300.0 of the First Tranche Offer notes and 400.0 of the Second Tranche Offer notes for cash totaling $837.7. Holders who tendered their notes prior to the early tender date received the principal amounts, applicable premium for early redemption and accrued and unpaid interest to the early tender offer settlement date. We recognized a loss on extinguishment of debt of $135.3 for the repurchase of these notes.
On July 30, 2013, we issued $650.0 of 2.300% notes due 2018 and $600.0 of 5.100% notes due 2044 under our shelf registration statement. We used the proceeds from this offering in part to fund the purchase price of the 6.000% senior unsecured notes and the Tender Offers, discussed above, and the balance for general corporate purposes. Interest on the notes is payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2014. The notes have a call feature that allows us to repurchase the notes at any time at our option and a put feature that allows a note holder to require us to repurchase the notes upon the occurrence of both a change in control event and a downgrade of the notes below an investment grade rating.
On January 25, 2013, we redeemed the outstanding principal balance of $475.0 of 7.500% senior unsecured notes due 2019, plus applicable premium for early redemption, for cash totaling $555.6. The weighted-average redemption price of the notes was approximately 117% of the principal amount outstanding.
Surplus notes are unsecured obligations of Anthem Insurance Companies, Inc., or Anthem Insurance, a wholly owned subsidiary, and are subordinate in right of payment to all of Anthem Insurance’s existing and future indebtedness. Any payment of interest or principal on the surplus notes 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 credit facility, or the facility, with certain lenders for general corporate purposes. The facility, as amended, provides credit up to $2,000.0 and matures on September 29, 2016. The interest rate on the facility is based on either, (i) the LIBOR rate plus a predetermined percentage rate based on our credit rating at the date of utilization, or (ii) a base rate as defined in the facility agreement plus a predetermined percentage rate based on our credit 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, 2014 or 2013.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
We have an authorized commercial paper program of up to $2,500.0, the proceeds of which may be used for general corporate purposes. We did not have any borrowings outstanding under our commercial paper program at December 31, 2014. At December 31, 2013, we had $379.2 outstanding under our commercial paper program with a weighted-average interest rate of 0.420%. Commercial paper borrowings have been classified as long-term debt at December 31, 2013 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 senior credit facility described above. We resumed borrowing under our commercial paper program in the first quarter of 2015.
Convertible Debentures
On October 9, 2012, we issued $1,500.0 of senior convertible debentures, or the Debentures. The Debentures are governed by an indenture, or the Indenture, dated as of October 9, 2012 between us and The Bank of New York Mellon Trust Company, N.A., as trustee. 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 commencing after the fiscal quarter ended December 31, 2012, 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 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 of cash and shares of common stock based on a daily conversion value, determined in accordance with the Indenture. The initial conversion rate for the Debentures will be 13.2319 shares of our common stock per $1,000 (whole dollars) of principal amount of Debentures, which represents 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. As of December 31, 2014, our common stock was last traded at a price of $125.67 per share. If the Debentures had been converted or matured at December 31, 2014, we would be obligated to pay the principal of the Debentures plus an amount in cash or shares equal to $1,019.3. The Debentures and underlying shares of our common stock have not been and will not be registered under the Securities Act of 1933, as amended, or 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. The Debentures were offered and sold to qualified institutional buyers pursuant to Rule 144A under the Securities Act, the restrictions for which expired in October 2013. We used approximately $371.0 of the net proceeds from the issuance to repurchase shares of our common stock concurrently with the offering of the Debentures, and the remaining balance was used for general corporate purposes, including but not limited to additional purchases of shares of our common stock pursuant to our share repurchase program and the repayment of short-term and/or long-term debt.
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 has been bifurcated from its debt host
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Notes to Consolidated Financial Statements (continued)
and recorded as a component of “additional paid-in capital” (net of deferred taxes and equity issuance costs) in our consolidated balance sheet.
The following table summarizes at December 31, 2014 the related balances, conversion rate and conversion price of the Debentures:
| Outstanding principal amount | $ | 1,500.0 | |
| Unamortized debt discount | $ | 525.6 | |
| Net debt carrying amount | $ | 974.4 | |
| Equity component carrying amount | $ | 543.6 | |
| Conversion rate (shares of common stock per $1,000 of principal amount) | 13.3645 | ||
| Effective conversion price (per $1,000 of principal amount) | $ | 74.8244 |
The remaining amortization period of the unamortized debt discount as of December 31, 2014 is approximately 28 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 year ended December 31, 2014, we recognized $49.6 of interest expense related to the Debentures, of which $41.2 represented interest expense recognized at the stated interest rate of 2.750% and $8.4 represented interest expense resulting from amortization of the debt discount.
Total interest paid during 2014, 2013 and 2012 was $575.9, $597.2, and $479.1, respectively.
We were in compliance with all applicable covenants under all of our outstanding debt agreements at December 31, 2014.
Future maturities of all long-term debt outstanding at December 31, 2014 are as follows: 2015, $625.0; 2016, $0.0; 2017, $927.8; 2018, $1,267.0; 2019, $1,288.2 and thereafter, $10,644.2.
- 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 defending a certified class action filed as a result of the 2001 demutualization of Anthem Insurance. The lawsuit names Anthem Insurance as well as Anthem, Inc. and is captioned Ronald Gold, et al. v. Anthem, Inc. et al. Anthem Insurance’s 2001 Plan of Conversion, or the Plan, provided for the conversion of Anthem Insurance from a mutual insurance company into a stock insurance company pursuant to Indiana law. Under the Plan, Anthem Insurance distributed the fair value of the company at the time of conversion to its Eligible Statutory Members, or ESMs, in the form of cash or Anthem common stock in exchange for their membership interests in the mutual company. Plaintiffs in Gold allege that Anthem Insurance distributed value to the wrong ESMs. Cross motions for summary judgment were granted in part and denied in part on July 26, 2006 with regard to the issue of sovereign immunity asserted by co-defendant, the state of Connecticut, or the State. The trial court also denied our motion for summary judgment as to plaintiffs’ claims on January 10, 2005. The State appealed the denial of its motion to the Connecticut Supreme Court. We filed a cross-appeal on the sovereign immunity issue. On May 11, 2010, the Supreme Court reversed the judgment of the trial court denying the State’s motion to dismiss the plaintiff’s claims under sovereign immunity and dismissed our cross-appeal. The case was remanded to the trial court for further proceedings. Plaintiffs’ motion for class certification was granted on December 15, 2011. We and the plaintiffs filed renewed cross-motions for summary judgment on January 24, 2013. On August 19, 2013, the trial court denied plaintiffs' motion for summary judgment. The trial court deferred a final ruling on our motion for summary judgment. On March 6, 2014, the trial court denied our motion for summary judgment finding that an issue of material fact
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Notes to Consolidated Financial Statements (continued)
existed. A trial on liability commenced on October 14, 2014 and concluded on October 16, 2014. The matter was taken under advisement by the trial court, which has requested post-trial briefing. We expect the trial court to issue its decision on liability sometime in 2015. We intend to vigorously defend the Gold lawsuit; however, its ultimate outcome cannot be presently determined.
We are currently a defendant in eleven putative class actions relating to out-of-network, or OON, reimbursement that were consolidated into a single multi-district lawsuit called In re WellPoint, Inc. (n/k/a Anthem, Inc.) Out-of-Network “UCR” Rates Litigation that is pending in the United States District Court for the Central District of California. The lawsuits were filed in 2009. The plaintiffs include current and former members on behalf of a putative class of members who received OON services for which the defendants paid less than billed charges, the American Medical Association, four state medical associations, OON physicians, OON non-physician providers, the American Podiatric Medical Association, California Chiropractic Association and the California Psychological Association on behalf of putative classes of OON physicians and all OON non-physician health care providers. The plaintiffs have filed several amended complaints alleging that the defendants violated the Racketeer Influenced and Corrupt Organizations Act, or RICO, the Sherman Antitrust Act, ERISA, federal regulations, and state law by using an OON reimbursement database called Ingenix and by using non-Ingenix OON reimbursement methodologies. We have filed motions to dismiss in response to each of those amended complaints. Our motions to dismiss have been granted in part and denied in part by the court. The most recent pleading filed by the plaintiffs is a Fourth Amended Complaint to which we filed a motion to dismiss most, but not all, of the claims. In July 2013 the court issued an order granting in part and denying in part our motion. The court held that the state and federal anti-trust claims along with the RICO claims should be dismissed in their entirety with prejudice. The court further found that the ERISA claims, to the extent they involved non-Ingenix methodologies, along with those that involved our alleged non-disclosures should be dismissed with prejudice. The court also dismissed most of the plaintiffs’ state law claims with prejudice. The only claims that remain after the court’s decision are an ERISA benefits claim relating to claims priced based on Ingenix, a breach of contract claim on behalf of one subscriber plaintiff, a breach of implied covenant claim on behalf of one subscriber plaintiff, and one subscriber plaintiff’s claim under the California Unfair Competition Law. The plaintiffs filed a motion for reconsideration of the motion to dismiss order, which the court granted in part and denied in part. The court ruled that the plaintiffs adequately allege that one Georgia provider plaintiff is deemed to have exhausted administrative remedies regarding non-Ingenix methodologies based on the facts alleged regarding that plaintiff so those claims are back in the case. Fact discovery is complete. The plaintiffs filed a motion for class certification in November 2013 seeking the following classes: (1) a subscriber ERISA class as to OON claims processed using the Ingenix database as the pricing methodology; (2) a physician provider class as to OON claims processed using Ingenix; (3) a non-physician provider class as to OON claims processed using Ingenix; (4) a provider ERISA class as to OON claims processed using non-Ingenix pricing methodologies; (5) a California subscriber breach of contract/unfair competition class; and (6) a subscriber breach of implied covenant class for all Anthem states except California. Following expert discovery and briefing, oral argument was held on the motion. In late 2014, the court denied the plaintiffs' motion for class certification in its entirety. The California subscriber plaintiffs are seeking leave to file a renewed motion for class certification with more narrowly defined proposed classes. We will oppose their request. Earlier in the case, in 2009, we filed a motion in the United States District Court for the Southern District of Florida, or the Florida Court, to enjoin the claims brought by the physician plaintiffs and certain medical association plaintiffs based on prior litigation releases, which was granted in 2011. The Florida Court ordered those plaintiffs to dismiss their claims that are barred by the release. The plaintiffs then filed a petition for declaratory judgment asking the court to find that these claims are not barred by the releases from the prior litigation. We filed a motion to dismiss the declaratory judgment action, which was granted. The plaintiffs appealed the dismissal of the declaratory judgment to the United States Court of Appeals for the Eleventh Circuit, but the dismissal was upheld. The enjoined physicians and some the medical associations did not dismiss their barred claims. The Florida Court found those enjoined plaintiffs in contempt and sanctioned them in July 2012. Those plaintiffs appealed the Florida Court’s sanctions order to the United States Court of Appeals for the Eleventh Circuit. The Eleventh Circuit upheld the Florida court’s enforcement of the injunction as it relates to the plaintiffs’ RICO and antitrust claims, but vacated it as it relates to certain ERISA claims. The plaintiffs filed a petition for rehearing en banc as to the antitrust claims only, which was denied. The plaintiffs then filed a petition for writ of certiorari with the U.S. Supreme Court. The American Medical Association filed an amicus brief in support of the petition. We filed a response in opposition to the petition and the plaintiffs filed a reply. The petition is now full briefed and we are awaiting a ruling from the U.S Supreme Court. We intend to vigorously defend these suits; however, their ultimate outcome cannot be presently determined.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
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. Generally, the suits allege that the BCBSA and the Blue plans have engaged in a conspiracy to horizontally allocate geographic markets through license agreements 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 on July 1, 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, which were argued in April 2014. In June 2014, the court denied the majority of the motions, ruling that plaintiffs had alleged sufficient facts at this 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. Discovery has commenced. We intend to vigorously defend these suits; however, their ultimate outcome cannot be presently determined.
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 to approximately $250.0 at December 31, 2014. This estimated aggregate range of reasonably 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.
Data Breach
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 of our current and former members and employees, such as names, birthdays, health care identification/social security numbers, street addresses, email addresses 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.
Currently, we are in the process of determining the extent of this cyber attack and supporting federal law enforcement efforts to identify the responsible parties. 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 will provide credit monitoring and identity protection services to those who have been affected by this cyber attack. While the cyber attack did not have an impact on our business, cash flows, financial condition and results of operations for the year ended December 31, 2014, 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. Although we are unable to quantify the ultimate magnitude of such expenses at this time, they may be significant. We will recognize these expenses in the periods in which they are incurred.
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Notes to Consolidated Financial Statements (continued)
Actions have been filed in courts in many states and other claims have been or may be asserted against us on behalf of current or former members, current or former employees, shareholders or others seeking damages or other related relief, allegedly arising out of the cyber attack. State and federal agencies, including state insurance regulators, state attorneys general, and the Federal Bureau of Investigations, are investigating events related to the cyber attack, including how it occurred, its consequences and our responses. 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 our results of operations.
We have contingency plans and insurance coverage for potential liabilities of this nature, however, the coverage may not be sufficient to cover all claims and liabilities. While a loss from these matters is reasonably possible, we cannot reasonably estimate a range of possible losses because our investigation into the matter is ongoing, the proceedings remain in the early stages, alleged damages have not been specified, there is uncertainty as to the likelihood of a class or classes being certified or the ultimate size of any class if certified, and there are significant factual and legal issues to be resolved.
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 health care 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. We are aware that the Pennsylvania Insurance Commissioner, or Insurance Commissioner, has placed Penn Treaty Network America Insurance Company and its subsidiary American Network Insurance Company, or collectively Penn Treaty, in rehabilitation, an intermediate action before insolvency. The state court denied the Insurance Commissioner’s petition for the liquidation of Penn Treaty and ordered the Insurance Commissioner to file an updated plan of rehabilitation. An initial plan was filed on April 30, 2013. The Insurance Commissioner filed an amended plan on August 8, 2014 and a second amended plan on October 8, 2014. The state court set a schedule for a notice and comment period and ordered a hearing on the second amended plan, with public comments due by February 13, 2015. The Insurance Commissioner has filed a Notice of Appeal asking the Pennsylvania Supreme Court to reverse the order denying the liquidation petition. The Supreme Court held oral argument on the appeal in September 2014. In the event rehabilitation of Penn Treaty is unsuccessful and Penn Treaty is declared insolvent and placed in liquidation, we and other insurers may be required to pay a portion of their policyholder claims through state guaranty association assessments in future periods. Given the uncertainty around whether Penn Treaty will ultimately be declared insolvent and, if so, the amount of the insolvency, the amount and timing of any associated future guaranty fund assessments, and the availability and amount of any potential premium tax and other offsets, we currently cannot estimate our net exposure, if any, to this potential insolvency. We will continue to monitor the situation and may record a liability and expense in future reporting periods, which could be material to our cash flows and results of operations.
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Notes to Consolidated Financial Statements (continued)
Contractual Obligations and Commitments
We are a party to an agreement with Express Scripts, Inc., or Express Scripts, whereby Express Scripts is the exclusive provider of pharmacy benefit management, or PBM, services to our plans, excluding some Amerigroup subsidiaries and certain self-insured members, which have exclusive agreements with different PBM service providers. It is expected that those Amerigroup subsidiaries will complete their transition to the Express Scripts agreement during 2015. The initial term of this agreement expires on December 31, 2019. Under this agreement, Express Scripts is the exclusive provider of certain specified PBM services, such as pharmacy network management, home delivery, pharmacy customer service, claims processing, rebate management, drug utilization and specialty pharmaceutical management services. Accordingly, the agreement contains certain financial and operational requirements obligating both Express Scripts and us. Express Scripts’ primary obligations relate to the performance of such services and meeting certain pricing guarantees and performance standards. Our primary obligations relate to oversight, provision of data, payment for services and certain minimum volume requirements. The failure by either party to meet the respective requirements could potentially serve as a basis for financial penalties or early termination of the contract. We believe we have appropriately recognized all rights and obligations under this contract at December 31, 2014.
During December 2014, we entered into a new agreement with International Business Machines Corporation to provide information technology infrastructure services. This new agreement supersedes certain prior agreements and also includes provisions for additional services. Our remaining commitment under this agreement at December 31, 2014 was $475.3 through March 31, 2020. We have the ability to terminate this agreement upon the occurrence of certain events, subject to early termination fees.
On March 31, 2009, we entered into an agreement with Affiliated Computer Services, Inc. to provide certain print and mailroom services that were previously performed in-house. Our remaining commitment under this agreement at December 31, 2014 was $78.6 through March 31, 2016. We have the ability to terminate this agreement upon the occurrence of certain events, subject to early termination fees.
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 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, 2014, there were no significant concentrations of financial instruments in a single investee, industry or geographic location.
- Capital Stock
Stock Incentive Plans
Our Board of Directors has adopted the Anthem Incentive Compensation Plan, or Incentive Compensation Plan, which has been approved by our shareholders. The term of the Incentive Compensation Plan is such that no awards may be granted on or after May 20, 2019. The Incentive Compensation 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 Incentive Compensation Plan, as amended and restated, limits the number of available shares for issuance to 60.1 shares, subject to adjustment as set forth in the Incentive Compensation 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 seven 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.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Restricted stock awards 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 restricted stock award to vest. The restrictions lapse in three equal annual installments.
For the years ended December 31, 2014, 2013 and 2012, we recognized share-based compensation expense of $168.9, $146.0 and $146.5, respectively, as well as related tax benefits of $60.7, $52.6 and $52.0, respectively.
A summary of stock option activity for the year ended December 31, 2014 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, 2014 | 10.0 | $ | 65.38 | |||||||||
| Granted | 1.8 | 90.32 | ||||||||||
| Exercised | (4.2 | ) | 67.26 | |||||||||
| Forfeited or expired | (0.3 | ) | 69.30 | |||||||||
| Outstanding at December 31, 2014 | 7.3 | 70.30 | 3.54 | $ | 402.0 | |||||||
| Exercisable at December 31, 2014 | 4.8 | 65.94 | 2.46 | $ | 286.8 |
The intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 amounted to $156.7, $176.0 and $65.4, respectively. We recognized tax benefits of $53.2, $56.8 and $22.9 in 2014, 2013 and 2012, respectively, from option exercises and disqualifying dispositions. During the years ended December 31, 2014, 2013 and 2012 we received cash of $283.6, $524.7 and $110.8, respectively, from exercises of stock options.
The total fair value of restricted stock awards that vested during the years ended December 31, 2014, 2013 and 2012 was $174.0, $46.7 and $222.3, respectively.
A summary of the status of nonvested restricted stock activity, including restricted stock units, for the year ended December 31, 2014 is as follows:
| Restricted Stock Shares and Units | Weighted-Average Grant Date Fair Value per Share | |||||
| Nonvested at January 1, 2014 | 4.2 | $ | 63.83 | |||
| Granted | 1.7 | 90.53 | ||||
| Vested | (1.9 | ) | 64.10 | |||
| Forfeited | (0.4 | ) | 68.71 | |||
| Nonvested at December 31, 2014 | 3.6 | 75.63 |
During the year ended December 31, 2014, we granted approximately 0.7 restricted stock units under the Incentive Compensation Plan that were contingent upon us achieving specified operating gain targets for 2014. We expect to issue approximately 1.0 restricted stock units under this performance plan as certain performance targets were exceeded. These restricted stock units have been included in the activity shown above.
As of December 31, 2014, the total remaining unrecognized compensation expense related to nonvested stock options and restricted stock amounted to $14.0 and $76.9, respectively, which will be amortized over the weighted-average remaining requisite service periods of 11 months and 10 months, respectively.
As of December 31, 2014, there were approximately 21.2 shares of common stock available for future grants under the Incentive Compensation Plan.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
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:
| 2014 | 2013 | 2012 | ||||||
| Risk-free interest rate | 2.16 | % | 1.25 | % | 1.41 | % | ||
| Volatility factor | 35.00 | % | 35.00 | % | 34.00 | % | ||
| Dividend yield (annual) | 2.00 | % | 2.40 | % | 1.60 | % | ||
| Weighted-average expected life (years) | 3.75 | 4.00 | 4.10 |
The following weighted-average fair values were determined for the years ending December 31:
| 2014 | 2013 | 2012 | |||||||||
| Options granted during the year | $ | 22.41 | $ | 14.64 | $ | 16.50 | |||||
| Restricted stock and stock awards granted during the year | 90.53 | 63.06 | 65.91 |
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. The Stock Purchase Plan was suspended during 2012 and 2013 and no shares were issued during those years. Effective January 1, 2014, the Stock Purchase Plan was reinstated. Pursuant to 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, 2014. As of December 31, 2014, 5.9 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 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 are at the discretion of our Board of Directors and depend upon our financial condition, results of operations, future liquidity needs, regulatory and capital requirements and other factors deemed relevant by our Board of Directors. Historically our common stock repurchase program, discussed below, has been our primary use of capital. Beginning in 2011, our Board of Directors established a quarterly dividend to shareholders.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
A summary of the cash dividend activity for the years ended December 31, 2014 and 2013 is as follows:
| Declaration Date | Record Date | Payment Date | Cash Dividend per Share | Total | ||||||||
| Year ended December 31, 2014 | ||||||||||||
| January 28, 2014 | March 10, 2014 | March 25, 2014 | $ | 0.4375 | $ | 123.4 | ||||||
| April 29, 2014 | June 10, 2014 | June 25, 2014 | 0.4375 | 120.5 | ||||||||
| July 29, 2014 | September 10, 2014 | September 25, 2014 | 0.4375 | 119.2 | ||||||||
| October 28, 2014 | December 5, 2014 | December 22, 2014 | 0.4375 | 117.6 | ||||||||
| Year ended December 31, 2013 | ||||||||||||
| February 20, 2013 | March 8, 2013 | March 25, 2013 | $ | 0.3750 | $ | 113.4 | ||||||
| May 15, 2013 | June 10, 2013 | June 25, 2013 | 0.3750 | 112.7 | ||||||||
| July 23, 2013 | September 10, 2013 | September 25, 2013 | 0.3750 | 111.4 | ||||||||
| October 22, 2013 | December 9, 2013 | December 23, 2013 | 0.3750 | 110.5 |
On January 27, 2015, the Board of Directors declared a quarterly cash dividend to shareholders of $0.6250 per share on the outstanding shares of our common stock. This quarterly dividend will be paid on March 25, 2015 to the shareholders of record as of March 10, 2015.
Under our Board of Directors’ authorization, we maintain a common stock repurchase program. On October 2, 2014, 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.
A summary of common stock repurchases for the period January 1, 2015 through February 5, 2015 (subsequent to December 31, 2014) and for the years ended December 31, 2014 and 2013 is as follows:
| January 1, 2015 through February 5, 2015 | Years Ended December 31 | ||||||||||
| 2014 | 2013 | ||||||||||
| Shares repurchased | 1.8 | 30.4 | 20.7 | ||||||||
| Average price per share | $ | 131.16 | $ | 98.52 | $ | 78.08 | |||||
| Aggregate cost | $ | 229.9 | $ | 2,998.8 | $ | 1,620.1 | |||||
| Authorization remaining at the end of each period | $ | 5,461.8 | $ | 5,691.7 | $ | 3,691.0 |
During 2013, we purchased call options on 3.0 shares of our common stock. The call options allow us to repurchase shares at a predetermined strike price up through the expiration dates. The purpose of the call options is to reduce share price volatility on potential future common stock repurchases. The aggregate premium paid was $25.8, of which $7.9 was recorded as a reduction of shareholders' equity and the remaining $17.9 was recorded as a derivative asset based on FASB guidance. The aggregate premium is reported in financing activities in our consolidated statements of cash flow. The call options had strike prices ranging from $77.50 to $83.10 per share. The aggregate fair value of the call options reported as a derivative asset was $27.5 at December 31, 2013. The call options were exercised on various dates throughout January and February 2014.
Under the common stock repurchase program authorized by our Board of Directors, on February 4, 2014, we entered into an accelerated share repurchase agreement with a counterparty. The agreement provided for the repurchase of a number
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
of our shares, equal to $600.0, as determined by the dollar volume weighted-average share price during the term of the agreement. In March 2014, we repurchased 6.6 shares under the agreement.
For additional information regarding the use of capital for debt security repurchases, see Note 12, "Debt."
- Accumulated Other Comprehensive Income
A reconciliation of the components of accumulated other comprehensive income at December 31 is as follows:
| 2014 | 2013 | ||||||
| Investments: | |||||||
| Gross unrealized gains | $ | 1,154.9 | $ | 1,054.2 | |||
| Gross unrealized losses | (196.8 | ) | (277.8 | ) | |||
| Net pretax unrealized gains | 958.1 | 776.4 | |||||
| Deferred tax liability | (330.5 | ) | (267.4 | ) | |||
| Net unrealized gains on investments | 627.6 | 509.0 | |||||
| Non-credit components of OTTI on investments: | |||||||
| Gross unrealized losses | (6.8 | ) | (0.8 | ) | |||
| Deferred tax asset | 2.4 | 0.3 | |||||
| Net unrealized non-credit component of OTTI on investments | (4.4 | ) | (0.5 | ) | |||
| Cash flow hedges: | |||||||
| Gross unrealized losses | (55.2 | ) | (49.7 | ) | |||
| Deferred tax asset | 19.3 | 17.4 | |||||
| Net unrealized losses on cash flow hedges | (35.9 | ) | (32.3 | ) | |||
| Defined benefit pension plans: | |||||||
| Deferred net actuarial loss | (563.7 | ) | (427.2 | ) | |||
| Deferred prior service credits | 2.2 | 3.0 | |||||
| Deferred tax asset | 223.2 | 169.9 | |||||
| Net unrecognized periodic benefit costs for defined benefit pension plans | (338.3 | ) | (254.3 | ) | |||
| Postretirement benefit plans: | |||||||
| Deferred net actuarial loss | (211.2 | ) | (169.6 | ) | |||
| Deferred prior service credits | 88.0 | 102.4 | |||||
| Deferred tax asset | 48.9 | 27.0 | |||||
| Net unrecognized periodic benefit costs for postretirement benefit plans | (74.3 | ) | (40.2 | ) | |||
| Foreign currency translation adjustments: | |||||||
| Gross unrealized (losses) gains | (4.3 | ) | 2.2 | ||||
| Deferred tax asset (liability) | 1.5 | (0.7 | ) | ||||
| Net unrealized (losses) gains on foreign currency translation adjustments | (2.8 | ) | 1.5 | ||||
| Accumulated other comprehensive income | $ | 171.9 | $ | 183.2 |
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
Other comprehensive income (loss) reclassification adjustments for the years ended December 31 are as follows:
| 2014 | 2013 | 2012 | |||||||||
| Investments: | |||||||||||
| Net holding gain (loss) on investment securities arising during the period, net of tax (expense) benefit of ($18.3), $223.6 and $5.4, respectively | $ | 35.4 | $ | (407.2 | ) | $ | (3.2 | ) | |||
| Reclassification adjustment for net realized gain on investment securities, net of tax expense of ($44.8), ($60.6) and ($104.0), respectively | 83.2 | 112.5 | 193.1 | ||||||||
| Total reclassification adjustment on investments | 118.6 | (294.7 | ) | 189.9 | |||||||
| Non-credit component of OTTI on investments: | |||||||||||
| Non-credit component of OTTI on investments, net of tax benefit (expense) of $2.1, ($0.9) and ($2.4), respectively | (3.9 | ) | 1.7 | 4.5 | |||||||
| Cash flow hedges: | |||||||||||
| Holding (loss) gain, net of tax benefit (expense) of $1.9, ($1.6) and ($0.1), respectively | (3.6 | ) | 3.0 | 0.1 | |||||||
| Other: | |||||||||||
| Net change in unrecognized periodic benefit costs for defined benefit pension and postretirement benefit plans, net of tax benefit (expense) of $75.2, ($106.8) and ($7.1), respectively | (118.1 | ) | 172.7 | (10.9 | ) | ||||||
| Foreign currency translation adjustment, net of tax benefit (expense) of $2.2, ($0.6) and ($0.3), respectively | (4.3 | ) | 1.4 | 0.6 | |||||||
| Net (loss) gain recognized in other comprehensive (loss) income, net of tax benefit (expense) of $18.3, $53.1 and ($108.5), respectively | $ | (11.3 | ) | $ | (115.9 | ) | $ | 184.2 |
- 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 Health Care Reform temporary reinsurance premium stabilization program, we recognize assessments upon our fully-insured non-grandfathered individual market plans that are eligible for reinsurance recoveries as ceded premiums and estimated reinsurance recoveries as a reduction to benefit expense. Assessments upon all other lines of business not eligible for reinsurance recoveries are recognized in general and administrative expense.
A summary of direct, assumed and ceded premiums written and earned for the years ended December 31 is as follows:
| 2014 | 2013 | 2012 | |||||||||||||||||||||
| Written | Earned | Written | Earned | Written | Earned | ||||||||||||||||||
| Direct | $ | 68,628.6 | $ | 68,304.3 | $ | 65,939.1 | $ | 66,038.9 | $ | 56,443.6 | $ | 56,373.6 | |||||||||||
| Assumed | 192.3 | 194.0 | 174.3 | 174.0 | 197.0 | 196.4 | |||||||||||||||||
| Ceded | (108.5 | ) | (108.5 | ) | (92.6 | ) | (93.8 | ) | (73.2 | ) | (73.3 | ) | |||||||||||
| Net premiums | $ | 68,712.4 | $ | 68,389.8 | $ | 66,020.8 | $ | 66,119.1 | $ | 56,567.4 | $ | 56,496.7 | |||||||||||
| Percentage—assumed to net premiums | 0.3 | % | 0.3 | % | 0.3 | % | 0.3 | % | 0.3 | % | 0.3 | % |
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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 is as follows:
| 2014 | 2013 | 2012 | |||||||||||||||||||||
| Written | Earned | Written | Earned | Written | Earned | ||||||||||||||||||
| Reportable segments: | |||||||||||||||||||||||
| Commercial and Specialty Business | $ | 35,084.7 | $ | 35,045.2 | $ | 35,733.9 | $ | 35,772.0 | $ | 35,358.1 | $ | 36,036.7 | |||||||||||
| Government Business | 33,627.7 | 33,344.6 | 30,286.9 | 30,347.1 | 21,209.3 | 20,460.0 | |||||||||||||||||
| Other | — | — | — | — | — | — | |||||||||||||||||
| Net premiums | $ | 68,712.4 | $ | 68,389.8 | $ | 66,020.8 | $ | 66,119.1 | $ | 56,567.4 | $ | 56,496.7 |
The effect of reinsurance on benefit expense for the years ended December 31 is as follows:
| 2014 | 2013 | 2012 | |||||||||
| Direct | $ | 57,496.6 | $ | 56,185.2 | $ | 48,135.1 | |||||
| Assumed | 182.4 | 155.6 | 173.0 | ||||||||
| Ceded | (824.1 | ) | (103.7 | ) | (94.5 | ) | |||||
| Net benefit expense | $ | 56,854.9 | $ | 56,237.1 | $ | 48,213.6 |
The effect of reinsurance on certain assets and liabilities at December 31 is as follows:
| 2014 | 2013 | ||||||
| Policy liabilities, assumed | $ | 57.4 | $ | 55.4 | |||
| Unearned income, assumed | 0.4 | 0.4 | |||||
| Premiums payable, ceded | 7.7 | 17.1 | |||||
| Premiums receivable, assumed | 5.4 | 14.1 |
- Leases
We lease office space and certain computer and related equipment using noncancelable operating leases. At December 31, 2014, future lease payments for operating leases with initial or remaining noncancelable terms of one year or more consist of the following:
| 2015 | $ | 148.7 | |
| 2016 | 132.1 | ||
| 2017 | 125.0 | ||
| 2018 | 115.8 | ||
| 2019 | 99.6 | ||
| Thereafter | 274.9 | ||
| Total minimum payments required | $ | 896.1 |
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 2014, 2013 and 2012 was $192.5, $185.9 and $153.3, respectively.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
- Earnings per Share
The denominator for basic and diluted earnings per share at December 31 is as follows:
| 2014 | 2013 | 2012 | ||||||
| Denominator for basic earnings per share—weighted-average shares | 275.9 | 298.5 | 321.5 | |||||
| Effect of dilutive securities—employee stock options, non-vested restricted stock awards and convertible debentures | 10.0 | 5.3 | 3.3 | |||||
| Denominator for diluted earnings per share | 285.9 | 303.8 | 324.8 |
During the years ended December 31, 2014, 2013 and 2012, weighted-average shares related to certain stock options of 0.5, 4.2 and 12.6, respectively, were excluded from the denominator for diluted earnings per share because the stock options were anti-dilutive.
- Segment Information
On May 20, 2013, we announced certain organizational and executive leadership changes to align with how our Chief Executive Officer is managing our operations. Beginning with the three months ended June 30, 2013, our organizational structure is comprised of three reportable segments: Commercial and Specialty Business; Government Business; and Other.
Our Commercial and Specialty Business segment includes our Local Group, National Accounts, Individual and Specialty businesses. Business units in the Commercial and 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 health care guidance.
Our Government Business segment includes 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 Advantage, Medicare Part D, and Medicare Supplement. Medicaid business includes our managed care alternatives through publicly funded health care programs, including Medicaid, Temporary Assistance for Needy Family programs, programs for seniors and people with disabilities, programs for long-term services and support, Children’s Health Insurance Programs and ACA-related Medicaid expansion programs. NGS acts as a Medicare contractor in several regions across the nation.
Our Other segment includes other businesses that do not meet the quantitative thresholds for an operating segment as defined by FASB guidance, as well as corporate expenses not allocated to the other reportable segments.
We define operating revenues, a non-GAAP measure, 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. 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 21.0%, 20.3% and 23.7% of our total consolidated revenues from agencies of the U.S. government for the years ended December 31, 2014, 2013, and 2012, 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 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 investment income, net realized gains on investments, OTTI losses recognized in income, interest expense, amortization expense, loss on extinguishment of debt and income taxes, and asset and liability details on a consolidated basis
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
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 is as follows:
| Commercial and Specialty Business | Government Business | Other | Total | ||||||||||||
| Year ended December 31, 2014 | |||||||||||||||
| Operating revenue | $ | 39,199.6 | $ | 33,796.4 | $ | 25.7 | $ | 73,021.7 | |||||||
| Operating gain (loss) | 3,260.9 | 1,191.9 | (34.4 | ) | 4,418.4 | ||||||||||
| Depreciation and amortization of property and equipment | — | — | 474.3 | 474.3 | |||||||||||
| Year ended December 31, 2013 | |||||||||||||||
| Operating revenue | $ | 39,404.2 | $ | 30,752.6 | $ | 34.6 | $ | 70,191.4 | |||||||
| Operating gain (loss) | 3,176.4 | 844.0 | (19.0 | ) | 4,001.4 | ||||||||||
| Depreciation and amortization of property and equipment | — | — | 457.1 | 457.1 | |||||||||||
| Year ended December 31, 2012 | |||||||||||||||
| Operating revenue | $ | 39,639.9 | $ | 20,838.9 | $ | 35.2 | $ | 60,514.0 | |||||||
| Operating gain (loss) | 3,396.3 | 285.4 | (61.8 | ) | 3,619.9 | ||||||||||
| Depreciation and amortization of property and equipment | — | — | 363.5 | 363.5 |
The major product revenues for each of the reportable segments for the years ended December 31 are as follows:
| 2014 | 2013 | 2012 | |||||||||
| Commercial and Specialty Business | |||||||||||
| Managed care products | $ | 33,755.6 | $ | 34,516.9 | $ | 34,875.4 | |||||
| Managed care services | 3,997.8 | 3,474.0 | 3,446.9 | ||||||||
| Dental/Vision products and services | 1,037.3 | 952.5 | 903.9 | ||||||||
| Other | 408.9 | 460.8 | 413.7 | ||||||||
| Total Commercial and Specialty Business | 39,199.6 | 39,404.2 | 39,639.9 | ||||||||
| Government Business | |||||||||||
| Managed care products | 33,344.6 | 30,347.1 | 20,460.0 | ||||||||
| Managed care services | 451.8 | 405.5 | 378.9 | ||||||||
| Total Government Business | 33,796.4 | 30,752.6 | 20,838.9 | ||||||||
| Other | |||||||||||
| Other | 25.7 | 34.6 | 35.2 | ||||||||
| Total product revenues | $ | 73,021.7 | $ | 70,191.4 | $ | 60,514.0 |
The classification between managed care products and managed care services in the above table primarily distinguishes between the level 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 and equity details by reportable segment have not been disclosed, as we do not internally report such information.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
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 is as follows:
| 2014 | 2013 | 2012 | |||||||||
| Reportable segments operating revenues | $ | 73,021.7 | $ | 70,191.4 | $ | 60,514.0 | |||||
| Net investment income | 724.4 | 659.1 | 686.1 | ||||||||
| Net realized gains on investments | 177.0 | 271.9 | 334.9 | ||||||||
| Other-than-temporary impairment losses recognized in income | (49.0 | ) | (98.9 | ) | (37.8 | ) | |||||
| Total revenues | $ | 73,874.1 | $ | 71,023.5 | $ | 61,497.2 |
A reconciliation of reportable segment operating gain to income from continuing operations before income taxes included in the consolidated statements of income for the years ended December 31 is as follows:
| 2014 | 2013 | 2012 | |||||||||
| Reportable segments operating gain | $ | 4,418.4 | $ | 4,001.4 | $ | 3,619.9 | |||||
| Net investment income | 724.4 | 659.1 | 686.1 | ||||||||
| Net realized gains on investments | 177.0 | 271.9 | 334.9 | ||||||||
| Other-than-temporary impairment losses recognized in income | (49.0 | ) | (98.9 | ) | (37.8 | ) | |||||
| Interest expense | (600.7 | ) | (602.7 | ) | (511.8 | ) | |||||
| Amortization of other intangible assets | (220.9 | ) | (245.3 | ) | (233.0 | ) | |||||
| Loss on extinguishment of debt | (81.1 | ) | (145.3 | ) | — | ||||||
| Income from continuing operations before income tax expense | $ | 4,368.1 | $ | 3,840.2 | $ | 3,858.3 |
- Related Party Transactions
Anthem Foundation, Inc., or the Foundation, is an Indiana non-profit organization exempt from federal taxation under Section 501(c)(3) of the Internal Revenue Code. The Foundation was formed to conduct, support and assist charitable, health-related, educational, and other community-based programs and projects. The officers and directors of the Foundation are also our officers. These officers and directors receive no compensation from the Foundation for the management services performed for the Foundation but may be reimbursed by the Foundation for any cash expenditures incurred on behalf of the Foundation. During the years ended December 31, 2014, 2013 and 2012, we received $0.8, $0.7 and $0.6, respectively, from the Foundation for administrative services provided by our associates. We contributed $10.0 to the Foundation during the year ended December 31, 2013. We did not make any contributions to the Foundation during the years ended December 31, 2014 and 2012. The Foundation is not a subsidiary of ours and the financial results of the Foundation are not consolidated with our financial statements. We have no current legal obligations for future commitments to the Foundation.
- 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, or statutory, 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.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
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 requirements. Risk-based capital 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 risk-based capital specifies various factors, weighted based on the perceived degree of risk, which are applied to certain financial balances and financial activity. Below minimum risk-based capital 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, 2014 and 2013, all of our regulated subsidiaries exceeded the minimum risk-based capital requirements and/or capital and solvency requirements of their applicable governmental regulator. The statutory risk-based capital necessary to satisfy regulatory requirements of our statutory basis insurance and HMO subsidiaries was approximately $3,400.0 as of December 31, 2014 and 2013. The tangible net equity required for the DMHC regulated entities was approximately $520.0 and $450.0 as of December 31, 2014 and 2013, 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 $9,727.2 and $9,992.7 at December 31, 2014 and 2013, 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 $2,403.8, $2,635.8 and $2,800.0 for 2014, 2013 and 2012, respectively. GAAP equity of the DMHC regulated entities was $1,696.1 and $1,449.2 at December 31, 2014 and 2013, respectively. GAAP net income of the DMHC regulated entities was $453.6, $487.7 and $469.7 for the years ended December 31, 2014, 2013 and 2012, respectively.
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Anthem, Inc.
Notes to Consolidated Financial Statements (continued)
- Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data is as follows:
| For the Quarter Ended | |||||||||||||||
| March 31 | June 30 | September 30 | December 31 | ||||||||||||
| 2014 | |||||||||||||||
| Total revenues | $ | 17,859.4 | $ | 18,473.4 | $ | 18,557.0 | $ | 18,984.3 | |||||||
| Income from continuing operations before income taxes | 1,130.1 | 1,263.7 | 1,087.2 | 887.1 | |||||||||||
| Income from continuing operations | 691.4 | 731.1 | 630.9 | 506.7 | |||||||||||
| Income from discontinued operations | 9.6 | — | — | — | |||||||||||
| Net income | 701.0 | 731.1 | 630.9 | 506.7 | |||||||||||
| Basic net income per share - continuing operations | $ | 2.43 | $ | 2.64 | $ | 2.31 | $ | 1.88 | |||||||
| Basic net income per share - discontinued operations | 0.03 | — | — | — | |||||||||||
| Basic net income per share | 2.46 | 2.64 | 2.31 | 1.88 | |||||||||||
| Diluted net income per share - continuing operations | $ | 2.37 | $ | 2.56 | $ | 2.22 | $ | 1.80 | |||||||
| Diluted net income per share - discontinued operations | 0.03 | — | — | — | |||||||||||
| Diluted net income per share | 2.40 | 2.56 | 2.22 | 1.80 | |||||||||||
| 2013 | |||||||||||||||
| Total revenues | $ | 17,576.0 | $ | 17,690.3 | $ | 17,855.5 | $ | 17,901.7 | |||||||
| Income from continuing operations before income taxes | 1,282.5 | 1,208.1 | 879.7 | 469.9 | |||||||||||
| Income from continuing operations | 872.3 | 799.3 | 653.8 | 308.9 | |||||||||||
| Income (loss) from discontinued operations | 12.9 | 0.8 | 2.4 | (160.7 | ) | ||||||||||
| Net income | 885.2 | 800.1 | 656.2 | 148.2 | |||||||||||
| Basic net income per share - continuing operations | $ | 2.88 | $ | 2.67 | $ | 2.20 | $ | 1.05 | |||||||
| Basic net income (loss) per share - discontinued operations | 0.04 | — | 0.01 | (0.55 | ) | ||||||||||
| Basic net income per share | 2.92 | 2.67 | 2.21 | 0.50 | |||||||||||
| Diluted net income per share - continuing operations | $ | 2.85 | $ | 2.64 | $ | 2.15 | $ | 1.02 | |||||||
| Diluted net income (loss) per share - discontinued operations | 0.04 | — | 0.01 | (0.53 | ) | ||||||||||
| Diluted net income per share | 2.89 | 2.64 | 2.16 | 0.49 |
Previous: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. · Next: Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.