Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2022
(In Millions, Except Per Share Data or As Otherwise Stated Herein)
1. Organization
References to the terms “we,” “our,” “us” or “Anthem” used throughout these Notes to Consolidated Financial Statements refer to Anthem, Inc., an Indiana corporation, and unless the context otherwise requires, its direct and indirect subsidiaries. References to the “states” include the District of Columbia and Puerto Rico, unless the context otherwise requires. On March 10, 2022, we announced our intent to change our name to better reflect our business and our journey from a traditional health benefits organization to a lifetime, trusted health partner. At our annual meeting of shareholders on May 18, 2022, our shareholders will vote on a proposed amendment to our amended and restated articles of incorporation to change our name to Elevance Health, Inc. Shareholders of record on March 17, 2022 are entitled to vote. If approved by our shareholders, we expect the name change to occur in the second quarter of 2022.
We are one of the largest health benefits companies in the United States in terms of medical membership, serving nearly 47 million medical members through our affiliated health plans as of March 31, 2022. We offer a broad spectrum of network-based managed care risk-based plans to Individual, Group, Medicaid and Medicare markets. In addition, we provide a broad array of managed care services to fee-based customers, including claims processing, stop loss insurance, provider network access, medical management, care management and wellness programs, actuarial services and other administrative services. We also provide services to the federal government in connection with our Federal Health Products & Services business, which administers the Federal Employees Health Benefits (“FEHB”) Program. We provide an array of specialty services both to our subsidiary health plans and also unaffiliated health plans, including pharmacy benefits management (“PBM”) services and dental, vision, life, disability and supplemental health insurance benefits, as well as integrated health services.
We are an independent licensee of the Blue Cross and Blue Shield Association (“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 (“BCBS”) licensee for Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri (excluding 30 counties in the Kansas City area), Nevada, New Hampshire, New York (in the New York City metropolitan area and upstate New York), Ohio, Virginia (excluding the Northern Virginia suburbs of Washington, D.C.) and Wisconsin. In a majority of these service areas, we do business as Anthem Blue Cross, Anthem Blue Cross and Blue Shield, and Empire Blue Cross Blue Shield or Empire Blue Cross. In addition, we conduct business through arrangements with other BCBS licensees as well as other strategic partners. Through our subsidiaries, we also serve customers in numerous states as AIM Specialty Health, Amerigroup, Aspire Health, Beacon, CareMore, Freedom Health, HealthLink, HealthSun, MMM, Optimum HealthCare, Simply Healthcare, and/or UniCare. We offer PBM services through our IngenioRx, Inc. (“IngenioRx”) subsidiary. We are licensed to conduct insurance operations in all 50 states, the District of Columbia and Puerto Rico through our subsidiaries.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. We have omitted certain footnote disclosures that would substantially duplicate the disclosures in our 2021 Annual Report on Form 10-K, unless the information contained in those disclosures materially changed or is required by GAAP. In the opinion of management, all adjustments, including normal recurring adjustments, necessary for a fair statement of the consolidated financial statements as of and for the three months ended March 31, 2022 and 2021 have been recorded. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2022, or any other period. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2021 included in our 2021 Annual Report on Form 10-K.
Certain of our subsidiaries operate outside of the United States and have functional currencies other than the U.S. dollar (“USD”). We translate the assets and liabilities of those subsidiaries to USD using the exchange rate in effect at the end of the
period. We translate the revenues and expenses of those subsidiaries to USD using the average exchange rates in effect during the period. The net effect of these translation adjustments is included in “Foreign currency translation adjustments” in our consolidated statements of comprehensive income.
Cash and Cash Equivalents: We control a number of bank accounts that are used exclusively to hold customer funds for the administration of customer benefits, and we have cash and cash equivalents on deposit to meet certain regulatory requirements. These amounts totaled $162 and $173 at March 31, 2022 and December 31, 2021, respectively, and are included in the cash and cash equivalents line on our consolidated balance sheets.
Investments: We classify fixed maturity securities in our investment portfolio as “available-for-sale” and report those securities at fair value. Certain fixed maturity securities are available to support current operations and, accordingly, we classify such investments as current assets without regard to their contractual maturity. Investments used to satisfy contractual, regulatory or other requirements are classified as long-term, without regard to contractual maturity.
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, we write down the fixed maturity security’s cost basis to fair value and record an impairment loss in our consolidated statements of income. For impaired fixed maturity securities that we do not intend to sell or if 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, we recognize the credit component of the impairment as an allowance for credit loss in our consolidated balance sheets and record an impairment loss in our consolidated statements of income. The non-credit component of the impairment is recognized in accumulated other comprehensive loss. Furthermore, unrealized losses entirely caused by non-credit-related factors related to fixed maturity securities for which we expect to fully recover the amortized cost basis continue to be recognized in accumulated other comprehensive loss.
The credit component of an impairment is determined primarily by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed maturity security. The net present value is calculated by discounting our best estimate of projected future cash flows at the effective interest rate implicit in the fixed maturity security at the date of purchase. For mortgage-backed and asset-backed securities, cash flow estimates are based on assumptions regarding the underlying collateral, including prepayment speeds, vintage, type of underlying asset, geographic concentrations, default rates, recoveries and changes in value. For all other securities, cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings and estimates regarding timing and amount of recoveries associated with a default.
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 purchase date of the securities. Such adjustments are reported within net investment income.
The changes in fair value of our marketable equity securities are recognized in our results of operations within net gains and losses on financial instruments. Certain marketable equity securities are held to satisfy contractual obligations, and are reported under the caption “Other invested assets” in our consolidated balance sheets.
We have corporate-owned life insurance policies on certain participants in our deferred compensation plans and other members of management. The cash surrender value of the corporate-owned life insurance policies is reported under the caption “Other invested assets” in our consolidated balance sheets.
We use the equity method of accounting for investments in companies in which our ownership interest may enable us to influence the operating or financial decisions of the investee company. Our proportionate share of equity in net income of these unconsolidated affiliates is reported within net investment income. The equity method investments are reported under the caption “Other invested assets” in our consolidated balance sheets.
Investment income is recorded when earned. All securities sold resulting in investment gains and losses are recorded on the trade date. Realized gains and losses are determined on the basis of the cost or amortized cost of the specific securities sold.
We participate in securities lending programs whereby marketable securities in our investment portfolio are transferred to independent brokers or dealers in exchange for cash and securities collateral. We recognize the collateral as an asset, which is reported under the caption “Other current assets” in our consolidated balance sheets, and we record a corresponding liability for the obligation to return the collateral to the borrower, which is reported under the caption “Other current liabilities” in our consolidated balance sheets. The securities on loan are reported in the applicable investment category on our consolidated balance sheets. Unrealized gains or losses on securities lending collateral are included in accumulated other comprehensive loss as a separate component of shareholders’ equity. The market value of loaned securities and that of the collateral pledged can fluctuate in non-synchronized fashions. To the extent the loaned securities’ value appreciates faster or depreciates slower than the value of the collateral pledged, we are exposed to the risk of the shortfall. As a primary mitigating mechanism, the loaned securities and collateral pledged are marked to market on a daily basis and the shortfall, if any, is collected accordingly. Secondarily, the collateral level is set at 102% of the value of the loaned securities, which provides a cushion before any shortfall arises. The investment of the cash collateral is subject to market risk, which is managed by limiting the investments to higher quality and shorter duration instruments.
Receivables: Receivables are reported net of amounts for expected credit losses. The allowance for doubtful accounts is based on historical collection trends, future forecasts and our judgment regarding the ability to collect specific accounts.
Premium receivables include the uncollected amounts from insured groups, individuals and government programs. Premium receivables are reported net of an allowance for doubtful accounts of $140 and $142 at March 31, 2022 and December 31, 2021, respectively.
Self-funded receivables include administrative fees, claims and other amounts due from self-funded customers. Self-funded receivables are reported net of an allowance for doubtful accounts of $53 and $50 at March 31, 2022 and December 31, 2021, respectively.
Other receivables include pharmacy rebates, provider advances, claims recoveries, reinsurance receivables, proceeds due from brokers on investment trades, accrued investment income, and other miscellaneous amounts due to us. These receivables are reported net of an allowance for doubtful accounts of $698 and $648 at March 31, 2022 and December 31, 2021, respectively.
Revenue Recognition: For our non-risk-based contracts, we had no material contract assets, contract liabilities or deferred contract costs recorded on our consolidated balance sheet at March 31, 2022. For the three months ended March 31, 2022 and 2021, revenue recognized from performance obligations related to prior periods, such as due to changes in transaction price, was not material. For contracts that have an original expected duration of greater than one year, revenue expected to be recognized in future periods related to unfulfilled contractual performance obligations and contracts with variable consideration related to undelivered performance obligations is not material.
Recently Adopted Accounting Guidance: In January 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2021-01, Reference Rate Reform (Topic 848) (“ASU 2021-01”). The amendments in ASU 2021-01 provide optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of the reference rate reform. The provisions must be applied at a Topic, Subtopic, or Industry Subtopic level for all transactions other than derivatives, which may be applied at a hedging relationship level. We adopted ASU 2021-01 on January 7, 2021, and the adoption did not have an impact on our consolidated financial position, results of operations or cash flows.
In October 2020, the FASB issued Accounting Standards Update No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs (“ASU 2020-08”). The amendments in ASU 2020-08 clarify when an entity should assess whether a callable debt security is within the scope of accounting guidance, which impacts the amortization period for nonrefundable fees and other costs. ASU 2020-08 became effective for interim and annual reporting periods beginning after December 15, 2020. The amendments were to be applied on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. We adopted ASU 2020-08 on January 1, 2021, and the adoption did not have an impact on our consolidated financial position, results of operations or cash flows.
In August 2020, the FASB issued Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting
for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). The amendments eliminate two of the three accounting models that require separate accounting for convertible features of debt securities, simplify the contract settlement assessment for equity classification, require the use of the if-converted method for all convertible instruments in the diluted earnings per share calculation and expand disclosure requirements. The amendments became effective for our annual and interim reporting periods beginning after December 15, 2021. We adopted ASU 2020-06 on January 1, 2022 using the modified retrospective transition method, which resulted in an increase to our reported debt outstanding of $31, a decrease to our deferred tax liabilities of $8, and a corresponding cumulative-effect reduction to our opening retained earnings of $23; the amounts are not material to our overall consolidated financial position. The adoption of ASU 2020-06 did not have an impact on our results of operations or our consolidated cash flows. Use of the if-converted method did not have an impact on our overall earnings per share calculation.
In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The amendments in ASU 2019-12 remove certain exceptions to the general principles in Accounting Standards Codification Topic 740. The amendments also clarify and amend existing guidance to improve consistent application. The amendments became effective for our annual reporting periods beginning after December 15, 2020. The transition method (retrospective, modified retrospective, or prospective basis) related to the amendments depends on the applicable guidance, and all amendments for which there is no transition guidance specified are to be applied on a prospective basis. We adopted ASU 2019-12 on January 1, 2021, and the adoption did not have an impact on our consolidated financial position, results of operations or cash flows.
Recent Accounting Guidance Not Yet Adopted: In November 2020, the FASB issued Accounting Standards Update No. 2020-11, Financial Services—Insurance (Topic 944): Effective Date and Early Application (“ASU 2020-11”). The amendments in ASU 2020-11 make changes to the effective date and early application of Accounting Standards Update No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (“ASU 2018-12”), which was issued in November 2018. The amendments in ASU 2020-11 have extended the original effective date by one year, and now the amendments are required for our interim and annual reporting periods beginning after December 15, 2022. The amendments in ASU 2018-12 make changes to a variety of areas to simplify or improve the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. The amendments require insurers to annually review the assumptions they make about their policyholders and update the liabilities for future policy benefits if the assumptions change. The amendments also simplify the amortization of deferred contract acquisition costs and add new disclosure requirements about the assumptions insurers use to measure their liabilities and how they may affect future cash flows. The amendments related to the liability for future policy benefits for traditional and limited-payment contracts and deferred acquisition costs are to be applied to contracts in force as of the beginning of the earliest period presented, with an option to apply such amendments retrospectively with a cumulative-effect adjustment to the opening balance of retained earnings as of the earliest period presented. The amendments for market risk benefits are to be applied retrospectively. We are currently evaluating the effects the adoption of ASU 2020-11 and ASU 2018-12 will have on our consolidated financial position, results of operations, cash flows, and related disclosures.
There were no other new accounting pronouncements that were issued or became effective since the issuance of our 2021 Annual Report on Form 10-K that had, or are expected to have, a material impact on our consolidated financial position, results of operations or cash flows.
3. Business Acquisitions
Pending Acquisition
On November 10, 2021, we announced our entrance into an agreement with Personal Touch Holding Corporation to acquire Integra Managed Care (“Integra”). Integra is a managed long-term care plan that serves New York state Medicaid members, enabling adults with long-term care needs and disabilities to live safely and independently in their own home. The acquisition is expected to close by the end of the second quarter of 2022 and is subject to standard closing conditions and customary approvals.
Completed Acquisitions
Acquisitions completed during the year ended December 31, 2021, for which the initial accounting was not finalized as of March 31, 2022, included myNEXUS, Inc. (“myNEXUS”), a comprehensive home-based nursing management company for payors, and MMM Holdings, LLC (“MMM”), including its Medicare Advantage plan, Medicaid plan and other affiliated companies. As of March 31, 2022, the purchase price of each transaction was allocated to the tangible and intangible net assets acquired based on management’s final estimates of their fair values, of which $1,577 has been allocated to finite-lived intangible assets, $20 to indefinite-lived intangible assets, and $2,525 to goodwill. The majority of goodwill is not deductible for income tax purposes. Adjustments to goodwill arising from contractual purchase price adjustments and subsequent adjustments made to the assets acquired or liabilities assumed during the quarter ended March 31, 2022 were $4.
4. Business Optimization Initiatives
Provided below is a summary of the activity, by reportable segment, related to the liability for employee termination costs previously incurred in connection with our enterprise-wide business optimization initiatives introduced in 2020.
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| Commercial & Specialty Business | | Government Business | | IngenioRx | | Other | | Total |
2020 Business Optimization Initiatives | | | | | | | | | |
Employee termination costs: | | | | | | | | | |
Liability for employee termination costs at January 1, 2022 | $ | 61 | | | $ | 57 | | | $ | 1 | | | $ | 3 | | | $ | 122 | |
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Payments | (5) | | | (5) | | | — | | | — | | | (10) | |
Liability for employee termination costs at March 31, 2022 | $ | 56 | | | $ | 52 | | | $ | 1 | | | $ | 3 | | | $ | 112 | |
5. Investments
Fixed Maturity Securities
We evaluate our available-for-sale fixed maturity securities for declines based on qualitative and quantitative factors. We have established an allowance for credit loss and recorded credit loss expense as a reflection of our expected impairment losses. We continue to review our investment portfolios under our impairment review policy. Given the inherent uncertainty of changes in market conditions and the significant judgments involved, there is a continuing risk that declines in fair value may occur and additional material impairment losses on investments may be recorded in future periods.
Although not material to our consolidated results of operations, during the three months ended March 31, 2022, we recorded a combination of credit losses, losses on sale of fixed maturity securities and impairments related to our exposure resulting from investments in Russia and Ukraine. These items are reflected in the tables presented below. At March 31, 2022, our remaining holdings of Russia and Ukraine fixed maturity securities were not material.
A summary of current and long-term fixed maturity securities, available-for-sale, at March 31, 2022 and December 31, 2021 is as follows:
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| Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance For Credit Losses | | Estimated Fair Value | | |
| | | | | |
March 31, 2022 | | | | | | | | | | | |
Fixed maturity securities: | | | | | | | | | | | |
United States Government securities | $ | 2,145 | | | $ | — | | | $ | (78) | | | $ | — | | | $ | 2,067 | | | |
Government sponsored securities | 54 | | | 2 | | | (2) | | | — | | | 54 | | | |
Foreign government securities | 343 | | | 2 | | | (25) | | | (3) | | | 317 | | | |
States, municipalities and political subdivisions | 5,369 | | | 84 | | | (126) | | | — | | | 5,327 | | | |
Corporate securities | 12,361 | | | 104 | | | (491) | | | (8) | | | 11,966 | | | |
Residential mortgage-backed securities | 4,262 | | | 18 | | | (174) | | | (2) | | | 4,104 | | | |
Commercial mortgage-backed securities | 82 | | | 1 | | | (4) | | | — | | | 79 | | | |
Other securities | 2,967 | | | 13 | | | (79) | | | — | | | 2,901 | | | |
Total fixed maturity securities | $ | 27,583 | | | $ | 224 | | | $ | (979) | | | $ | (13) | | | $ | 26,815 | | | |
December 31, 2021 | | | | | | | | | | | |
Fixed maturity securities: | | | | | | | | | | | |
United States Government securities | $ | 1,443 | | | $ | 7 | | | $ | (18) | | | $ | — | | | $ | 1,432 | | | |
Government sponsored securities | 65 | | | 4 | | | (1) | | | — | | | 68 | | | |
Foreign government securities | 353 | | | 7 | | | (13) | | | — | | | 347 | | | |
States, municipalities and political subdivisions | 5,321 | | | 310 | | | (10) | | | — | | | 5,621 | | | |
Corporate securities | 12,044 | | | 401 | | | (78) | | | (4) | | | 12,363 | | | |
Residential mortgage-backed securities | 4,059 | | | 75 | | | (35) | | | (2) | | | 4,097 | | | |
Commercial mortgage-backed securities | 65 | | | 2 | | | (3) | | | — | | | 64 | | | |
Other securities | 2,907 | | | 24 | | | (24) | | | — | | | 2,907 | | | |
Total fixed maturity securities | $ | 26,257 | | | $ | 830 | | | $ | (182) | | | $ | (6) | | | $ | 26,899 | | | |
For fixed maturity securities in an unrealized loss position at March 31, 2022 and December 31, 2021, the following table summarizes the aggregate fair values and gross unrealized losses by length of time those securities have continuously been in an unrealized loss position:
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| Less than 12 Months | | 12 Months or Greater |
(Securities are whole amounts) | Number of Securities | | Estimated Fair Value | | Gross Unrealized Loss | | Number of Securities | | Estimated Fair Value | | Gross Unrealized Loss |
March 31, 2022 | | | | | | | | | | | |
Fixed maturity securities: | | | | | | | | | | | |
United States Government securities | 86 | | | $ | 1,801 | | | $ | (66) | | | 20 | | | $ | 149 | | | $ | (12) | |
Government sponsored securities | 25 | | | 21 | | | (1) | | | 1 | | | 1 | | | (1) | |
Foreign government securities | 233 | | | 205 | | | (15) | | | 95 | | | 54 | | | (10) | |
States, municipalities and political subdivisions | 1,140 | | | 2,088 | | | (123) | | | 23 | | | 25 | | | (3) | |
Corporate securities | 3,616 | | | 7,520 | | | (423) | | | 532 | | | 620 | | | (68) | |
Residential mortgage-backed securities | 1,547 | | | 3,142 | | | (137) | | | 184 | | | 419 | | | (37) | |
Commercial mortgage-backed securities | 21 | | | 51 | | | (1) | | | 5 | | | 9 | | | (3) | |
Other securities | 746 | | | 2,240 | | | (70) | | | 84 | | | 183 | | | (9) | |
Total fixed maturity securities | 7,414 | | | $ | 17,068 | | | $ | (836) | | | 944 | | | $ | 1,460 | | | $ | (143) | |
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| | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | |
Fixed maturity securities: | | | | | | | | | | | |
United States Government securities | 51 | | | $ | 990 | | | $ | (11) | | | 27 | | | $ | 176 | | | $ | (7) | |
Government sponsored securities | — | | | — | | | — | | | 1 | | | 1 | | | (1) | |
Foreign government securities | 188 | | | 143 | | | (8) | | | 68 | | | 41 | | | (5) | |
States, municipalities and political subdivisions | 281 | | | 634 | | | (9) | | | 8 | | | 16 | | | (1) | |
Corporate securities | 1,846 | | | 3,310 | | | (57) | | | 403 | | | 485 | | | (21) | |
Residential mortgage-backed securities | 692 | | | 1,967 | | | (26) | | | 125 | | | 173 | | | (9) | |
Commercial mortgage-backed securities | 2 | | | 4 | | | (1) | | | 4 | | | 8 | | | (2) | |
Other securities | 511 | | | 1,707 | | | (19) | | | 50 | | | 85 | | | (5) | |
Total fixed maturity securities | 3,571 | | | $ | 8,755 | | | $ | (131) | | | 686 | | | $ | 985 | | | $ | (51) | |
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Below are discussions by security type for unrealized losses and credit losses as of March 31, 2022:
Foreign government securities: An allowance for credit loss was established on certain foreign government securities related to Russia and the Ukraine. The ongoing Russian/Ukrainian conflict and the uncertainties around future ability to collect payment, as well as a significant decline in fair value, were factors indicating a credit loss. No other foreign government securities had material unrealized losses or qualitative factors to indicate a credit loss.
Corporate securities: An allowance for credit losses on consumer-driven and financial sector fixed maturity corporate securities has been determined based on qualitative and quantitative factors including credit rating, decline in fair value and industry condition along with other available market data. With multiple risk factors present, these securities were reviewed for expected future cash flow to determine the portion of unrealized losses that were credit related and to record an allowance for credit losses. Unrealized losses on our other corporate securities were largely due to market conditions relating to the COVID-19 pandemic and increasing interest rates; however, qualitative factors did not indicate a credit loss as of March 31, 2022. We do not intend to sell these investments and it is likely we will not have to sell these investments prior to maturity or recovery of amortized cost.
Residential mortgage-backed securities: An allowance for credit loss was established on certain residential mortgage-backed securities. Notification of maturity and coupon default, as well as a significant and sustained decline in fair value, were factors to indicate a credit loss. Unrealized losses on our other residential mortgage-backed securities were largely due to market conditions and rising interest rates; however, qualitative factors did not indicate a credit loss. We do not intend to sell these investments and it is likely we will not be required to sell these investments prior to maturity or recovery of amortized cost.
As for the remaining securities shown in the table above, unrealized losses on these securities have not been recognized into income because we do not intend to sell these investments and it is likely that we will not be required to sell these investments prior to their anticipated recovery. The decline in fair value is largely due to changes in interest rates and other market conditions. We have evaluated these securities for any change in credit rating and have determined that no allowance is necessary. The fair value is expected to recover as the securities approach maturity.
The table below presents a roll-forward by major security type of the allowance for credit losses on fixed maturity securities available-for-sale held at period end for the three months March 31, 2022 and 2021:
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| Three Months Ended March 31, 2022 | | |
| Foreign government securities | | Corporate securities | | Residential mortgage-backed securities | | Total | | | | | | |
Allowance for credit losses: | | | | | | | | | | | | | |
Beginning balance | $ | — | | | $ | 4 | | | $ | 2 | | | $ | 6 | | | | | | | |
Additions for securities for which no previous expected credit losses were recognized | 3 | | | 4 | | | — | | | 7 | | | | | | | |
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Total allowance for credit losses, ending balance | $ | 3 | | | $ | 8 | | | $ | 2 | | | $ | 13 | | | | | | | |
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| Three Months Ended March 31, 2021 | | |
| Corporate securities | | Residential mortgage-backed securities | | Total | | | | | | |
Allowance for credit losses: | | | | | | | | | | | |
Beginning balance | $ | 7 | | | $ | — | | | $ | 7 | | | | | | | |
Additions for securities for which no previous expected credit losses were recognized | 1 | | | — | | | 1 | | | | | | | |
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(Decreases) increases to the allowance for credit losses on securities | (2) | | | 2 | | | — | | | | | | | |
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Total allowance for credit losses, ending balance | $ | 6 | | | $ | 2 | | | $ | 8 | | | | | | | |
The amortized cost and fair value of fixed maturity securities at March 31, 2022, 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.
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| Amortized Cost | | Estimated Fair Value |
Due in one year or less | $ | 1,257 | | | $ | 1,254 | |
Due after one year through five years | 6,686 | | | 6,569 | |
Due after five years through ten years | 9,225 | | | 8,905 | |
Due after ten years | 6,071 | | | 5,904 | |
Mortgage-backed securities | 4,344 | | | 4,183 | |
Total fixed maturity securities | $ | 27,583 | | | $ | 26,815 | |
During the three months ended March 31, 2022 and 2021, we received total proceeds from sales, maturities, calls or redemptions of fixed maturity securities of $3,646 and $5,323, respectively.
In the ordinary course of business, we may sell securities at a loss for a number of reasons, including, but not limited to: (i) changes in the investment environment; (ii) expectation that the fair value could deteriorate further; (iii) desire to reduce exposure to an issuer or an industry; (iv) changes in credit quality; or (v) changes in expected cash flow.
All securities sold resulting in investment gains and losses are recorded on the trade date. Realized gains and losses are determined on the basis of the cost or amortized cost of the specific securities sold.
Equity Securities
A summary of marketable equity securities at March 31, 2022 and December 31, 2021 is as follows:
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| | | | | March 31, 2022 | | December 31, 2021 |
Equity securities: | | | | | | | |
Exchange traded funds | | | | | $ | 1,539 | | | $ | 1,750 | |
| | | | | | | |
Common equity securities | | | | | 24 | | | 42 | |
Private equity securities | | | | | 99 | | | 89 | |
Total | | | | | $ | 1,662 | | | $ | 1,881 | |
Other Invested Assets
Other invested assets include primarily our investments in limited partnerships, joint ventures and other non-controlled corporations, mortgage loans and 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. Financial information for certain of these investments are reported on a one or three month lag due to the timing of when we receive financial information from the companies.
Investment Gains and Losses
Net investment gains (losses) for the three months ended March 31, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31 | | |
| 2022 | | 2021 | | | | |
Net (losses) gains: | | | | | | | |
Fixed maturity securities: | | | | | | | |
Gross realized gains from sales | $ | 20 | | | $ | 56 | | | | | |
Gross realized losses from sales | (78) | | | (12) | | | | | |
Impairment losses recognized in income | (20) | | | (1) | | | | | |
Net realized (losses) gains from sales of fixed maturity securities | (78) | | | 43 | | | | | |
Equity securities: | | | | | | | |
Unrealized losses recognized on equity securities still held at the end of the period | (71) | | | (40) | | | | | |
Net realized losses recognized on equity securities sold during the period | (14) | | | (26) | | | | | |
Net losses on equity securities | (85) | | | (66) | | | | | |
Other investments: | | | | | | | |
Gross gains | 23 | | | 5 | | | | | |
Gross losses | (30) | | | — | | | | | |
Impairment losses recognized in income | (4) | | | (8) | | | | | |
Net losses on other investments | (11) | | | (3) | | | | | |
Net losses on investments | $ | (174) | | | $ | (26) | | | | | |
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Accrued Investment Income
At March 31, 2022 and December 31, 2021, accrued investment income totaled $185 and $205, respectively. We recognize accrued investment income under the caption “Other receivables” on our consolidated balance sheets.
Securities Lending Programs
We participate in securities lending programs whereby marketable securities in our investment portfolio are transferred to independent brokers or dealers in exchange for cash and securities collateral. The fair value of the collateral received at the time of the transactions amounted to $2,596 and $2,155 at March 31, 2022 and December 31, 2021, respectively. The value of the collateral represented 102% of the market value of the securities on loan at each of March 31, 2022 and December 31, 2021. We recognize the collateral as an asset under the caption “Other current assets” in our consolidated balance sheets, and we recognize a corresponding liability for the obligation to return the collateral to the borrower under the caption “Other current liabilities.” The securities on loan are reported in the applicable investment category on our consolidated balance sheets.
At March 31, 2022 and December 31, 2021, the remaining contractual maturity of our securities lending agreements included overnight and continuous transactions of cash for $2,408 and $1,874, respectively, of United States Government securities for $184 and $281, respectively, and of Other securities for $4 and $0, respectively.
6. Derivative Financial Instruments
We primarily invest in the following types of derivative financial instruments: interest rate swaps, futures, forward contracts, put and call options, swaptions, embedded derivatives and warrants. We also enter into master netting agreements, which reduce credit risk by permitting net settlement of transactions.
We 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 or the Secured Overnight Financing Rate (“SOFR”). Any amounts recognized for changes in fair value of these derivatives are included in the captions “Other current assets,” or “Other noncurrent assets,” or “Other current liabilities” or “Other noncurrent liabilities” in our consolidated balance sheets.
The unrecognized loss for all expired and terminated cash flow hedges included in accumulated other comprehensive loss, net of tax, was $236 and $239 at March 31, 2022 and December 31, 2021, respectively.
During the three months ended March 31, 2022 and 2021, we recognized net gains on non-hedging derivatives of $23 and $22, respectively.
For additional information relating to the fair value of our derivative assets and liabilities, see Note 7, “Fair Value,” of this Form 10-Q.
7. Fair Value
Assets and liabilities recorded at fair value in our consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Level inputs, as defined by FASB guidance for fair value measurements and disclosures, are as follows:
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Level Input | | Input Definition |
Level I | | Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. |
Level II | | Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date. |
Level III | | Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. |
The following methods, assumptions and inputs were used to determine the fair value of each class of the following assets and liabilities recorded at fair value in our consolidated balance sheets:
Cash equivalents: Cash equivalents primarily consist of highly rated money market funds with maturities of three months or less and are purchased daily at par value with specified yield rates. Due to the high ratings and short-term nature of the funds, we designate all cash equivalents as Level I.
Fixed maturity securities, available-for-sale: Fair values of available-for-sale fixed maturity securities are based on quoted market prices, where available. These fair values are obtained primarily from third-party pricing services, which generally use Level I or Level II inputs for the determination of fair value to facilitate fair value measurements and disclosures. Level II securities primarily include corporate securities, securities from states, municipalities and political subdivisions, mortgage-backed securities, United States government securities, foreign government securities, and certain other asset-backed securities. For securities not actively traded, the pricing services may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. We have controls in place to review the pricing services’ qualifications and procedures used to determine fair values. In addition, we periodically review the pricing services’ pricing methodologies, data sources and pricing inputs to ensure the fair values obtained are reasonable. Inputs that are often used in the valuation methodologies include, but are not limited to, broker quotes, benchmark yields, credit spreads, default rates and prepayment speeds. We also have certain fixed maturity securities, primarily corporate debt securities, which are designated Level III securities. For these securities, the valuation methodologies may incorporate broker quotes or discounted cash flow analyses using assumptions for inputs such as expected cash flows, benchmark yields, credit spreads, default rates and prepayment speeds that are not observable in the markets.
Equity securities: Fair values of equity securities are generally designated as Level I and are based on quoted market prices. For certain equity securities, quoted market prices for the identical security are not always available, and the fair value is estimated by reference to similar securities for which quoted prices are available. These securities are designated Level II. We also have certain equity securities, including private equity securities, for which the fair value is estimated based on each security’s current condition and future cash flow projections. Such securities are designated Level III. The fair values of these private equity securities are generally based on either broker quotes or discounted cash flow projections using assumptions for inputs such as the weighted-average cost of capital, long-term revenue growth rates and earnings before interest, taxes, depreciation and amortization, and/or revenue multiples that are not observable in the markets.
Securities lending collateral: Fair values of securities lending collateral are based on quoted market prices, where available. These fair values are obtained primarily from third-party pricing services, which generally use Level I or Level II inputs for the determination of fair value, to facilitate fair value measurements and disclosures.
Derivatives: Fair values are based on the quoted market prices by the financial institution that is the counterparty to the derivative transaction. We independently verify prices provided by the counterparties using valuation models that incorporate observable market inputs for similar derivative transactions. Derivatives are designated as Level II securities. Derivatives presented within the fair value hierarchy table below are presented on a gross basis and not on a master netting basis by counterparty.
A summary of fair value measurements by level for assets and liabilities measured at fair value on a recurring basis at March 31, 2022 and December 31, 2021 is as follows:
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| Level I | | Level II | | Level III | | Total |
March 31, 2022 | | | | | | | |
Assets: | | | | | | | |
Cash equivalents | $ | 2,831 | | | $ | — | | | $ | — | | | $ | 2,831 | |
Fixed maturity securities, available-for-sale: | | | | | | | |
United States Government securities | — | | | 2,067 | | | — | | | 2,067 | |
Government sponsored securities | — | | | 54 | | | — | | | 54 | |
Foreign government securities | — | | | 317 | | | — | | | 317 | |
States, municipalities and political subdivisions, tax-exempt | — | | | 5,327 | | | — | | | 5,327 | |
Corporate securities | — | | | 11,625 | | | 341 | | | 11,966 | |
Residential mortgage-backed securities | — | | | 4,100 | | | 4 | | | 4,104 | |
Commercial mortgage-backed securities | — | | | 79 | | | — | | | 79 | |
Other securities | — | | | 2,864 | | | 37 | | | 2,901 | |
Total fixed maturity securities, available-for-sale | — | | | 26,433 | | | 382 | | | 26,815 | |
Equity securities: | | | | | | | |
Exchange traded funds | 1,539 | | | — | | | — | | | 1,539 | |
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Common equity securities | 8 | | | 16 | | | — | | | 24 | |
Private equity securities | — | | | — | | | 99 | | | 99 | |
Total equity securities | 1,547 | | | 16 | | | 99 | | | 1,662 | |
Other invested assets - common equity securities | 126 | | | — | | | — | | | 126 | |
Securities lending collateral | — | | | 2,596 | | | — | | | 2,596 | |
Derivatives - other assets | — | | | 9 | | | — | | | 9 | |
Total assets | $ | 4,504 | | | $ | 29,054 | | | $ | 481 | | | $ | 34,039 | |
Liabilities: | | | | | | | |
Derivatives - other liabilities | $ | — | | | $ | (19) | | | $ | — | | | $ | (19) | |
Total liabilities | $ | — | | | $ | (19) | | | $ | — | | | $ | (19) | |
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December 31, 2021 | | | | | | | |
Assets: | | | | | | | |
Cash equivalents | $ | 2,415 | | | $ | — | | | $ | — | | | $ | 2,415 | |
Fixed maturity securities, available-for-sale: | | | | | | | |
United States Government securities | — | | | 1,432 | | | — | | | 1,432 | |
Government sponsored securities | — | | | 68 | | | — | | | 68 | |
Foreign government securities | — | | | 347 | | | — | | | 347 | |
States, municipalities and political subdivisions, tax-exempt | — | | | 5,621 | | | — | | | 5,621 | |
Corporate securities | — | | | 12,027 | | | 336 | | | 12,363 | |
Residential mortgage-backed securities | — | | | 4,092 | | | 5 | | | 4,097 | |
Commercial mortgage-backed securities | — | | | 64 | | | — | | | 64 | |
Other securities | — | | | 2,888 | | | 19 | | | 2,907 | |
Total fixed maturity securities, available-for-sale | — | | | 26,539 | | | 360 | | | 26,899 | |
Equity securities: | | | | | | | |
Exchange traded funds | 1,750 | | | — | | | — | | | 1,750 | |
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Common equity securities | 8 | | | 34 | | | — | | | 42 | |
Private equity securities | — | | | — | | | 89 | | | 89 | |
Total equity securities | 1,758 | | | 34 | | | 89 | | | 1,881 | |
Other invested assets - common equity securities | 138 | | | — | | | — | | | 138 | |
Securities lending collateral | — | | | 2,155 | | | — | | | 2,155 | |
Derivatives - other assets | — | | | 19 | | | — | | | 19 | |
Total assets | $ | 4,311 | | | $ | 28,747 | | | $ | 449 | | | $ | 33,507 | |
Liabilities: | | | | | | | |
Derivatives - other liabilities | $ | — | | | $ | (1) | | | $ | — | | | $ | (1) | |
Total liabilities | $ | — | | | $ | (1) | | | $ | — | | | $ | (1) | |
A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level III inputs for the three months ended March 31, 2022 and 2021 is as follows:
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| Corporate Securities | | Residential Mortgage- backed Securities | | | | Other Securities | | Equity Securities | | | | Total |
Three Months Ended March 31, 2022 | | | | | | | | | | | | | |
Beginning balance at January 1, 2022 | $ | 336 | | | $ | 5 | | | | | $ | 19 | | | $ | 89 | | | | | $ | 449 | |
Total gains (losses): | | | | | | | | | | | | | |
Recognized in net income | 1 | | | — | | | | | — | | | 3 | | | | | 4 | |
Recognized in accumulated other comprehensive (loss) income | (2) | | | (1) | | | | | 1 | | | — | | | | | (2) | |
Purchases | 46 | | | — | | | | | 17 | | | 8 | | | | | 71 | |
Sales | (7) | | | — | | | | | — | | | (1) | | | | | (8) | |
Settlements | (33) | | | — | | | | | — | | | — | | | | | (33) | |
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Ending balance at March 31, 2022 | $ | 341 | | | $ | 4 | | | | | $ | 37 | | | $ | 99 | | | | | $ | 481 | |
Change in unrealized gains (losses) included in net income related to assets still held at March 31, 2022 | $ | — | | | $ | — | | | | | $ | — | | | $ | 3 | | | | | $ | 3 | |
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Three Months Ended March 31, 2021 | | | | | | | | | | | | | |
Beginning balance at January 1, 2021 | $ | 325 | | | $ | 2 | | | | | $ | 5 | | | $ | 60 | | | | | $ | 392 | |
Total gains: | | | | | | | | | | | | | |
Recognized in net income | — | | | — | | | | | — | | | 8 | | | | | 8 | |
Recognized in accumulated other comprehensive (loss) income | 3 | | | — | | | | | — | | | — | | | | | 3 | |
Purchases | 39 | | | — | | | | | — | | | — | | | | | 39 | |
Sales | (2) | | | — | | | | | — | | | (3) | | | | | (5) | |
Settlements | (41) | | | — | | | | | — | | | — | | | | | (41) | |
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Ending balance at March 31, 2021 | $ | 324 | | | $ | 2 | | | | | $ | 5 | | | $ | 65 | | | | | $ | 396 | |
Change in unrealized gains (losses) included in net income related to assets still held at March 31, 2021 | $ | — | | | $ | — | | | | | $ | — | | | $ | 8 | | | | | $ | 8 | |
There were no individually material transfers into or out of Level III during the three months ended March 31, 2022 or 2021.
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. As disclosed in Note 3, “Business Acquisitions,” we completed our acquisitions of myNEXUS and MMM during the second quarter of 2021. The net assets acquired in our acquisitions of myNEXUS and MMM and resulting goodwill and other intangible assets were recorded at fair value primarily using Level III inputs. The majority of assets acquired and liabilities assumed were recorded at their carrying values as of the respective date of acquisition, as their carrying values approximated their fair values due to their short-term nature. The fair values of goodwill and other intangible assets acquired in our acquisitions of myNEXUS and MMM were internally estimated based on the income approach. The income approach estimates fair value based on the present value of the cash flows that the assets could be expected to generate in the future. We developed internal estimates for the expected cash flows and discount rate in the present value calculation. Other than the assets acquired and liabilities assumed in our acquisitions of myNEXUS and MMM described above, there were no material assets or liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2022 or 2021.
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, unobservable inputs or other valuation techniques. These techniques are significantly affected by our assumptions, including discount rates and estimates of future cash flows. The use of assumptions for unobservable inputs for the determination of fair value involves a level of judgment and uncertainty. Changes in assumptions that reasonably could have been different at the reporting date may result in a higher or lower determination of fair value. Changes in fair value measurements, if significant, may affect performance of cash flows.
Potential taxes and other transaction costs are not considered in estimating fair values. Our valuation policy is generally to obtain quoted prices 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. As we are responsible for the determination of fair value, we perform 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 procedures such as a review of month-to-month price fluctuations and price comparisons to secondary pricing services. There were no adjustments to quoted market prices obtained from the pricing services during the three months ended March 31, 2022 or 2021.
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 our 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, premium receivables, self-funded receivables, other receivables, unearned income, accounts payable and accrued expenses, and certain other current liabilities approximate fair value because of the short-term nature of these items. These assets and liabilities are not listed in the table below.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument that is recorded at its carrying value in our consolidated balance sheets:
Other invested assets: Other invested assets include primarily our investments in limited partnerships, joint ventures and other non-controlled corporations and mortgage loans, 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. Mortgage loans are carried at amortized cost, 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.
Long-term debt—commercial paper: The carrying amount for commercial paper approximates fair value, as the underlying instruments have variable interest rates at market value.
Long-term debt—senior unsecured notes and surplus notes: The fair values of our notes are based on quoted market prices in active markets for the same or similar debt, or, if no quoted market prices are available, on the current market observable rates estimated to be available to us for debt of similar terms and remaining maturities.
Long-term debt—convertible debentures: The fair value of our convertible debentures is based on the quoted market price in the active private market in which the convertible debentures trade.
A summary of the estimated fair values by level of each class of financial instrument that is recorded at its carrying value on our consolidated balance sheets at March 31, 2022 and December 31, 2021 is as follows:
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| Carrying Value | | Estimated Fair Value |
| | Level I | | Level II | | Level III | | Total |
March 31, 2022 | | | | | | | | | |
Assets: | | | | | | | | | |
Other invested assets | $ | 5,239 | | | $ | — | | | $ | — | | | $ | 5,239 | | | $ | 5,239 | |
Liabilities: | | | | | | | | | |
Debt: | | | | | | | | | |
Short-term borrowings | 275 | | | — | | | 275 | | | — | | | 275 | |
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Commercial paper | 525 | | | — | | | 525 | | | — | | | 525 | |
Notes | 22,354 | | | — | | | 23,030 | | | — | | | 23,030 | |
Convertible debentures | 102 | | | — | | | 730 | | | — | | | 730 | |
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December 31, 2021 | | | | | | | | | |
Assets: | | | | | | | | | |
Other invested assets | $ | 5,087 | | | $ | — | | | $ | — | | | $ | 5,087 | | | $ | 5,087 | |
Liabilities: | | | | | | | | | |
Debt: | | | | | | | | | |
Short-term borrowings | 275 | | | — | | | 275 | | | — | | | 275 | |
Commercial paper | 300 | | | — | | | 300 | | | — | | | 300 | |
Notes | 22,384 | | | — | | | 25,150 | | | — | | | 25,150 | |
Convertible debentures | 72 | | | — | | | 687 | | | — | | | 687 | |
8. Income Taxes
During the three months ended March 31, 2022 and 2021, we recognized income tax expense of $531 and $509, respectively, which represent effective income tax rates of 22.8% and 23.4%, respectively. The decrease in our effective tax rate from the three months ended March 31, 2021 was primarily related to the tax impact of expected geographic changes in our mix of 2022 earnings.
Income taxes payable totaled $395 at March 31, 2022. Income taxes receivable totaled $173 at December 31, 2021. We recognized the income tax payable as a liability under the caption “Other current liabilities” and the income tax receivable as an asset under the caption “Other current assets” in our consolidated balance sheets.
9. Medical Claims Payable
A reconciliation of the beginning and ending balances for medical claims payable, by segment (see Note 15, “Segment Information”), for the three months ended March 31, 2022 is as follows:
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| Commercial & Specialty Business | | Government Business | | Other | | Total |
Gross medical claims payable, beginning of period | $ | 3,847 | | | $ | 9,157 | | | $ | 278 | | | $ | 13,282 | |
Ceded medical claims payable, beginning of period | (13) | | | (8) | | | — | | | (21) | |
Net medical claims payable, beginning of period | 3,834 | | | 9,149 | | | 278 | | | 13,261 | |
Business combinations and purchase adjustments | 3 | | | — | | | — | | | 3 | |
Net incurred medical claims: | | | | | | | |
Current period | 7,070 | | | 20,586 | | | 408 | | | 28,064 | |
Prior periods redundancies | (236) | | | (643) | | | (54) | | | (933) | |
Total net incurred medical claims | 6,834 | | | 19,943 | | | 354 | | | 27,131 | |
Net payments attributable to: | | | | | | | |
Current period medical claims | 4,571 | | | 12,331 | | | 214 | | | 17,116 | |
Prior periods medical claims | 2,232 | | | 6,457 | | | 137 | | | 8,826 | |
Total net payments | 6,803 | | | 18,788 | | | 351 | | | 25,942 | |
Net medical claims payable, end of period | 3,868 | | | 10,304 | | | 281 | | | 14,453 | |
Ceded medical claims payable, end of period | 9 | | | 8 | | | — | | | 17 | |
Gross medical claims payable, end of period | $ | 3,877 | | | $ | 10,312 | | | $ | 281 | | | $ | 14,470 | |
At March 31, 2022, the total of net incurred but not reported liabilities plus expected development on reported claims for the Commercial & Specialty Business was $148, $1,217 and $2,503 for the claim years 2020 and prior, 2021 and 2022, respectively.
At March 31, 2022, the total of net incurred but not reported liabilities plus expected development on reported claims for the Government Business was $270, $1,779 and $8,255 for the claim years 2020 and prior, 2021 and 2022, respectively.
At March 31, 2022, the total of net incurred but not reported liabilities plus expected development on reported claims for Other was $3, $84 and $194 for the claim years 2020 and prior, 2021 and 2022, respectively.
A reconciliation of the beginning and ending balances for medical claims payable, by segment (see Note 15, “Segment Information”), for the three months ended March 31, 2021 is as follows:
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| Commercial & Specialty Business | | Government Business | | Other | | Total |
Gross medical claims payable, beginning of period | $ | 3,294 | | | $ | 7,646 | | | $ | 195 | | | $ | 11,135 | |
Ceded medical claims payable, beginning of period | (13) | | | (33) | | | — | | | (46) | |
Net medical claims payable, beginning of period | 3,281 | | | 7,613 | | | 195 | | | 11,089 | |
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Net incurred medical claims: | | | | | | | |
Current period | 6,575 | | | 17,289 | | | 351 | | | 24,215 | |
Prior periods redundancies | (503) | | | (970) | | | (15) | | | (1,488) | |
Total net incurred medical claims | 6,072 | | | 16,319 | | | 336 | | | 22,727 | |
Net payments attributable to: | | | | | | | |
Current period medical claims | 4,164 | | | 10,650 | | | 217 | | | 15,031 | |
Prior periods medical claims | 1,746 | | | 4,856 | | | 146 | | | 6,748 | |
Total net payments | 5,910 | | | 15,506 | | | 363 | | | 21,779 | |
Net medical claims payable, end of period | 3,443 | | | 8,426 | | | 168 | | | 12,037 | |
Ceded medical claims payable, end of period | 9 | | | 30 | | | — | | | 39 | |
Gross medical claims payable, end of period | $ | 3,452 | | | $ | 8,456 | | | $ | 168 | | | $ | 12,076 | |
The favorable development recognized in the three months ended March 31, 2022 and 2021 resulted primarily from trend factors in late 2021 and late 2020, respectively, developing more favorably than originally expected. Favorable development in the completion factors resulting from the latter parts of 2020 developing faster than expected also contributed to the favorable development in the three months ended March 31, 2021. The impact from COVID-19 on healthcare utilization and medical claims submission patterns continues to provide increased estimation uncertainty on our incurred but not reported liability at March 31, 2022.
The reconciliation of net incurred medical claims to benefit expense included in our consolidated statements of income for periods in 2022 and 2021 is as follows:
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| Three Months Ended | | |
| March 31, 2022 | | March 31, 2021 | | | | | |
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Net incurred medical claims: | | | | | | | | | |
Commercial & Specialty Business | $ | 6,834 | | | $ | 6,072 | | | | | | | |
Government Business | 19,943 | | | 16,319 | | | | | | | |
Other | 354 | | | 336 | | | | | | | |
Total net incurred medical claims | 27,131 | | | 22,727 | | | | | | | |
Quality improvement and other claims expense | 1,084 | | | 972 | | | | | | | |
Benefit expense | $ | 28,215 | | | $ | 23,699 | | | | | | | |
The reconciliation of the medical claims payable reflected in the tables above to the consolidated ending balance for medical claims payable included in the consolidated balance sheet, as of March 31, 2022, is as follows:
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| Commercial & Specialty Business | | Government Business | | Other | | Total |
Net medical claims payable, end of period | $ | 3,868 | | | $ | 10,304 | | | $ | 281 | | | $ | 14,453 | |
Ceded medical claims payable, end of period | 9 | | | 8 | | | — | | | 17 | |
Insurance lines other than short duration | — | | | 243 | | | — | | | 243 | |
Gross medical claims payable, end of period | $ | 3,877 | | | $ | 10,555 | | | $ | 281 | | | $ | 14,713 | |
10. Debt
We generally issue senior unsecured notes for long-term borrowing purposes. At March 31, 2022 and December 31, 2021, we had $22,329 and $22,359, respectively, outstanding under these notes.
We have an unsecured surplus note with an outstanding principal balance of $25 at both March 31, 2022 and December 31, 2021.
We have a senior revolving credit facility (the “5-Year Facility”) with a group of lenders for general corporate purposes. On April 18, 2022, we amended and restated the credit agreement for the 5-Year Facility to, among other things, extend the maturity date of the 5-Year Facility from June 2024 to April 2027 and increase the amount of credit available under the 5-Year Facility from $2,500 to $4,000. Also on April 18, 2022, concurrently with the amendment and restatement of the 5-Year Facility, we terminated our 364-day senior revolving credit facility that provided for credit in the amount of $1,000, which was scheduled to mature in June 2022 (the “2021 364-Day Facility” and together with the 5-Year Facility, the “Credit Facilities”). In June 2021, we terminated our 364-day senior revolving credit facility (the “prior 364-Day Facility”), which was scheduled to mature in June 2021, and entered into the 2021 364-Day Facility with a group of lenders for general corporate purposes. Our ability to borrow under the 5-Year Facility is subject to compliance with certain covenants, including covenants requiring us to maintain a defined debt-to-capital ratio of not more than 60%, subject to increase in certain circumstances set forth in the credit agreement for the 5-Year Facility. As of March 31, 2022, our debt-to-capital ratio, as defined and calculated under the Credit Facilities, was 39.2%. We do not believe the restrictions contained in our 5-Year Facility covenants materially affect our financial or operating flexibility. As of March 31, 2022, we were in compliance with all of our debt covenants under the Credit Facilities. There were no amounts outstanding under the 5-Year Facility, 2021 364-Day Facility or the prior 364-Day Facility at any time during the three months ended March 31, 2022 or the year ended December 31, 2021.
Through certain subsidiaries, we have entered into multiple 364-day lines of credit (the “Subsidiary Credit Facilities”) with separate lenders for general corporate purposes. The Subsidiary Credit Facilities provide combined credit of up to $200. At March 31, 2022 and December 31, 2021, there were no amounts outstanding under our Subsidiary Credit Facilities.
We have an authorized commercial paper program of up to $3,500, the proceeds of which may be used for general corporate purposes. At March 31, 2022 and December 31, 2021, we had $525 and $300, respectively, outstanding under this program.
We have outstanding senior unsecured convertible debentures due 2042 (the “Debentures”), which are governed by an indenture (the “indenture”) between us and The Bank of New York Mellon Trust Company, N.A., as trustee. We accounted for the Debentures in accordance with the FASB cash conversion guidance for debt with conversion and other options at the time of issue. As a result, the value of the embedded conversion option (net of deferred taxes and equity issuance costs) was bifurcated from its debt host and recorded as a component of additional paid-in capital in our consolidated balance sheets. We adopted ASU 2020-06 on January 1, 2022 using the modified retrospective transition method, which resulted in an increase to our reported debt outstanding of $31, a decrease of our deferred tax liabilities of $8 and a corresponding cumulative-effect reduction to our opening retained earnings of $23, eliminating the bifurcation of the embedded conversion option. During the three months ended March 31, 2022, $2 of aggregate principal amount of the Debentures was surrendered for conversion by certain holders in accordance with the terms and provisions of the indenture. We elected to settle the excess of the principal amount of the conversions with cash for total payments during the three months ended March 31, 2022 of $14.
The following table summarizes at March 31, 2022 the related balances, conversion rate and conversion price of the Debentures:
| | | | | |
Outstanding principal amount | $ | 102 | |
| |
Net debt carrying amount | $ | 102 | |
| |
Conversion rate (shares of common stock per $1,000 of principal amount) | 14.2390 | |
Effective conversion price (per $1,000 of principal amount) | $ | 70.2297 | |
We are a member, through certain subsidiaries, of the Federal Home Loan Bank of Indianapolis, the Federal Home Loan Bank of Cincinnati, the Federal Home Loan Bank of Atlanta and the Federal Home Loan Bank of New York (collectively, the “FHLBs”). As a member, we have the ability to obtain short-term cash advances, subject to certain minimum collateral requirements. We had $275 of outstanding short-term borrowings from the FHLBs at each of March 31, 2022 and December 31, 2021.
All debt is a direct obligation of Anthem, Inc., except for the surplus note, the FHLB borrowings, and the Subsidiary Credit Facilities.
11. Commitments and Contingencies
Litigation and Regulatory Proceedings
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.
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 is, in the aggregate, from $0 to approximately $250 at March 31, 2022. 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.
Blue Cross Blue Shield Antitrust Litigation
We are a defendant in multiple lawsuits that were initially filed in 2012 against the BCBSA and Blue Cross and/or Blue Shield licensees (the “Blue plans”) across the country. Cases filed in twenty-eight states were consolidated into a single, multi-district proceeding captioned In re Blue Cross Blue Shield Antitrust Litigation that is pending in the U.S. District Court for the Northern District of Alabama (the “Court”). Generally, the suits allege that the BCBSA and the Blue plans have conspired to horizontally allocate geographic markets through license agreements, best efforts rules that limit the percentage of non-Blue revenue of each plan, restrictions on acquisitions, rules governing the BlueCard® and National Accounts
programs and other arrangements in violation of the Sherman Antitrust Act (“Sherman Act”) and related state laws. The cases were brought by two putative nationwide classes of plaintiffs, health plan subscribers and providers.
In April 2018, the Court issued an order on the parties’ cross motions for partial summary judgment, determining that the defendants’ aggregation of geographic market allocations and output restrictions are to be analyzed under a per se standard of review, and the BlueCard® program and other alleged Section 1 Sherman Act violations are to be analyzed under the rule of reason standard of review. The Court also found that there remain genuine issues of material fact as to whether the defendants operate as a single entity with regard to the enforcement of the Blue Cross Blue Shield trademarks. In April 2019, the plaintiffs filed motions for class certification, which defendants opposed.
The BCBSA and Blue plans have approved a settlement agreement and release (the “Subscriber Settlement Agreement”) with the subscriber plaintiffs. If approved by the Court, the Subscriber Settlement Agreement will require the defendants to make a monetary settlement payment, our portion of which is estimated to be $594, and will contain certain terms imposing non-monetary obligations including (i) eliminating the “national best efforts” rule in the BCBSA license agreements (which rule limits the percentage of non-Blue revenue permitted for each Blue plan) and (ii) allowing for some large national employers with self-funded benefit plans to request a bid for insurance coverage from a second Blue plan in addition to the local Blue plan. As of March 31, 2022, the liability balance accrued for our estimated payment obligation was $507, net of payments made.
In November 2020, the Court issued an order preliminarily approving the Subscriber Settlement Agreement, following which members of the subscriber class were provided notice of the Subscriber Settlement Agreement and an opportunity to opt out of the class. All terms of the Subscriber Settlement Agreement are subject to final approval by the Court. The deadline for objections to the settlement as well as the deadline for those who wish to opt-out from the settlement was in July 2021 and a small number of subscribers submitted valid opt outs by the deadline. The claims deadline was in November 2021 and in excess of eight thousand claims were submitted. A final approval hearing was held in October 2021. The Court took the request for approval under advisement and requested supplemental briefing that was submitted. In February 2022, the Court ordered the issuance of a supplemental notice to self-funded account class members. The notice process was completed in March 2022. Objections to the supplemental notice along with opt-outs must be submitted by May 2, 2022, with a motion certifying compliance with the supplemental notice due from class counsel by May 10, 2022. If the Court grants approval of the Subscriber Settlement Agreement, and after all appellate rights have expired or have been exhausted in a manner that affirms the Court’s final order and judgment, the defendants’ payment and non-monetary obligations under the Subscriber Settlement Agreement will become effective.
In October 2020, after the Court lifted the stay as to the provider litigation, provider plaintiffs filed a renewed motion for class certification, which defendants opposed. In March 2021, the Court issued an order terminating the pending motion for class certification until the Court determines the standard of review applicable to providers’ claims. In May 2021, the defendants and provider plaintiffs filed renewed standard of review motions, which are now fully briefed. In June 2021, the parties filed summary judgment motions not critically dependent on class certification. In February 2022, the Court issued (1) an order granting certain defendants’ motion for partial summary judgment against provider plaintiffs who had previously released claims against such defendants, and (2) an order granting provider plaintiffs’ motion for partial summary judgment, holding that Ohio v. American Express Co. does not affect the standard of review in this case. We intend to continue to vigorously defend the provider suit, which we believe is without merit; however, its ultimate outcome cannot be presently determined.
Blue Cross of California Taxation Litigation
In July 2013, our California affiliate Blue Cross of California (doing business as Anthem Blue Cross) (“BCC”) was named as a defendant in a California taxpayer action filed in Los Angeles County Superior Court (the “Superior Court”) captioned Michael D. Myers v. State Board of Equalization, et al. This action was brought under a California statute that permits an individual taxpayer to sue a governmental agency when the taxpayer believes the agency has failed to enforce governing law. Plaintiff contends that BCC, a licensed Health Care Service Plan, is an “insurer” for purposes of taxation despite acknowledging it is not an “insurer” under regulatory law. At the time, under California law, “insurers” were required to pay a gross premiums tax (“GPT”) calculated as 2.35% on gross premiums. As a licensed Health Care Service Plan, BCC has paid the California Corporate Franchise Tax (“CFT”), the tax paid by California businesses generally. Plaintiff contends that BCC must pay the GPT rather than the CFT, and seeks a writ of mandate directing the taxing
agencies to collect the GPT and an order requiring BCC to pay GPT back taxes, interest, and penalties for the eight-year period prior to the filing of the complaint.
Because the GPT is constitutionally imposed in lieu of certain other taxes, BCC has filed protective tax refund claims with the City of Los Angeles, the California Department of Health Care Services and the Franchise Tax Board to protect its rights to recover certain taxes previously paid should BCC eventually be determined to be subject to the GPT for the tax periods at issue in the litigation.
In March 2018, the Superior Court denied BCC's motion for judgment on the pleadings and similar motions brought by other entities. BCC filed a motion for summary judgment with the Superior Court, which was heard in October 2020. In December 2020, the Superior Court granted BCC’s motion for summary judgment, dismissing the plaintiff's lawsuit. In November 2021, the plaintiff appealed the order granting our motion for summary judgment. Our responding brief was filed in February 2022. We estimate that the appeal will be heard sometime in 2022. We intend to vigorously defend the appeal of this lawsuit.
Express Scripts, Inc. Pharmacy Benefit Management Litigation
In March 2016, we filed a lawsuit against Express Scripts, Inc. (“Express Scripts”), our vendor at the time for PBM services, captioned Anthem, Inc. v. Express Scripts, Inc., in the U.S. District Court for the Southern District of New York. The lawsuit seeks to recover over $14,800 in damages for pharmacy pricing that is higher than competitive benchmark pricing under the agreement between the parties (the “ESI PBM Agreement”), over $158 in damages related to operational breaches, as well as various declarations under the ESI PBM Agreement, including that Express Scripts: (i) breached its obligation to negotiate in good faith and to agree in writing to new pricing terms; (ii) was required to provide competitive benchmark pricing to us through the term of the ESI PBM Agreement; (iii) has breached the ESI PBM Agreement; and (iv) is required under the ESI PBM Agreement to provide post-termination services, at competitive benchmark pricing, for one year following any termination.
Express Scripts has disputed our contractual claims and is seeking declaratory judgments: (i) regarding the timing of the periodic pricing review under the ESI PBM Agreement, and (ii) that it has no obligation to ensure that we receive any specific level of pricing, that we have no contractual right to any change in pricing under the ESI PBM Agreement and that its sole obligation is to negotiate proposed pricing terms in good faith. In the alternative, Express Scripts claims that we have been unjustly enriched by its payment of $4,675 at the time we entered into the ESI PBM Agreement. In March 2017, the District Court granted our motion to dismiss Express Scripts’ counterclaims for (i) breach of the implied covenant of good faith and fair dealing, and (ii) unjust enrichment with prejudice. After such action, the only remaining claims were for breach of contract and declaratory relief. In August 2021, Express Scripts filed a motion for summary judgment, which we opposed. In March 2022, the District Court granted in part and denied in part Express Scripts' motion for summary judgment. The District Court dismissed our declaratory judgment claim, our breach of contract claim for failure to prove damages and most of our operational breach claims. As a result of the summary judgment decision, the only remaining claims as of the filing of this Quarterly Report on Form 10-Q are (i) our operational breach claim based on Express Scripts' prior authorization processes and (ii) Express Scripts' counterclaim for breach of the market check provision of the ESI PBM Agreement. We intend to appeal the decision at the appropriate time, vigorously pursue our claims and defend against counterclaims, which we believe are without merit; however, the ultimate outcome cannot be presently determined.
In re Express Scripts/Anthem ERISA Litigation
We are a defendant in a class action lawsuit that was initially filed in June 2016 against Anthem, Inc. and Express Scripts, which has been consolidated into a single multi-district lawsuit captioned In Re Express Scripts/Anthem ERISA Litigation, in the U.S. District Court for the Southern District of New York. The consolidated complaint was filed by plaintiffs against Express Scripts and us on behalf of all persons who are participants in or beneficiaries of any ERISA or non-ERISA healthcare plan from December 1, 2009 to December 31, 2019 in which we provided prescription drug benefits through the ESI PBM Agreement and paid a percentage based co-insurance payment in the course of using that prescription drug benefit. The plaintiffs allege that we breached our duties, either under ERISA or with respect to the implied covenant of good faith and fair dealing implied in the health plans, (i) by failing to adequately monitor Express Scripts’ pricing under the ESI PBM Agreement, (ii) by placing our own pecuniary interest above the best interests of our insureds by allegedly agreeing to higher pricing in the ESI PBM Agreement in exchange for the purchase price for our NextRx PBM business, and (iii) with
respect to the non-ERISA members, by negotiating and entering into the ESI PBM Agreement that was allegedly detrimental to the interests of such non-ERISA members. Plaintiffs seek to hold us and Express Scripts jointly and severally liable and to recover all losses suffered by the proposed class, equitable relief, disgorgement of alleged ill-gotten gains, injunctive relief, attorney’s fees and costs and interest.
In April 2017, we filed a motion to dismiss the claims brought against us, and it was granted, without prejudice, in January 2018. Plaintiffs pursued an appeal with the United States Court of Appeals for the Second Circuit (the “Second Circuit”). In December 2020, the Second Circuit affirmed the trial court’s order dismissing the ERISA complaint. Plaintiffs filed a Petition for Rehearing and Rehearing En Banc, which was denied. Plaintiffs filed a writ of certiorari with the United States Supreme Court, which we opposed. In December 2021, the United States Supreme Court requested that the Solicitor General submit a brief “expressing the views of the United States” as to whether the court should grant plaintiffs’ writ. We intend to vigorously defend this suit, which we believe is without merit; however, its ultimate outcome cannot be presently determined.
Medicare Risk Adjustment Litigation
In March 2020, the U.S. Department of Justice (“DOJ”) filed a civil lawsuit against Anthem, Inc. in the U.S. District Court for the Southern District of New York in a case captioned United States v. Anthem, Inc. The DOJ’s suit alleges, among other things, that we falsely certified the accuracy of the diagnosis data we submitted to the Centers for Medicare and Medicaid Services (“CMS”) for risk-adjustment purposes under Medicare Part C and knowingly failed to delete inaccurate diagnosis codes. The DOJ further alleges that, as a result of these purported acts, we caused CMS to calculate the risk-adjustment payments based on inaccurate diagnosis information, which enabled us to obtain unspecified amounts of payments in Medicare funds in violation of the False Claims Act. The DOJ filed an amended complaint in July 2020, alleging the same causes of action but revising some of its allegations. In September 2020, we filed a motion to transfer the lawsuit to the Southern District of Ohio, a motion to dismiss part of the lawsuit, and a motion to strike certain allegations in the amended complaint. The motions are fully briefed and no decision has been rendered. We intend to continue to vigorously defend this suit, which we believe is without merit; however, the ultimate outcome cannot be presently determined.
Investigations of CareMore and HealthSun
With the assistance of outside counsel, we are conducting investigations of risk-adjustment practices involving data submitted to CMS (unrelated to our retrospective chart review program) at CareMore Health Plans, Inc. (“CareMore”), one of our California subsidiaries, and HealthSun Health Plans, Inc. (“HealthSun”), one of our Florida subsidiaries. Our CareMore investigation has resulted in the termination of CareMore’s relationship with one contracted provider in California. Our HealthSun investigation has focused on risk adjustment practices initiated prior to our acquisition of HealthSun in December 2017 that continued after the acquisition. We have voluntarily self-disclosed the existence of both of our investigations to CMS and the Criminal and Civil Divisions of the DOJ. We are cooperating with the ongoing investigations of the Criminal and Civil Divisions of the DOJ related to these risk adjustment practices, and have entered into a tolling agreement with the Civil Division of the DOJ related to its investigation. We are analyzing the scope of potential data corrections to be submitted to CMS and have begun to submit data corrections to CMS. We have also asserted indemnity claims for escrowed funds under the HealthSun purchase agreement for, among other things, breach of healthcare and financial representation provisions, based on the conduct discovered during our investigation. While certain elements of the escrow claims were resolved in the fourth quarter of 2021, there remains litigation in the Delaware Court of Chancery related to the remaining indemnity claims for escrowed funds.
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 Health Maintenance Organizations (“HMOs”) and health insurers generally, exclude certain healthcare and other services from coverage under our HMO, Preferred Provider Organizations 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 reimbursement 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.
Contractual Obligations and Commitments
In March 2020, we entered into an agreement with a vendor for information technology infrastructure and related management and support services through June 2025. The new agreement supersedes certain prior agreements for such services and includes provisions for additional services not provided under those agreements. Our remaining commitment under this agreement at March 31, 2022 is approximately $971. We will have the ability to terminate the agreement upon the occurrence of certain events, subject to early termination fees.
In the second quarter of 2019, we began using our pharmacy benefits manager IngenioRx to market and offer PBM services to our affiliated health plan customers, as well as to external customers outside of the health plans we own. The comprehensive PBM services portfolio includes, but is not limited to, formulary management, pharmacy networks, prescription drug database, member services and mail order capabilities. IngenioRx delegates certain PBM administrative functions, such as claims processing and prescription fulfillment, to CaremarkPCS Health, L.L.C., which is a subsidiary of CVS Health Corporation, pursuant to a five-year agreement. With IngenioRx, we retain the responsibilities for clinical and formulary strategy and development, member and employer experiences, operations, sales, marketing, account management and retail network strategy.
12. Capital Stock
Use of Capital – Dividends and Stock Repurchase Program
We regularly review the appropriate use of capital, including acquisitions, common stock and debt security repurchases and dividends to shareholders. The declaration and payment of any dividends or repurchases of our common stock or debt is at the discretion of our Board of Directors and depends upon our financial condition, results of operations, future liquidity needs, regulatory and capital requirements and other factors deemed relevant by our Board of Directors.
A summary of our cash dividend activity for the three months ended March 31, 2022 and 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Declaration Date | | Record Date | | Payment Date | | Cash Dividend per Share | | Total |
Three Months Ended March 31, 2022 | | | | | | | | |
January 25, 2022 | | March 10, 2022 | | March 25, 2022 | | $1.28 | | $ | 309 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Three Months Ended March 31, 2021 | | | | | | | | |
January 26, 2021 | | March 10, 2021 | | March 25, 2021 | | $1.13 | | $ | 277 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
On April 19, 2022, our Audit Committee declared a second quarter 2022 dividend to shareholders of $1.28 per share, payable on June 24, 2022 to shareholders of record at the close of business on June 10, 2022.
Under our Board of Directors’ authorization, we maintain a common stock repurchase program. On January 26, 2021, our Audit Committee, pursuant to authorization granted by the Board of Directors, authorized a $5,000 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 three months ended March 31, 2022 and 2021 is as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31 |
| | 2022 | | 2021 |
Shares repurchased | | 1.2 | | | 1.4 | |
Average price per share | | $ | 453.32 | | | $ | 316.06 | |
Aggregate cost | | $ | 545 | | | $ | 447 | |
Authorization remaining at the end of the period | | $ | 3,647 | | | $ | 5,645 | |
For additional information regarding the use of capital for debt security repurchases, see Note 10, “Debt,” included in this Form 10-Q and Note 13, “Debt,” to our audited consolidated financial statements as of and for the year ended December 31, 2021 included in our 2021 Annual Report on Form 10-K.
Stock Incentive Plans
A summary of stock option activity for the three months ended March 31, 2022 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, 2022 | 2.9 | | | $ | 255.50 | | | | | |
Granted | 0.5 | | | 451.50 | | | | | |
Exercised | (0.2) | | | 249.89 | | | | | |
Forfeited or expired | — | | | 306.80 | | | | | |
Outstanding at March 31, 2022 | 3.2 | | | 288.98 | | | 7.06 | | $ | 643 | |
Exercisable at March 31, 2022 | 1.9 | | | 238.19 | | | 5.87 | | $ | 480 | |
A summary of the status of nonvested restricted stock activity, including restricted stock units and performance units, for the three months ended March 31, 2022 is as follows:
| | | | | | | | | | | |
| Restricted Stock Shares and Units | | Weighted- Average Grant Date Fair Value per Share |
Nonvested at January 1, 2022 | 1.3 | | | $ | 299.65 | |
Granted | 0.5 | | | 451.42 | |
Vested | (0.5) | | | 301.42 | |
Forfeited | — | | | 310.98 | |
Nonvested at March 31, 2022 | 1.3 | | | 353.20 | |
During the three months ended March 31, 2022, we granted approximately 0.2 restricted stock units that are contingent upon us achieving earnings targets over the three year period from 2022 to 2024. These grants have been included in the activity shown above, but will be subject to adjustment at the end of 2024 based on results in the three year period.
Fair Value
We use a binomial lattice valuation model to estimate the fair value of all stock options granted. For a more detailed discussion of our stock incentive plan fair value methodology, see Note 15, “Capital Stock,” to our audited consolidated financial statements as of and for the year ended December 31, 2021 included in our 2021 Annual Report on Form 10-K.
The following weighted-average assumptions were used to estimate the fair values of options granted during the three months ended March 31, 2022 and 2021:
| | | | | | | | | | | |
| Three Months Ended March 31 |
| 2022 | | 2021 |
Risk-free interest rate | 1.97 | % | | 1.44 | % |
Volatility factor | 29.00 | % | | 30.00 | % |
Quarterly dividend yield | 0.282 | % | | 0.360 | % |
Weighted-average expected life (years) | 5.10 | | 5.50 |
The following weighted-average fair values per option or share were determined for the three months ended March 31, 2022 and 2021:
| | | | | | | | | | | |
| Three Months Ended March 31 |
| 2022 | | 2021 |
Options granted during the period | $ | 116.64 | | | $ | 79.03 | |
Restricted stock awards granted during the period | 451.42 | | | 311.32 | |
13. Accumulated Other Comprehensive Loss
A reconciliation of the components of accumulated other comprehensive loss at March 31, 2022 and 2021 is as follows:
| | | | | | | | | | | | | |
| March 31 | | |
| 2022 | | 2021 | | |
Net unrealized investment (losses) gains: | | | | | |
Beginning of period balance | $ | 494 | | | $ | 949 | | | |
Other comprehensive loss before reclassifications, net of tax benefit of $355 and $108, respectively | (1,146) | | | (333) | | | |
Amounts reclassified from accumulated other comprehensive loss, net of tax (expense) benefit of $(21) and $8, respectively | 77 | | | (29) | | | |
Other comprehensive loss | (1,069) | | | (362) | | | |
Other comprehensive loss attributable to noncontrolling interests, net of tax benefit of $(2) and $(1), respectively | 5 | | | 2 | | | |
End of period balance | (570) | | | 589 | | | |
| | | | | |
Non-credit components of impairments on investments: | | | | | |
Beginning of period balance | — | | | (2) | | | |
Other comprehensive (loss) income, net of tax benefit (expense) of $1 and $(1), respectively | (1) | | | 1 | | | |
End of period balance | (1) | | | (1) | | | |
| | | | | |
Net cash flow hedges: | | | | | |
Beginning of period balance | (239) | | | (250) | | | |
Other comprehensive income, net of tax expense of $(1) and $(1), respectively | 3 | | | 4 | | | |
End of period balance | (236) | | | (246) | | | |
| | | | | |
Pension and other postretirement benefits: | | | | | |
Beginning of period balance | (429) | | | (552) | | | |
Other comprehensive income, net of tax expense of $(2) and $(4), respectively | 7 | | | 10 | | | |
End of period balance | (422) | | | (542) | | | |
| | | | | |
Foreign currency translation adjustments: | | | | | |
Beginning of period balance | (4) | | | 5 | | | |
Other comprehensive loss, net of tax benefit of $1 and $0 | (3) | | | — | | | |
End of period balance | (7) | | | 5 | | | |
| | | | | |
Total: | | | | | |
Total beginning of period accumulated other comprehensive (loss) income | (178) | | | 150 | | | |
Total other comprehensive loss, net of tax benefit of $333 and $110, respectively | (1,063) | | | (347) | | | |
Total other comprehensive loss attributable to noncontrolling interests, net of tax benefit of $(2) and $(1), respectively | 5 | | | 2 | | | |
Total end of period accumulated other comprehensive loss | $ | (1,236) | | | $ | (195) | | | |
14. Earnings per Share
The denominator for basic and diluted earnings per share for the three months ended March 31, 2022 and 2021 is as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31 | | |
| 2022 | | 2021 | | | | |
Denominator for basic earnings per share – weighted-average shares | 241.4 | | | 245.0 | | | | | |
Effect of dilutive securities – employee stock options, nonvested restricted stock awards and convertible debentures | 3.0 | | | 3.2 | | | | | |
Denominator for diluted earnings per share | 244.4 | | | 248.2 | | | | | |
During the three months ended March 31, 2022 and 2021, weighted-average shares related to certain stock options of 0.2 and 0.4, respectively, were excluded from the denominator for diluted earnings per share because the stock options were anti-dilutive.
During the three months ended March 31, 2022, we issued approximately 0.5 restricted stock units under our stock incentive plans, 0.2 of which vesting is contingent upon us meeting specified annual earnings targets for the three year period of 2022 through 2024. During the three months ended March 31, 2021, we issued approximately 0.9 restricted stock units under our stock incentive plans, 0.3 of which vesting is contingent upon us meeting specified annual earnings targets for the three year period of 2021 through 2023. The contingent restricted stock units have been excluded from the denominators for diluted earnings per share and will be included only if and when the contingency is met.
15. Segment Information
The results of our operations are described through four reportable segments: Commercial & Specialty Business, Government Business, IngenioRx and Other.
Our Commercial & Specialty Business segment offers plans and services to our Individual, Group risk-based, Group fee-based and BlueCard® members. The Commercial & Specialty Business segment offers health products on a full-risk basis; provides a broad array of administrative managed care services to our fee-based customers; and provides a variety of specialty and other insurance products and services such as dental, vision, life, disability and supplemental health insurance benefits.
Our Government Business segment includes our Medicare and Medicaid businesses, National Government Services, and services provided to the federal government in connection with the FEHB program.
Our IngenioRx segment includes our PBM business. IngenioRx markets and offers PBM services to our affiliated health plan customers, as well as to external customers outside of the health plans we own. IngenioRx has a comprehensive PBM services portfolio, which includes services such as formulary management, pharmacy networks, prescription drug database, member services and mail order capabilities.
Our Other segment includes our Diversified Business Group, which is our health services business focused on lowering the cost and improving the quality of healthcare by enabling and creating new care delivery and payment models, with a special emphasis on serving those with complex and chronic conditions. This segment also includes certain eliminations and corporate expenses not allocated to our other reportable segments.
We define operating revenues to include premium income, product revenue and administrative fees and other revenues. Operating revenues are derived from premium and fees received, primarily from the sale and administration of health benefits and pharmacy products and services. Operating gain is calculated as total operating revenue less benefit expense, cost of products sold and selling, general and administrative expense.
Affiliated revenues represent revenues or cost for services provided to our subsidiaries by IngenioRx and our Diversified Business Group, as well as certain back-office services provided by our international businesses, and are recorded at cost or management’s estimate of fair market value. These affiliated revenues are eliminated in consolidation.
Financial data by reportable segment for the three months ended March 31, 2022 and 2021 is as follows:
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| Commercial & Specialty Business | | Government Business | | IngenioRx | | Other | | Eliminations | | Total |
Three Months Ended March 31, 2022 | | | | | | | | | | | |
Operating revenue - unaffiliated | $ | 10,269 | | | $ | 23,758 | | | $ | 3,301 | | | $ | 558 | | | $ | — | | | $ | 37,886 | |
Operating revenue - affiliated | — | | | — | | | 3,382 | | | 2,663 | | | (6,045) | | | — | |
Operating gain | 1,082 | | | 789 | | | 398 | | | 178 | | | — | | | 2,447 | |
Three Months Ended March 31, 2021 | | | | | | | | | | | |
Operating revenue - unaffiliated | $ | 9,491 | | | $ | 19,283 | | | $ | 2,738 | | | $ | 586 | | | $ | — | | | $ | 32,098 | |
Operating revenue - affiliated | — | | | — | | | 3,124 | | | 1,784 | | | (4,908) | | | — | |
Operating gain | 1,268 | | | 478 | | | 407 | | | 8 | | | — | | | 2,161 | |
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The major product revenues for each of the reportable segments for the three months ended March 31, 2022 and 2021 are as follows:
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| Three Months Ended March 31 | | |
| 2022 | | 2021 | | | | |
Commercial & Specialty Business | | | | | | | |
Managed care products | $ | 8,401 | | | $ | 7,689 | | | | | |
Managed care services | 1,476 | | | 1,386 | | | | | |
Dental/Vision products and services | 356 | | | 336 | | | | | |
Other | 36 | | | 80 | | | | | |
Total Commercial & Specialty Business | 10,269 | | | 9,491 | | | | | |
Government Business | | | | | | | |
Managed care products | 23,635 | | | 19,182 | | | | | |
Managed care services | 123 | | | 101 | | | | | |
Total Government Business | 23,758 | | | 19,283 | | | | | |
IngenioRx | | | | | | | |
Pharmacy products and services | 6,683 | | | 5,862 | | | | | |
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Other | | | | | | | |
Integrated health services | 2,947 | | | 2,249 | | | | | |
Other | 274 | | | 121 | | | | | |
Total Other Business | 3,221 | | | 2,370 | | | | | |
Eliminations | | | | | | | |
Eliminations | (6,045) | | | (4,908) | | | | | |
Total product revenues | $ | 37,886 | | | $ | 32,098 | | | | | |
The classification between managed care products and managed care services in the above table primarily distinguishes between the levels of risk assumed. Managed care products represent insurance products where we bear the insurance risk, whereas managed care services represent product offerings where we provide claims adjudication and other administrative services to the customer, but the customer principally bears the insurance risk.
A reconciliation of reportable segments’ operating revenue to the amounts of total revenues included in our consolidated statements of income for the three months ended March 31, 2022 and 2021 is as follows:
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| Three Months Ended March 31 | | |
| 2022 | | 2021 | | | | |
Reportable segments’ operating revenue | $ | 37,886 | | | $ | 32,098 | | | | | |
Net investment income | 360 | | | 291 | | | | | |
Net losses on financial instruments | (151) | | | (4) | | | | | |
Total revenues | $ | 38,095 | | | $ | 32,385 | | | | | |
A reconciliation of income before income tax expense to reportable segments’ operating gain included in our consolidated statements of income for the three months ended March 31, 2022 and 2021 is as follows:
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| Three Months Ended March 31 | | |
| 2022 | | 2021 | | | | |
Income before income tax expense | $ | 2,326 | | | $ | 2,176 | | | | | |
Net investment income | (360) | | | (291) | | | | | |
Net losses on financial instruments | 151 | | | 4 | | | | | |
Interest expense | 201 | | | 192 | | | | | |
Amortization of other intangible assets | 129 | | | 80 | | | | | |
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Reportable segments’ operating gain | $ | 2,447 | | | $ | 2,161 | | | | | |
16. Leases
We lease office space and certain computer and related equipment using noncancellable operating leases. Our leases have remaining lease terms of 1 year to 12 years.
The information related to our leases is as follows:
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| Balance Sheet Location | | March 31, 2022 | | December 31, 2021 |
Operating Leases | | | | | |
Right-of-use assets | Other noncurrent assets | | $ | 599 | | | $ | 628 | |
Lease liabilities, current | Other current liabilities | | 128 | | | 133 | |
Lease liabilities, noncurrent | Other noncurrent liabilities | | 807 | | | 864 | |
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| | Three Months Ended March 31 | | |
| | 2022 | | 2021 | | | | |
Lease Expense | | | | | | | |
Operating lease expense | $ | 28 | | | $ | 29 | | | | | |
Short-term lease expense | 12 | | | 12 | | | | | |
Sublease income | (1) | | | (1) | | | | | |
Total lease expense | $ | 39 | | | $ | 40 | | | | | |
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Other information | | | | | | | |
Operating cash paid for amounts included in the measurement of lease liabilities, operating leases | $ | 53 | | | $ | 52 | | | | | |
Right-of-use assets obtained in exchange for new lease liabilities, operating leases | $ | — | | | $ | 14 | | | | | |
As of March 31, 2022 and December 31, 2021, the weighted average remaining lease term of our operating leases was 7 years for each period. The lease liabilities reflect a weighted average discount rate of 2.68% at March 31, 2022 and 2.69% at December 31, 2021.
Future lease payments for noncancellable operating leases with initial or remaining terms of one year or more are as follows:
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2022 (excluding the three months ended March 31, 2022) | $ | 157 | |
2023 | 194 | |
2024 | 165 | |
2025 | 127 | |
2026 | 90 | |
Thereafter | 307 | |
Total future minimum payments | 1,040 | |
Less imputed interest | (105) | |
Total lease liabilities | $ | 935 | |
As of March 31, 2022, we have additional operating leases for building spaces that have not yet commenced, and some building spaces are being constructed by the lessors and their agents. These leases have terms of up to 10 years and are expected to commence on various dates during 2022 when the construction is complete and we take possession of the buildings. The undiscounted lease payments for these leases, which are not included in the tables above, aggregate to $41.