UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2019March 31, 2020
OR
☐
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission file number: 001-16751
ANTHEM, INC.
(Exact name of registrant as specified in its charter)
Indiana
 
35-2145715
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
220 Virginia Avenue
Indianapolis, Indiana 46204
(Address of principal executive offices) (Zip Code)
Registrant’sRegistrant’s telephone number, including area code: (800) 331-1476
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.01 par value
 
ANTM
 
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒ ☒ No ☐ ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒  ☒    No ☐ ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large“large accelerated filer”filer”, “accelerated filer”“accelerated filer”, “smaller“smaller reporting company”company”, and “emerging“emerging growth company”company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
☒☒

 
  
Accelerated filer
☐
☐
Non-accelerated filer
☐☐

 
  
Smaller reporting company
☐
☐
Emerging growth company
☐
☐
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐ ☐    No ☒ ☒
As of October 16, 2019, 253,563,697April 22, 2020, 252,116,097 shares of the Registrant’sRegistrant’s Common Stock were outstanding.


Anthem, Inc.
Quarterly Report on Form 10-Q
For the Period Ended September 30, 2019March 31, 2020
Table of Contents
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
PART II. OTHER INFORMATION
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.

-1-


PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Anthem, Inc.
Consolidated Balance Sheets
September 30,
2019		 December 31,
2018
March 31,
2020
 
December 31,
2019
(In millions, except share data)(Unaudited)  
(Unaudited)
 
 
Assets   
 
 
 
Current assets:   
 
 
 
Cash and cash equivalents$4,190
 $3,934
$
5,345

 
$
4,937

Fixed maturity securities, current (amortized cost of $19,267 and $16,894)19,960
 16,692
Equity securities, current2,300
 1,493
Other invested assets, current10
 21
Accrued investment income168
 162
Fixed maturity securities (amortized cost of $20,211 and $19,021; allowance for credit losses of $51 and $0)
19,881

 
19,676

Equity securities
570

 
1,009

Premium receivables4,782
 4,465
5,786

 
5,014

Self-funded receivables2,555
 2,278
2,613

 
2,570

Other receivables2,870
 2,558
2,926

 
2,807

Income taxes receivable91
 10
Securities lending collateral465
 604
Other current assets2,113
 2,104
4,135

 
3,020

Total current assets39,504
 34,321
41,256

 
39,033

Long-term investments:   
 
 
 
Fixed maturity securities (amortized cost of $500 and $486)518
 487
Equity securities29
 33
Fixed maturity securities (amortized cost of $489 and $487;
allowance for credit losses of $0 and $0)
505

 
505

Other invested assets3,914
 3,726
4,181

 
4,258

Property and equipment, net2,921
 2,735
3,350

 
3,133

Goodwill20,500
 20,504
21,661

 
20,500

Other intangible assets8,756
 9,007
9,613

 
8,674

Other noncurrent assets1,667
 758
1,833

 
1,350

Total assets$77,809
 $71,571
$
82,399

 
$
77,453

   
 
 
 
Liabilities and shareholders’ equity   
Liabilities and shareholders’ equity
 
 
 
Liabilities   
 
 
 
Current liabilities:   
 
 
 
Policy liabilities:   
Medical claims payable$8,977
 $7,454
$
9,902

 
$
8,842

Reserves for future policy benefits77
 75
Other policyholder liabilities2,503
 2,590
3,252

 
3,050

Total policy liabilities11,557
 10,119
Unearned income948
 902
947

 
1,017

Accounts payable and accrued expenses4,445
 4,959
5,058

 
4,198

Security trades pending payable542
 197
Securities lending payable465
 604
Short-term borrowings710
 1,145
1,075

 
700

Current portion of long-term debt700
 849
1,603

 
1,598

Other current liabilities3,867
 3,190
5,202

 
4,127

Total current liabilities23,234
 21,965
27,039

 
23,532

Long-term debt, less current portion18,820
 17,217
19,005

 
17,787

Reserves for future policy benefits, noncurrent661
 706
Reserves for future policy benefits
754

 
759

Deferred tax liabilities, net2,140
 1,960
2,213

 
2,227

Other noncurrent liabilities1,622
 1,182
1,695

 
1,420

Total liabilities46,477
 43,030
50,706

 
45,725

Commitment and contingencies – Note 11


 


Shareholders’ equity   
Preferred stock, without par value, shares authorized – 100,000,000; shares issued and outstanding – none—
 —
Common stock, par value $0.01, shares authorized – 900,000,000; shares issued and outstanding –
253,780,229 and 257,395,577
3
 3
Commitment and contingencies – Note 11


 


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

 
—

Common stock, par value $0.01, shares authorized – 900,000,000; shares issued and outstanding –
252,020,028 and 252,922,161
3

 
3

Additional paid-in capital9,524
 9,536
9,338

 
9,448

Retained earnings22,104
 19,988
23,360

 
22,573

Accumulated other comprehensive loss(299) (986)
(1,008
)
 
(296
)
Total shareholders’ equity31,332
 28,541
Total liabilities and shareholders’ equity$77,809
 $71,571
Total shareholders’ equity
31,693

 
31,728

Total liabilities and shareholders’ equity
$
82,399

 
$
77,453








See accompanying notes.

See accompanying notes.
-2-


Anthem, Inc.
Consolidated Statements of Income
(Unaudited) 
Three Months Ended 
 September 30		 Nine Months Ended 
 September 30
 
Three Months Ended 
 March 31
(In millions, except per share data)2019 2018 2019 2018
 
2020
 
2019
Revenues       
 
 
 
 
Premiums$23,793
 $21,451
 $70,137
 $63,602
 
$
25,517

 
$
22,843

Product revenue
 
2,344

 
—

Administrative fees and other revenue2,651
 1,529
 5,872
 4,435
 
1,587

 
1,545

Total operating revenue26,444
 22,980
 76,009
 68,037
 
29,448

 
24,388

Net investment income242
 250
 737
 708
 
254

 
210

Net realized gains on financial instruments1
 27
 90
 5
Other-than-temporary impairment losses on investments:       
Total other-than-temporary impairment losses on investments(14) (8) (36) (20)
Portion of other-than-temporary impairment losses recognized in other comprehensive income1
 2
 6
 2
Other-than-temporary impairment losses recognized in income(13) (6) (30) (18)
Net realized (losses) gains on financial instruments
 
(24
)
 
78

Impairment losses on investments:
 
 
 
 
Total impairment losses on investments
 
(101
)
 
(13
)
Portion of impairment losses recognized in other comprehensive income
 
44

 
3

Impairment losses recognized in income
 
(57
)
 
(10
)
Total revenues26,674
 23,251
 76,806
 68,732
 
29,621

 
24,666

Expenses       
 
 
 
 
Benefit expense20,753
 18,185
 60,403
 52,959
 
21,489

 
19,282

Cost of products sold745
 —
 843
 —
 
1,984

 
—

Selling, general and administrative expense3,418
 3,546
 9,862
 10,402
 
3,781

 
3,166

Interest expense185
 188
 556
 564
 
194

 
187

Amortization of other intangible assets84
 91
 256
 265
 
83

 
87

(Gain) loss on extinguishment of debt—
 (1) (1) 17
Loss (gain) on extinguishment of debt
 
1

 
(1
)
Total expenses25,185
 22,009
 71,919
 64,207
 
27,532

 
22,721

Income before income tax expense1,489
 1,242
 4,887
 4,525
 
2,089

 
1,945

Income tax expense306
 282
 1,014
 1,200
 
566

 
394

Net income$1,183
 $960
 $3,873
 $3,325
 
$
1,523

 
$
1,551

Net income per share       
 
 
 
 
Basic$4.64
 $3.70
 $15.11
 $12.89
 
$
6.03

 
$
6.03

Diluted$4.55
 $3.62
 $14.83
 $12.58
 
$
5.94

 
$
5.91

Dividends per share$0.80
 $0.75
 $2.40
 $2.25
 
$
0.95

 
$
0.80














See accompanying notes.


-3-








See accompanying notes.


Anthem, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited) 
 Three Months Ended 
 September 30		 Nine Months Ended 
 September 30
 
Three Months Ended 
 March 31
(In millions) 2019 2018 2019 2018
 
2020
 
2019
Net income $1,183
 $960
 $3,873
 $3,325
 
$
1,523

 
$
1,551

Other comprehensive income (loss), net of tax:        
Change in net unrealized gains/losses on investments 116
 (36) 711
 (353)
Change in non-credit component of other-than-temporary impairment losses on investments (1) (2) (2) (2)
Change in net unrealized losses on cash flow hedges (34) 2
 (31) 34
Other comprehensive (loss) income, net of tax:
 
 
 
 
Change in net unrealized losses/gains on investments
 
(689
)
 
357

Change in non-credit component of impairment losses on investments
 
(32
)
 
—

Change in net unrealized gains/losses on cash flow hedges
 
3

 
3

Change in net periodic pension and postretirement costs 4
 7
 10
 22
 
7

 
3

Foreign currency translation adjustments (1) —
 (1) —
 
(1
)
 
—

Other comprehensive income (loss) 84
 (29) 687
 (299)
Other comprehensive (loss) income
 
(712
)
 
363

Total comprehensive income $1,267
 $931
 $4,560
 $3,026
 
$
811

 
$
1,914



































See accompanying notes.


-4-































See accompanying notes.

Anthem, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended 
 September 30
Three Months Ended 
 March 31
(In millions)2019 2018
2020
 
2019
Operating activities   
 
 
 
Net income$3,873
 $3,325
$
1,523

 
$
1,551

Adjustments to reconcile net income to net cash provided by operating activities:   
 
 
 
Net realized gains on financial instruments(90) (5)
Other-than-temporary impairment losses recognized in income30
 18
(Gain) Loss on extinguishment of debt(1) 17
Loss on disposal of assets1
 2
Net realized losses (gains) on financial instruments
24

 
(78
)
Depreciation and amortization
270

 
289

Deferred income taxes(29) 141
57

 
55

Amortization, net of accretion778
 752
Depreciation expense109
 92
Share-based compensation226
 135
67

 
70

Changes in operating assets and liabilities:   
 
 
 
Receivables, net(880) (823)
(639
)
 
(753
)
Other invested assets(30) (17)
63

 
(21
)
Other assets(280) (734)
(525
)
 
(125
)
Policy liabilities1,394
 (556)
692

 
791

Unearned income46
 (42)
(109
)
 
96

Accounts payable and accrued expenses(931) 756
Other liabilities675
 190
Accounts payable and other liabilities
588

 
(354
)
Income taxes(81) 273
491

 
115

Other, net(76) (160)
13

 
(6
)
Net cash provided by operating activities4,734
 3,364
2,515

 
1,630

Investing activities   
 
 
 
Purchases of fixed maturity securities(7,616) (6,790)
Proceeds from fixed maturity securities:   
Sales3,919
 4,971
Maturities, calls and redemptions1,583
 1,442
Purchases of equity securities(9,408) (812)
Proceeds from sales of equity securities8,671
 2,119
Purchases of other invested assets(286) (324)
Proceeds from sales of other invested assets242
 251
Changes in securities lending collateral139
 (286)
Purchases of investments
(3,896
)
 
(6,069
)
Proceeds from sale of investments
2,728

 
5,236

Maturities, calls and redemptions from investments
597

 
393

Purchases of subsidiaries, net of cash acquired—
 (1,732)
(1,908
)
 
—

Purchases of property and equipment(726) (888)
(204
)
 
(234
)
Other, net(33) 17
(101
)
 
22

Net cash used in investing activities(3,515) (2,032)
(2,784
)
 
(652
)
Financing activities   
 
 
 
Net repayments of commercial paper borrowings(197) (54)
Net proceeds from commercial paper borrowings
905

 
178

Proceeds from long-term borrowings2,473
 835
300

 
2

Repayments of long-term borrowings(923) (1,393)
(52
)
 
(63
)
Proceeds from short-term borrowings6,480
 5,300
1,075

 
2,710

Repayments of short-term borrowings(6,915) (5,305)
(700
)
 
(2,760
)
Changes in securities lending payable(139) 287
Changes in bank overdrafts250
 97
Proceeds from issuance of common stock under Equity Units stock purchase contracts—
 1,250
Repurchase and retirement of common stock(1,396) (1,192)
(529
)
 
(294
)
Change in collateral and settlements of debt-related derivatives(34) 22
Cash dividends(616) (583)
(240
)
 
(206
)
Proceeds from issuance of common stock under employee stock plans137
 133
44

 
76

Taxes paid through withholding of common stock under employee stock plans(82) (77)
(107
)
 
(78
)
Net cash used in financing activities(962) (680)
Other, net
(17
)
 
6

Net cash provided by (used in) financing activities
679

 
(429
)
Effect of foreign exchange rates on cash and cash equivalents(1) (1)
(2
)
 
(1
)
Change in cash and cash equivalents256
 651
408

 
548

Cash and cash equivalents at beginning of period3,934
 3,609
4,937

 
3,934

Cash and cash equivalents at end of period$4,190
 $4,260
$
5,345

 
$
4,482















See accompanying notes.


-5-
See accompanying notes.

Anthem, Inc.
Consolidated Statements of Shareholders’Shareholders’ Equity
(Unaudited)
Nine Months Ended September 30, 2019
Common Stock 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Total
Shareholders’
Equity
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
(In millions)
Number of
Shares
 
Par
Value
 
Number of
Shares
 
Par
Value
 
December 31, 2019 (audited)
252.9

 
$
3

 
$
9,448

 
$
22,573

 
$
(296
)
 
$
31,728

Adoption of Accounting Standards Update No. 2016-13 (Note 2)
—

 
—

 
—

 
(35
)
 
—

 
(35
)
January 1, 2020
252.9

 
3

 
9,448

 
22,538

 
(296
)
 
31,693

Net income
—

 
—

 
—

 
1,523

 
—

 
1,523

Other comprehensive loss
—

 
—

 
—

 
—

 
(712
)
 
(712
)
Repurchase and retirement of common stock
(1.9
)
 
—

 
(71
)
 
(458
)
 
—

 
(529
)
Dividends and dividend equivalents
—

 
—

 
—

 
(243
)
 
—

 
(243
)
Issuance of common stock under employee stock plans, net of related tax benefits
1.0

 
—

 
3

 
—

 
—

 
3

Convertible debenture repurchases and conversions
—

 
—

 
(42
)
 
—

 
—

 
(42
)
March 31, 2020
252.0

 
$
3

 
$
9,338

 
$
23,360

 
(1,008
)
 
$
31,693

 
 
 
 
 
 
 
 
 
 
 
December 31, 2018 (audited)257.4
 $3
 $9,536
 $19,988
 $(986) $28,541
257.4

 
$
3

 
$
9,536

 
$
19,988

 
$
(986
)
 
$
28,541

Adoption of Accounting Standards Update No. 2016-02 (Note 2)—
 —
 —
 26
 —
 26
—

 
—

 
—

 
26

 
—

 
26

January 1, 2019257.4
 3
 9,536
 20,014
 (986) 28,567
257.4

 
3

 
9,536

 
20,014

 
(986
)
 
28,567

Net income—
 —
 —
 1,551
 —
 1,551
—

 
—

 
—

 
1,551

 
—

 
1,551

Other comprehensive income—
 —
 —
 —
 363
 363
—

 
—

 
—

 
—

 
363

 
363

Repurchase and retirement of common stock(1.1) —
 (71) (223) —
 (294)
(1.1
)
 
—

 
(71
)
 
(223
)
 
—

 
(294
)
Dividends and dividend equivalents—
 —
 —
 (206) —
 (206)
—

 
—

 
—

 
(206
)
 
—

 
(206
)
Issuance of common stock under employee stock plans, net of related tax benefits1.1
 —
 69
 —
 —
 69
1.1

 
—

 
69

 
—

 
—

 
69

Convertible debenture repurchases and conversions—
 —
 (52) —
 —
 (52)
—

 
—

 
(52
)
 
—

 
—

 
(52
)
March 31, 2019257.4
 3
 9,482
 21,136
 (623) 29,998
257.4

 
$
3

 
$
9,482

 
$
21,136

 
$
(623
)
 
$
29,998

Net income—
 —
 —
 1,139
 —
 1,139
Other comprehensive income—
 —
 —
 —
 240
 240
Repurchase and retirement of common stock(1.7) —
 (70) (388) —
 (458)
Dividends and dividend equivalents—
 —
 —
 (208) —
 (208)
Issuance of common stock under employee stock plans, net of related tax benefits0.2
 —
 91
 —
 —
 91
Convertible debenture repurchases and conversions—
 —
 (9) —
 —
 (9)
June 30, 2019255.9
 3
 9,494
 21,679
 (383) 30,793
Net income—
 —
 —
 1,183
 —
 1,183
Other comprehensive income—
 —
 —
 —
 84
 84
Repurchase and retirement of common stock(2.4) —
 (90) (554) —
 (644)
Dividends and dividend equivalents—
 —
 —
 (204) —
 (204)
Issuance of common stock under employee stock plans, net of related tax benefits0.3
 —
 120
 —
 —
 120
September 30, 2019253.8
 $3
 $9,524
 $22,104
 $(299) $31,332

See accompanying notes.

Anthem, Inc.
Consolidated Statements of Shareholders’ Equity (continued)
(Unaudited)
 Nine Months Ended September 30, 2018
 Common Stock 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Total
Shareholders’
Equity
(In millions)
Number of
Shares
 
Par
Value
 
December 31, 2017 (audited)256.1
 $3
 $8,547
 $18,054
 $(101) $26,503
Adoption of Accounting Standards Update No. 2016-01 (Note 2)—
 —
 —
 320
 (320) —
January 1, 2018256.1
 3
 8,547
 18,374
 (421) 26,503
Net income—
 —
 —
 1,312
 —
 1,312
Other comprehensive loss—
 —
 —
 —
 (209) (209)
Repurchase and retirement of common stock(1.7) —
 (56) (338) —
 (394)
Dividends and dividend equivalents—
 —
 —
 (198) —
 (198)
Issuance of common stock under employee stock plans, net of related tax benefits1.1
 —
 28
 —
 —
 28
Convertible debenture repurchases and conversions—
 —
 (30) —
 —
 (30)
Adoption of Accounting Standards Update No. 2018-02 (Note 2)—
 —
 —
 91
 (91) —
March 31, 2018255.5
 3
 8,489
 19,241
 (721) 27,012
Net income—
 —
 —
 1,053
 —
 1,053
Other comprehensive loss—
 —
 —
 —
 (61) (61)
Issuance of common stock under Equity Units stock purchase contracts6.0
 —
 1,250
 —
 —
 1,250
Repurchase and retirement of common stock(1.7) —
 (60) (341) —
 (401)
Dividends and dividend equivalents—
 —
 —
 (197) —
 (197)
Issuance of common stock under employee stock plans, net of related tax benefits0.3
 —
 69
 —
 —
 69
June 30, 2018260.1
 3
 9,748
 19,756
 (782) 28,725
Net income—
 —
 —
 960
 —
 960
Other comprehensive loss—
 —
 —
 —
 (29) (29)
Repurchase and retirement of common stock(1.6) —
 (58) (339) —
 (397)
Dividends and dividend equivalents—
 —
 —
 (195) —
 (195)
Issuance of common stock under employee stock plans, net of related tax benefits0.4
 —
 95
 —
 —
 95
Convertible debenture repurchases and conversions—
 —
 (65) —
 —
 (65)
September 30, 2018258.9
 $3
 $9,720
 $20,182
 $(811) $29,094
 
 
 
 
 
 
 
 
 
 
 
 








See accompanying notes.

See accompanying notes.
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Anthem, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2019(Unaudited)
March 31, 2020
(In Millions, Except Per Share Data or As Otherwise Stated Herein)
 
1.
Organization
References to the terms “we,” “our,” “us”“we,” “our,” “us” or “Anthem”“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”“states” include the District of Columbia, unless the context otherwise requires.
We are one of the largest health benefits companies in the United States in terms of medical membership, serving approximately 4142 million medical members through our affiliated health plans as of September 30, 2019March 31, 2020. We offer a broad spectrum of network-based managed care plans to Large Group, Small Group, Individual, Medicaid and Medicare markets. Our managed care plans include: Preferred Provider Organizations, or PPOs; Health Maintenance Organizations, or HMOs; Point-of-Service plans; traditional indemnity plans and other hybrid plans, including Consumer-Driven Health Plans,Plans; and hospital only and limited benefit products. In addition, we provide a broad array of managed care services to self-funded customers, including claims processing, stop loss insurance, actuarial services, provider network access, medical cost management, disease management, wellness programs and other administrative services. We provide an array of specialty and other insurance products and services such as pharmacy benefits management, or PBM, dental, vision, life and disability insurance benefits, radiology benefit management and analytics-driven personal health care.healthcare. We also provide services to the federal government in connection with our Federal Health Products && Services business.business, which administers the Federal Employees Health Benefits, or FEHB, Program.
We are an independent licensee of the Blue Cross and Blue Shield Association, or BCBSA, an association of independent health benefit plans. We serve our members as the Blue Cross licensee for California and as the Blue Cross and Blue Shield, or BCBS, licensee for Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri (excluding 30 counties in the Kansas City area), Nevada, New Hampshire, New York (in the New York City metropolitan area and upstate New York), Ohio, Virginia (excluding the Northern Virginia suburbs of Washington, D.C.) and Wisconsin. In a majority of these service areas, we do business as Anthem Blue Cross, Anthem Blue Cross and Blue Shield, and Empire Blue Cross Blue Shield or Empire Blue Cross. We also conduct business through arrangements with other BCBS licensees.licensees as well as other strategic partners. Through our subsidiaries, we also serve customers in numerous states across the country as America’s 1st Choice,AIM Specialty Health, Amerigroup, Aspire Health, Beacon Health, CareMore, Freedom Health, HealthLink, HealthSun, Optimum HealthCare, Simply Healthcare, and/or Unicare. Also, beginning in the second quarter of 2019, we provide pharmacy benefits managementbegan providing PBM services through our IngenioRx subsidiary. We are licensed to conduct insurance operations in all 50 states and the District of Columbia through our subsidiaries.
2.
Basis of Presentation and Significant Accounting Policies
Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. We have omitted certain footnote disclosures that would substantially duplicate the disclosures in our 20182019 Annual Report on Form 10-K, unless the information contained in those disclosures materially changed or is required by GAAP. Certain prior year amounts have been reclassified to conform to the current year presentation or adjusted to conform to the current year rounding convention of reporting financial data in whole millions of dollars, except as otherwise noted.presentation. For additional information on prior year reclassifications, see Note 15, “Segment“Segment Information.”” In the opinion of management, all adjustments, including normal recurring adjustments, necessary for a fair statement of the consolidated financial statements as of and for the three and nine months ended September 30, 2019March 31, 2020 and 20182019 have been recorded. The results of operations for the three and nine months ended September 30, 2019March 31, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 20192020, 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, 20182019 included in our 20182019 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, or USD. We translate the assets and liabilities of those subsidiaries to USD using the exchange rate in effect at the end of the


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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“Foreign currency translation adjustments”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 $242$221 and $222$215 at September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively, and are included in the cash and cash equivalents line on our consolidated balance sheets.
Leases:Investments: We lease office spacePrior to 2020, our fixed maturities were evaluated for other-than-temporary impairment where credit related impairments were presented within the other-than-temporary impairment losses recognized in our consolidated statements of income with an adjustment to the security’s amortized cost basis. Effective January 1, 2020, if a fixed maturity security is in an unrealized loss position and certain computer and related equipment under noncancelable operating leases. We determine whether an arrangement iswe have the intent to sell the fixed maturity security, or contains a lease at its inception. We recognize lease liabilities based on the present value of the minimum lease payments not yet paid by using the lease term, any amounts probable of being owed under any residual value guarantees and discount rate determined at lease commencement. As our leases do not generally provide an implicit rate, we use our incremental secured borrowing rate commensurate with the underlying lease terms to determine the present value of our lease payments. Our leases may include options to extend or terminate a lease when it is reasonably certainmore likely than not that we will exercise that option. We recognizehave to sell the operating right-of-use, or ROU, assets atfixed 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 amount equal to the lease liability adjusted for prepaid or accrued rent, the remaining balance of any lease incentives and unamortized initial direct costs.
The operating lease liabilities are reportedimpairment loss in other current liabilities and other noncurrent liabilities and the related ROU assets are reported in other noncurrent assets on our consolidated balance sheet as of September 30, 2019. Lease expense for our operating leases is calculated on a straight-line basis over the lease term and is reported in selling, general and administrative expense on 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 office space leases,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 accountexpect 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.
In accordance with the Financial Accounting Standards Board, or FASB guidance, the changes in fair value of our marketable equity securities are recognized in our results of operations within net realized gains and losses on financial instruments.
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 enables us to influence the operating or financial decisions of the investee company. Our proportionate share of equity in net income of these unconsolidated affiliates is reported within net investment income. 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.

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We participate in securities lending programs whereby marketable securities in our investment portfolio are transferred to independent brokers or dealers in exchange for cash and securities collateral. Under FASB guidance related to accounting for transfers and servicing of financial assets and extinguishments of liabilities, we recognize the collateral as an asset, which is reported under the caption “Other current assets” in our consolidated balance sheets, and we record a corresponding liability for the lease and non-lease components (such as common area maintenance)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 single lease component. We also do not recognize a lease liability or ROU asset for our office space leases whose lease terms, at commencement, are twelve months or lessseparate component of shareholders’ equity. The market value of loaned securities and that do not include a purchase optionof the collateral pledged can fluctuate in non-synchronized fashions. To the extent the loaned securities’ value appreciates faster or option to extend thatdepreciates slower than the value of the collateral pledged, we are reasonably certainexposed to exercise.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: 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 $234 and $237 at March 31, 2020 and December 31, 2019, 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 $55 and $46 at March 31, 2020 and 2019, respectively. The allowance for doubtful accounts is based on historical collection trends, future forecasts and our judgment regarding the ability to collect specific accounts.
Other receivables include pharmacy rebates, provider advances, claims recoveries, reinsurance receivables, proceeds due from brokers on investment trades, other government receivables and other miscellaneous amounts due to us. These receivables are reported net of an allowance for doubtful accounts of $282 and $242 at March 31, 2020 and December 31, 2019, respectively, which is based on historical collection trends, future forecasts and our judgment regarding the ability to collect specific accounts.
Revenue Recognition: Premiums for fully-insured contracts are recognized as revenue over the period insurance coverage is provided, and, if applicable, net of amounts recognized for the minimum medical loss ratio rebates or contractual or government-mandated premium stabilization programs. Administrative fees and other revenues include revenue from certain group contracts that provide for the group to be at risk for all, or with supplemental insurance arrangements, a portion of their claims experience. We charge these self-funded groups an administrative fee, which is based on the number of members in a group or the group’s claim experience. Under our self-funded arrangements, revenue is recognized as administrative services are performed, and benefit payments under these programs are excluded from benefit expense. Beginning in the second quarter of 2019, administrative fees and other revenues also include unaffiliated revenue from services performed by IngenioRx. For additional information about our revenues, see Note 2, “Basis of Presentation and Significant Accounting Policies” and Note 19, “Segment Information,” to our audited consolidated financial statements as of and for the year ended December 31, 2018 included in our 2018 Annual Report on Form 10-K. In addition, see Note 15, “Segment Information,” herein for the disaggregation of revenues by segments and products.
For our non-fully-insured contracts, we had no material contract assets, contract liabilities or deferred contract costs recorded on our consolidated balance sheet at September 30, 2019.March 31, 2020. For the three and nine months ended September 30, 2019,March 31, 2020, 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 MarchNovember 2019, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2019-01, Leases (Topic 842): Codification Improvements. In July 2018, the FASB issued Accounting Standards Update No. 2018-11, Leases (Topic 842): Targeted Improvements and Accounting Standards Update No. 2018-10,2019-11, Codification Improvements to Topic 842, Leases. These updates provide additional clarification, an optional transition method, a practical expedient and implementation guidance on the previously issued Accounting Standards Update No. 2016-02, Leases (Topic 842). Collectively, these updates supersede the lease guidance in Accounting Standards Codification, or ASC, Topic 840 and require lessees to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis.


Concurrently, lessees are required to recognize an ROU asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. We adopted this standard on January 1, 2019 by applying the optional transition method on the adoption date and did not adjust comparative periods. We also elected the package of practical expedients permitted, which, among other things, allowed us to carry forward the lease classification for our existing leases. In preparation for the adoption of this standard and to enable preparation of the required financial information, we implemented a new lease accounting software solution as well as new internal controls. The adoption of this standard impacted our 2019 opening consolidated balance sheet, as we recorded operating lease liabilities of $728 and ROU assets of $637, which equals the lease liabilities net of accrued rent, lease incentives and the carrying amount of ceased-use liabilities previously recorded on our consolidated balance sheet under the old guidance. We also recognized a cumulative-effect adjustment of $26 to our opening retained earnings for deferred gains on our previous sale-leaseback transactions. The adoption of this standard did not have an impact on our consolidated statements of income or cash flows.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13. The amendments in ASU 2018-13 eliminate, add, and modify certain disclosure requirements for fair value measurements. The amendments are effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for either the entirety of ASU 2018-13 or only the provisions that eliminate or modify disclosure requirements. We early adopted the provisions that eliminate and modify disclosure requirements, on a retrospective basis, effective in our 2018 Annual Report on Form 10-K. We will adopt the new disclosure requirements, on a prospective basis, effective for our interim and annual reporting periods beginning after December 15, 2019.
In February 2018, the FASB issued Accounting Standards Update No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, or ASU 2018-02. On December 22, 2017, the federal government enacted a tax bill, H.R.1, An act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, or the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act contains significant changes to corporate taxation, including, but not limited to, reducing the U.S. federal corporate income tax rate from 35% to 21% and modifying or limiting many business deductions. Current FASB guidance requires adjustments of deferred taxes due to a change in the federal corporate income tax rate to be included in income from operations. As a result, the tax effects of items within accumulated other comprehensive loss did not reflect the appropriate tax rate. The amendments in ASU 2018-02 allowed a reclassification from accumulated other comprehensive loss to retained earnings for stranded tax effects resulting from the change in the federal corporate income tax rate. We adopted the amendments in ASU 2018-02 for our interim and annual reporting periods beginning on January 1, 2018 and reclassified $91 of stranded tax effects from accumulated other comprehensive loss to retained earnings on our consolidated balance sheets. The adoption of ASU 2018-02 did not have any impact on our consolidated results of operations or cash flows.
In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, or ASU 2017-09. This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC Topic 718. We adopted ASU 2017-09 on January 1, 2018. The guidance has been and will be applied prospectively to awards modified on or after the adoption date. The adoption of ASU 2017-09 did not have any impact on our consolidated financial position, results of operations or cash flows.
In March 2017, the FASB issued Accounting Standards Update No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, or ASU 2017-08. This update changes the amortization period for certain purchased callable debt securities held at a premium by shortening the amortization period for the premium to the earliest call date. Under the old guidance, the premium was generally amortized over the contractual life of the instrument. The amendments are to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We adopted ASU 2017-08 on January 1, 2019, and the adoption of this standard did not have a material impact on our beginning retained earnings or on our consolidated financial position, results of operations or cash flows.
In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, or ASU 2017-07. This amendment requires entities to disaggregate the service cost component from the other components of the


benefit cost and present the service cost component in the same income statement line item as other employee compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. Certain of our defined benefit plans have previously been frozen, resulting in no annual service costs, and the remaining service costs for our non-frozen plan are not material. We adopted ASU 2017-07 on January 1, 2018, and it did not have a material impact on our consolidated results of operations, cash flows or financial position.
In December 2016, the FASB issued Accounting Standards Update No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. In May 2016, the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. In April 2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. In March 2016, the FASB issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). These updates provide additional clarification and implementation guidance on the previously issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). Collectively, these updates require a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. These updates supersede almost all existing revenue recognition guidance under GAAP, with certain exceptions, including an exception for our premium revenues, which are recorded on the Premiums line item on our consolidated statements of income and will continue to be accounted for in accordance with the provisions of ASC Topic 944, Financial Services - Insurance. Our administrative service and other contracts that are subject to these Accounting Standards Updates are recorded in the Administrative fees and other revenue line item on our consolidated statements of income and represent approximately 6% of our consolidated total operating revenue. We adopted these standards on January 1, 2018 using the modified retrospective approach. The adoption of these standards did not have a material impact on our beginning retained earnings, or on our consolidated results of operations, cash flows or financial position.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, or ASU 2016-18. This update amends ASC Topic 230, Statement of Cash Flows, to add and clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. We adopted ASU 2016-18 on January 1, 2018 using a retrospective approach. The adoption of ASU 2016-18 did not have a material impact on our consolidated statements of cash flows and did not impact our consolidated results of operations or financial position.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, or ASU 2016-15. This update addresses the presentation and classification on the statement of cash flows for eight specific items, with the objective of reducing existing diversity in practice in how certain cash receipts and cash payments are presented and classified. We adopted ASU 2016-15 on January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on our consolidated statements of cash flows, results of operations or financial position.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, 326, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial LiabilitiesCredit Losses, or ASU 2016-01. The amendments in ASU 2016-01 change the accounting for non-consolidated equity investments that are not accounted for under the equity method of accounting by requiring changes in fair value to be recognized in income. Additionally, ASU 2016-01 simplifies the impairment assessment of equity investments without readily determinable fair values; requires entities to use the exit price when estimating the fair value of financial instruments; and modifies various presentation disclosure requirements for financial instruments. We adopted ASU 2016-01 on January 1, 2018 as a cumulative-effect adjustment and reclassified $320 of unrealized gains on equity investments, net of tax, from accumulated other comprehensive loss to retained earnings on our consolidated balance sheets. Effective January 1, 2018, our results of operations include the changes in fair value of these financial instruments.
Recent Accounting Guidance Not Yet Adopted: . In May 2019, the FASB issued Accounting Standards Update No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Reliefor ASU 2019-05.. In April 2019, the FASB issued Accounting Standards Update No. 2019-04, Codification Improvements to Topic 326, Financial Instruments -


Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. In November 2018, the FASB issued Accounting Standards Update No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. These updates provide an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost and provide additional clarification and implementation guidance on certain aspects of the previously issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13, and have the same effective date and transition requirements as ASU 2016-13. ASU 2016-13 introduces a current expected credit loss model for measuring expected credit losses for certain types of financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. ASU 2016-13 replaces the current incurred loss model for measuring expected credit losses, requires expected losses on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities and provides for additional disclosure requirements. ASU 2016-13 requires a cumulative-effect adjustment to the statement of financial position to the opening balance of retained earnings on the statement of financial position at the date of adoption and a prospective transition approach for debt securities for which an other-than-temporary impairment had been recognized before the adoption date. The effect of a prospective transition approach is to maintain the same amortized cost basis before and after the date of adoption. We adopted ASU 2016-13 is effective for us on January 1, 2020, with earlyand

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recognized a cumulative-effect adjustment of $35 to our opening retained earnings for credit related allowances on receivables. The adoption permitted. We are currently gathering data and evaluating the effects the adoption of ASU 2016-13 willdid not have an impact on our consolidated financial statements.statements of income or cash flows.
In August 2018, the FASB issued Accounting Standards Update No. 2018-15, Intangibles—Intangibles—Goodwill and Other—Other—Internal-Use Software (Subtopic 350-40): Customer’sCustomer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, or ASU 2018-15. The amendments in ASU 2018-15 require implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance. The amendments also require an entity to disclose the nature of its hosting arrangements and adhere to certain presentation requirements in its balance sheet, income statement and statement of cash flows. We adopted ASU 2018-15 is effective for us on January 1, 2020 with early adoption permitted. The guidance can be applied either prospectively tousing a prospective approach for all implementation costs incurred after the date of adoption, or retrospectively. While we are continuing to evaluate the effectsand the adoption of ASU 2018-15 willdid not have an impact on our consolidated financial position, results of operations or cash flows.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13. The amendments in ASU 2018-13 eliminate, add, and modify certain disclosure requirements for fair value measurements. The amendments are effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for either the entirety of ASU 2018-13 or only the provisions that eliminate or modify disclosure requirements. We early adopted the provisions that eliminate and modify disclosure requirements, on a retrospective basis, effective in our 2018 Annual Report on Form 10-K. We adopted the new disclosure requirements on January 1, 2020, on a prospective basis.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, or ASU 2017-04. This update removes Step 2 of the goodwill impairment test under current guidance, which required a hypothetical purchase price allocation. The new guidance requires an impairment charge to be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. We adopted ASU 2017-04 on January 1, 2020, and the adoption did not have an impact on our consolidated financial position, results of operations or cash flows; we intendflows.
Recent Accounting Guidance Not Yet Adopted: In March 2020, the FASB issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, or ASU 2020-04. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to applycontract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate, or 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. The provisions within ASU 2020-04 are available until December 31, 2022, when the reference rate replacement activity is expected to have been completed. We are currently evaluating the provisions within ASU 2020-04.
In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, or ASU 2019-12. The amendments in ASU 2019-12 remove certain exceptions to the general principles in ASC Topic 740. The amendments also clarify and amend existing guidance to improve consistent application. The amendments are effective for our annual reporting periods beginning after December 15, 2020, with early adoption permitted. The transition method (retrospective, modified retrospective, or prospective methodbasis) 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 are currently evaluating the effects the adoption of adoption.ASU 2019-12 will have on our consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update No. 2018-14, Compensation—Compensation—Retirement Benefits - Defined Benefit Plans—Plans—General (Subtopic 715-20): Disclosure Framework—Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, or ASU 2018-14. The amendments in ASU 2018-14 eliminate, add, and modify certain disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments are effective for our annual reporting periods beginning after December 15, 2020, with early adoption permitted. The guidance is to be applied on a retrospective basis to all periods presented. We are currently evaluating the effects the adoption of ASU 2018-14 will have on our disclosures.
In August 2018, the FASB issued Accounting Standards Update No. 2018-12, Financial Services—Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, or ASU 2018-12. The amendments in ASU

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2018-12 make changes to a variety of areas to simplify or improve the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. The amendments require insurers to annually review the assumptions they make about their policyholders and update the liabilities for future policy benefits if the assumptions change. The amendments also simplify the amortization of deferred contract acquisition costs and add new disclosure requirements about the assumptions insurers use to measure their liabilities and how they may affect future cash flows. The amendments in ASU 2018-12 will be effective for our interim and annual reporting periods beginning after December 15, 2020.2021. The amendments related to the liability for future policy benefits for traditional and limited-payment contracts and deferred acquisition costs are to be applied to contracts in force as of the beginning of the earliest period presented, with an option to apply such amendments retrospectively with a cumulative-effect adjustment to the opening balance of retained earnings as of the earliest period presented. The amendments for market risk benefits are to be applied retrospectively. We are currently evaluating the effects the adoption of ASU 2018-12 will have on our consolidated financial position, results of operations, cash flows, and related disclosures.


In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, or ASU 2017-04. This update removes Step 2 of the goodwill impairment test under current guidance, which requires a hypothetical purchase price allocation. The new guidance requires an impairment charge to be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. Upon adoption, the guidance is to be applied prospectively. ASU 2017-04 is effective for us on January 1, 2020, with early adoption permitted. The adoption of ASU 2017-04 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
There were no other new accounting pronouncements that were issued or became effective since the issuance of our 20182019 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 AcquisitionsAcquisition
Pending Acquisition of Beacon Health Options, Inc.
On June 6, 2019,February 28, 2020, we announcedcompleted our entrance into an agreement to acquireacquisition of Beacon Health Options, Inc., or Beacon, the largest independently held behavioral health organization in the country. At the time of acquisition, Beacon serves approximately fortyserved more than thirty-four million individuals across all fifty states. This acquisition aligns with our strategy to diversify into health services and deliver both integrated solutions and care delivery models that personalize care for people with complex and chronic conditions. The acquisition is expected
In accordance with FASB accounting guidance for business combinations, the consideration transferred was allocated to close late in the fourth quarterpreliminary fair value of 2019Beacon’s assets acquired and is subject to standard closing conditions and customary approvals.
Acquisition of America’s 1st Choice
On February 15, 2018, we completed our acquisition of Freedom Health, Inc., Optimum HealthCare, Inc., America’s 1st Choice of South Carolina, Inc. and related entities, or collectively, America’s 1st Choice, a Medicare Advantage organization that offers HMO products,liabilities assumed, including Chronic Special Needs Plans and Dual-Eligible Special Needs Plans under its Freedom Health and Optimum HealthCare brands in Florida and its America’s 1st Choice of South Carolina brand in South Carolina. Upon the conclusion of our one-year measurement period, theidentifiable intangible assets. The excess of the consideration transferred over the preliminary fair value of net assets acquired resulted in preliminary goodwill of $1,049 at March 31, 2020, all of which was allocated to our Other segment. Preliminary goodwill recognized from the acquisition of Beacon primarily relates to the future economic benefits arising from the assets acquired and is consistent with our stated intentions and strategy. Any additional payments or receipts of cash resulting from contractual purchase price adjustments or any subsequent adjustments made to the assets acquired or liabilities assumed during the measurement period will be recorded as an adjustment to goodwill.
The preliminary fair value of the net assets acquired resulted in goodwillfrom Beacon includes $752 of $1,029,other intangible assets at March 31, 2020, which primarily consist of which $333 was tax deductible. All of the goodwill was allocatedfinite-lived customer relationships with amortization periods ranging from 9 to our Government Business segment.21 years. The results of operations of America’s 1st ChoiceBeacon are included in our consolidated financial statements within our Government BusinessOther segment for the periodsperiod following February 15, 2018.28, 2020. The pro forma effects of this acquisition for prior periods were not material to our consolidated results of operations.
4.
Investments
Fixed Maturity Securities
We evaluate our available-for-sale fixed maturity securities for other-than-temporary declines based on qualitative and quantitative factors. There were no individuallyOur fixed maturity securities have been negatively impacted by the significant other-than-temporarymarket volatility that began in March 2020 due to the COVID-19 global health pandemic, or COVID-19 pandemic, and other market related changes. Declines in fair value have increased the potential for material credit losses. We have established an allowance for credit loss and recorded credit loss expense as a reflection of our expected impairment losses on investments during the three and nine months ended September 30, 2019 and 2018.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 other-than-temporary impairment or OTTI, losses on investments may be recorded in future periods.


-11-


A summary of current and long-term fixed maturity securities, available-for-sale, at September 30, 2019March 31, 2020 and December 31, 20182019 is as follows:
        
Non-Credit
Component of
OTTIs
Recognized in
Accumulated
Other
Comprehensive
Loss
Cost or
Amortized
Cost
 
 
 
 
 
 
 
 
 
Non-Credit
Component of
Impairment Recognized in
Accumulated
Other
Comprehensive
Loss
Cost or
Amortized
Cost		 Gross
Unrealized
Gains		 Gross Unrealized Losses Estimated
Fair Value		 
 
Gross
Unrealized
Gains
 
Gross Unrealized Losses
 
Allowance For Credit Losses
 
Estimated
Fair Value
 
 
Less than
12 Months
 
12 Months
or Greater
 
 
Less than
12 Months
 
12 Months
or Greater
 
September 30, 2019           
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:           
 
 
 
 
 
 
 
 
 
 
 
 
 
United States Government securities$487
 $10
 $—
 $—
 $497
 $—
$
450

 
$
24

 
$
—

 
$
—

 
$
—

 
$
474

 
$
—

Government sponsored securities125
 6
 —
 —
 131
 —
369

 
5

 
(48
)
 
—

 
—

 
326

 
—

States, municipalities and political subdivisions4,469
 275
 (1) (1) 4,742
 —
4,768

 
233

 
(14
)
 
—

 
—

 
4,987

 
—

Corporate securities9,040
 341
 (17) (25) 9,339
 (5)
9,609

 
148

 
(450
)
 
(44
)
 
(51
)
 
9,212

 
(44
)
Residential mortgage-backed securities3,914
 111
 (4) (4) 4,017
 —
3,731

 
93

 
(95
)
 
(7
)
 
—

 
3,722

 
—

Commercial mortgage-backed securities87
 3
 —
 —
 90
 —
81

 
1

 
(3
)
 
(1
)
 
—

 
78

 
—

Other securities1,645
 24
 (2) (5) 1,662
 —
1,692

 
6

 
(97
)
 
(14
)
 
—

 
1,587

 
—

Total fixed maturity securities$19,767
 $770
 $(24) $(35) $20,478
 $(5)
$
20,700

 
$
510

 
$
(707
)
 
$
(66
)
 
$
(51
)
 
$
20,386

 
$
(44
)
December 31, 2018           
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:           
 
 
 
 
 
 
 
 
 
 
 
 
 
United States Government securities$414
 $3
 $—
 $(1) $416
 $—
$
524

 
$
4

 
$
(3
)
 
$
—

 
$
—

 
$
525

 
$
—

Government sponsored securities108
 1
 —
 (1) 108
 —
136

 
5

 
—

 
—

 
—

 
141

 
—

States, municipalities and political subdivisions4,716
 91
 (3) (19) 4,785
 —
4,592

 
262

 
(3
)
 
—

 
—

 
4,851

 
—

Corporate securities8,189
 33
 (170) (115) 7,937
 (3)
8,870

 
339

 
(9
)
 
(15
)
 
—

 
9,185

 
(3
)
Residential mortgage-backed securities2,769
 31
 (3) (47) 2,750
 —
3,654

 
87

 
(6
)
 
(3
)
 
—

 
3,732

 
—

Commercial mortgage-backed securities69
 —
 —
 (2) 67
 —
84

 
2

 
—

 
—

 
—

 
86

 
—

Other securities1,115
 14
 (8) (5) 1,116
 —
1,648

 
21

 
(3
)
 
(5
)
 
—

 
1,661

 
—

Total fixed maturity securities$17,380
 $173
 $(184) $(190) $17,179
 $(3)
$
19,508

 
$
720

 
$
(24
)
 
$
(23
)
 
$
—

 
$
20,181

 
$
(3
)




-12-


For fixed maturity securities in an unrealized loss position at September 30, 2019March 31, 2020 and December 31, 20182019, the following table summarizes the aggregate fair values and gross unrealized losses by length of time those securities have continuously been in an unrealized loss position: 
Less than 12 Months 12 Months or Greater
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
Number of
Securities
 
Estimated
Fair Value
 
Gross
Unrealized
Loss
 
Number of
Securities
 
Estimated
Fair Value
 
Gross
Unrealized
Loss
September 30, 2019           
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:           
 
 
 
 
 
 
 
 
 
 
 
United States Government securities8
 $49
 $—
 5
 $14
 $—
1

 
$
—

 
$
—

 
—

 
$
—

 
$
—

Government sponsored securities6
 5
 —
 3
 1
 —
278

 
224

 
(48
)
 
1

 
—

 
—

States, municipalities and political subdivisions66
 108
 (1) 16
 13
 (1)
239

 
509

 
(14
)
 
3

 
4

 
—

Corporate securities455
 711
 (17) 338
 509
 (25)
2,773

 
5,003

 
(450
)
 
170

 
176

 
(44
)
Residential mortgage-backed securities228
 422
 (4) 215
 323
 (4)
603

 
1,182

 
(95
)
 
63

 
57

 
(7
)
Commercial mortgage-backed securities1
 3
 —
 4
 8
 —
14

 
29

 
(3
)
 
3

 
6

 
(1
)
Other securities190
 483
 (2) 107
 332
 (5)
520

 
1,175

 
(97
)
 
58

 
142

 
(14
)
Total fixed maturity securities954
 $1,781
 $(24) 688
 $1,200
 $(35)
4,428

 
$
8,122

 
$
(707
)
 
298

 
$
385

 
$
(66
)
December 31, 2018           
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:           
 
 
 
 
 
 
 
 
 
 
 
United States Government securities5
 $47
 $—
 25
 $79
 $(1)
27

 
$
250

 
$
(3
)
 
2

 
$
1

 
$
—

Government sponsored securities8
 11
 —
 24
 31
 (1)
14

 
12

 
—

 
3

 
1

 
—

States, municipalities and political subdivisions177
 295
 (3) 604
 1,032
 (19)
114

 
306

 
(3
)
 
14

 
11

 
—

Corporate securities2,185
 4,503
 (170) 1,220
 2,072
 (115)
386

 
558

 
(9
)
 
224

 
286

 
(15
)
Residential mortgage-backed securities259
 383
 (3) 816
 1,458
 (47)
321

 
635

 
(6
)
 
189

 
237

 
(3
)
Commercial mortgage-backed securities6
 11
 —
 19
 37
 (2)
1

 
3

 
—

 
4

 
8

 
—

Other securities193
 599
 (8) 93
 237
 (5)
166

 
415

 
(3
)
 
113

 
358

 
(5
)
Total fixed maturity securities2,833
 $5,849
 $(184) 2,801
 $4,946
 $(190)
1,029

 
$
2,179

 
$
(24
)
 
549

 
$
902

 
$
(23
)

Below are discussions by security type for unrealized losses as of March 31, 2020:
United States Government securities:Unrealized losses on government sponsored securities have not been recognized into income because management does not intend to sell and it is likely that management will not be required to sell these securities 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 the credit ratings of the securities and have determined that no allowance is necessary. The fair value is expected to recover as the securities approach maturity.
Government sponsored securities: There were no material unrealized losses on investments in government sponsored securities. We have no intent to sell these investments, and it is more likely than not that we will not be required to sell the investments before recovery of their amortized cost bases.
States, municipalities and political subdivisions: Unrealized losses on securities of states, municipalities and political subdivisions have not been recognized into income because management does not intend to sell, and it is likely that management will not be required to sell these securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. We have evaluated the credit ratings of the securities and have determined that no allowance is necessary. The fair value is expected to recover as the securities approach maturity.

-13-


Corporate securities: An allowance for credit losses on certain energy-related fixed maturity corporate securities has been determined based on qualitative and quantitative factors including credit rating, default, industry condition and known information of the issuer 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. No allowance for credit loss was required for the remaining corporate fixed maturity securities at March 31, 2020. Unrealized losses on the remaining corporate securities have not been recognized into income because management does not intend to sell, and it is likely that management will not be required to sell these securities prior to their anticipated recovery, and the decline in fair value is largely due to current market conditions relating to the COVID-19 pandemic and tensions within the energy sector. We have evaluated each corporate security’s credit rating as well as industry risk factors associated with the securities. At this time, no allowance has been deemed necessary. The issuers continue to make timely principal and interest payments on the bonds. The fair value of these securities is expected to recover as they approach maturity.
Residential mortgage-backed securities: Unrealized losses on residential mortgage-backed securities have not been recognized into income because management does not intend to sell, and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. We have evaluated the 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.
Commercial mortgage-backed securities: There were no material unrealized losses on investments in commercial mortgage-backed securities. We have no intent to sell these investments, and it is more likely than not that we will not be required to sell the investments before recovery of their amortized cost bases.
Other securities: Unrealized losses on other securities have not been recognized into income because management does not intend to sell, and it is likely that management will not be required to sell these securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. Other securities largely consists of asset-backed securities. 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 ended March 31, 2020:
 
 
 
Corporate Securities
Allowance for credit losses:
 
 
 
 
Beginning balance
 
 
$
—

 
Additions for securities for which no previous expected credit losses were recognized
 
 
51

Total allowance for credit losses
 
 
$
51


The amortized cost and fair value of fixed maturity securities at September 30, 2019,March 31, 2020, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations.
Amortized
Cost
 
Estimated
Fair Value
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less$628
 $628
$
520

 
$
511

Due after one year through five years5,569
 5,701
5,730

 
5,583

Due after five years through ten years5,504
 5,731
6,035

 
5,882

Due after ten years4,065
 4,311
4,603

 
4,610

Mortgage-backed securities4,001
 4,107
3,812

 
3,800

Total fixed maturity securities$19,767
 $20,478
$
20,700

 
$
20,386




-14-


Proceeds from sales, maturities, calls or redemptions of fixed maturity securities and the related gross realized gains and gross realized losses for the three and nine months ended September 30, 2019March 31, 2020 and 20182019 are as follows:
Three Months Ended 
 September 30		 Nine Months Ended 
 September 30
 
Three Months Ended 
 March 31
2019 2018 2019 2018
 
2020
 
2019
Proceeds$2,048
 $1,532
 $5,502
 $6,413
 
$
1,931

 
$
1,468

Gross realized gains26
 12
 66
 73
 
43

 
18

Gross realized losses(9) (16) (43) (85)
 
(20
)
 
(17
)

In the ordinary course of business, we may sell securities at a loss for a number of reasons, including, but not limited to: (i) changes in the investment environment; (ii) expectation that the fair value could deteriorate further; (iii) desire to reduce exposure to an issuer or an industry; (iv) changes in credit quality; or (v) changes in expected cash flow.
All securities sold resulting in investment gains and losses are recorded on the trade date. Realized gains and losses are determined on the basis of the cost or amortized cost of the specific securities sold.
Equity Securities
A summary of current and long-term marketable equity securities at September 30, 2019March 31, 2020 and December 31, 20182019 is as follows:
September 30, 2019 December 31, 2018
March 31, 2020
 
December 31, 2019
Equity securities:   
 
 
 
Exchange traded funds$563
 $2
$
245

 
$
44

Fixed maturity mutual funds631
 557
211

 
643

Common equity securities829
 654
32

 
237

Private equity securities306
 313
82

 
85

Total$2,329
 $1,526
$
570

 
$
1,009


The gains and losses related to equity securities for the three and nine months ended September 30,March 31, 2020 and 2019 and 2018 are as follows:
Three Months Ended September 30 Nine Months Ended September 30
 
Three Months Ended March 31
2019 2018 2019 2018
 
2020
 
2019
Net realized (losses) gains recognized on equity securities$(16) $27
 $75
 $(33)
 
$
(50
)
 
$
79

Less: Net realized gains recognized on equity securities sold during the period(6) (11) (55) (208)
 
(18
)
 
(21
)
Unrealized (losses) gains recognized on equity securities still held at September 30$(22) $16
 $20
 $(241)
Unrealized (losses) gains recognized on equity securities still held at March 31
 
$
(68
)
 
$
58


Other Invested Assets
Other invested assets include primarily our investments in limited partnerships, joint ventures and other non-controlled corporations, as well as the cash surrender value of corporate-owned life insurance policies. Investments in limited partnerships, joint ventures and other non-controlled corporations are carried at our share in the entities’ undistributed earnings, which approximates fair value. 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. Given the recent market volatility, there is a risk that the value of some of these investments may decline in future periods.
Investment Income
At March 31, 2020 and December 31, 2019, accrued investment income totaled $166 and $173, respectively. We recognize accrued investment income under the caption “Other receivables” on our consolidated balance sheets.

-15-


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 $465$427 and $604$351 at September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. The value of the collateral represented 103% and 102% of the market value of the securities on loan at September 30, 2019each of March 31, 2020 and December 31, 2018, respectively.2019. We recognize the collateral as an asset under the caption “Securities lending collateral” on“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 “Securities lending payable.”“Other current liabilities.” The securities on loan are reported in the applicable investment category on our consolidated balance sheets.


The remaining contractual maturity of our securities lending agreements at September 30, 2019March 31, 2020 is as follows:
Overnight and Continuous
Overnight and Continuous
Securities lending transactions 
 
Cash
$
354

United States Government securities$132
69

Corporate securities324
Equity securities9
Other securities
4

Total$465
$
427


The market value of loaned securities and that of the collateral pledged can fluctuate in non-synchronized fashions. To the extent the loaned securities’securities’ value appreciates faster or depreciates slower than the value of the collateral pledged, we are exposed to the risk of the shortfall. As a primary mitigating mechanism, the loaned securities and collateral pledged are marked to market on a daily basis and the shortfall, if any, is collected accordingly. Secondarily, the minimum collateral level is set at 102% of the value of the loaned securities, which provides a cushion before any shortfall arises. The investment of the cash collateral is subject to market risk, which is managed by limiting the investments to higher quality and shorter duration instruments.
5.
Derivative Financial Instruments
We primarily invest in the following types of derivative financial instruments: interest rate swaps, futures, forward contracts, put and call options, swaptions, embedded derivatives and warrants. We also enter into master netting agreements, which reduce credit risk by permitting net settlement of transactions.
We 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. Any amounts recognized for changes in fair value of these derivatives are included in the London Interbank Offered Rate.captions “Other current or noncurrent assets” or “Other current or noncurrent liabilities” in our consolidated balance sheet.
Prior to 2019,2020, we entered into a series of forward starting pay fixed interest rate swaps with the objective of reducing the variability of cash flows in the interest payments on anticipated future financings. The unrecognized loss for all expired and terminated cash flow hedges included in accumulated other comprehensive loss, net of tax, was $277$259 and $246$262 at September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.
For additional information relating to the fair value of our derivative assets and liabilities, see Note 6, “Fair“Fair Value,”” of this Form 10-Q.

-16-


6.
Fair Value
Assets and liabilities recorded at fair value in our consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Level inputs, as defined by FASB guidance for fair value measurements and disclosures, are as follows:
Level Input
 
Input Definition
Level I
 
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level II
 
Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date.
Level III
 
Unobservable inputs that reflect management’smanagement’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 partythird-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 United States Government securities, corporate securities, securities from states, municipalities and political subdivisions, mortgage-backed securities, United States 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’services’ qualifications and procedures used to determine fair values. In addition, we periodically review the pricing services’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 with quoted market prices are generally designated as Level I.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’ssecurity’s current condition and future cash flow projections. Such securities are designated Level III. The fair values of these private equity securities are generally based on either broker quotes or discounted cash flow projections using assumptions for inputs such as the weighted-average cost of capital, long-term revenue growth rates and earnings before interest, taxes, depreciation and amortization, and/or revenue multiples that are not observable in the markets.
Other invested assets, current: Other invested assets, current include securities held in rabbi trusts that are classified as trading. These securities are designated Level I securities, as fair values are based on quoted market prices.
Securities lending collateral: Fair values of securities lending collateral are based on quoted market prices, where available. These fair values are obtained primarily from third partythird-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.



-17-


A summary of fair value measurements by level for assets and liabilities measured at fair value on a recurring basis at September 30, 2019March 31, 2020 and December 31, 20182019 is as follows:
Level I Level II Level III Total
Level I
 
Level II
 
Level III
 
Total
September 30, 2019       
March 31, 2020
 
 
 
 
 
 
 
Assets:       
 
 
 
 
 
 
 
Cash equivalents$1,258
 $—
 $—
 $1,258
$
2,363

 
$
—

 
$
—

 
$
2,363

Fixed maturity securities, available-for-sale:       
 
 
 
 
 
 
 
United States Government securities—
 497
 —
 497
—

 
474

 
—

 
474

Government sponsored securities—
 131
 —
 131
—

 
326

 
—

 
326

States, municipalities and political subdivisions—
 4,742
 —
 4,742
States, municipalities and political subdivisions, tax-exempt
—

 
4,987

 
—

 
4,987

Corporate securities—
 9,028
 311
 9,339
—

 
8,896

 
316

 
9,212

Residential mortgage-backed securities—
 4,014
 3
 4,017
—

 
3,720

 
2

 
3,722

Commercial mortgage-backed securities—
 90
 —
 90
—

 
78

 
—

 
78

Other securities—
 1,651
 11
 1,662
—

 
1,582

 
5

 
1,587

Total fixed maturity securities, available-for-sale—
 20,153
 325
 20,478
—

 
20,063

 
323

 
20,386

Equity securities:

 

 

 



 


 


 


Exchange traded funds563
 —
 —
 563
245

 
—

 
—

 
245

Fixed maturity mutual funds—
 631
 —
 631
—

 
211

 
—

 
211

Common equity securities796
 33
 —
 829
2

 
30

 
—

 
32

Private equity securities—
 —
 306
 306
—

 
—

 
82

 
82

Total equity securities1,359
 664
 306
 2,329
247

 
241

 
82

 
570

Other invested assets, current10
 —
 —
 10
Securities lending collateral—
 465
 —
 465
—

 
426

 
—

 
426

Derivatives—
 25
 —
 25
—

 
49

 
—

 
49

Total assets$2,627
 $21,307
 $631
 $24,565
$
2,610

 
$
20,779

 
$
405

 
$
23,794

Liabilities:       
 
 
 
 
 
 
 
Derivatives$—
 $(1) $—
 $(1)
$
—

 
$
(5
)
 
$
—

 
$
(5
)
Total liabilities$—
 $(1) $—
 $(1)
$
—

 
$
(5
)
 
$
—

 
$
(5
)
       
 
 
 
 
 
 
 
December 31, 2018       
December 31, 2019
 
 
 
 
 
 
 
Assets:       
 
 
 
 
 
 
 
Cash equivalents$1,815
 $—
 $—
 $1,815
$
2,015

 
$
—

 
$
—

 
$
2,015

Fixed maturity securities, available-for-sale:       
 
 
 
 
 
 
 
United States Government securities—
 416
 —
 416
—

 
525

 
—

 
525

Government sponsored securities—
 108
 —
 108
—

 
141

 
—

 
141

States, municipalities and political subdivisions—
 4,785
 —
 4,785
States, municipalities and political subdivisions, tax-exempt
—

 
4,851

 
—

 
4,851

Corporate securities2
 7,648
 287
 7,937
—

 
8,882

 
303

 
9,185

Residential mortgage-backed securities—
 2,744
 6
 2,750
—

 
3,730

 
2

 
3,732

Commercial mortgage-backed securities—
 67
 —
 67
—

 
86

 
—

 
86

Other securities—
 1,099
 17
 1,116
—

 
1,654

 
7

 
1,661

Total fixed maturity securities, available-for-sale2
 16,867
 310
 17,179
—

 
19,869

 
312

 
20,181

Equity securities:

 

 

 



 


 


 


Exchange traded funds2
 —
 —
 2
44

 
—

 
—

 
44

Fixed maturity mutual funds—
 557
 —
 557
—

 
643

 
—

 
643

Common equity securities601
 53
 —
 654
206

 
31

 
—

 
237

Private equity securities—
 —
 313
 313
—

 
—

 
85

 
85

Total equity securities603
 610
 313
 1,526
250

 
674

 
85

 
1,009

Other invested assets, current21
 —
 —
 21
Securities lending collateral314
 290
 —
 604
—

 
353

 
—

 
353

Derivatives—
 16
 —
 16
—

 
23

 
—

 
23

Total assets$2,755
 $17,783
 $623
 $21,161
$
2,265

 
$
20,919

 
$
397

 
$
23,581

Liabilities:       
 
 
 
 
 
 
 
Derivatives$—
 $(17) $—
 $(17)
$
—

 
$
(1
)
 
$
—

 
$
(1
)
Total liabilities$—
 $(17) $—
 $(17)
$
—

 
$
(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 September 30, 2019 and 2018 is as follows:
 
Corporate
Securities
 
Residential
Mortgage-
backed
Securities
 
Other 
Securities
 
Equity
Securities
 Total
Three Months Ended September 30, 2019         
Beginning balance at July 1, 2019$297
 $3
 $11
 $305
 $616
Total gains (losses):         
Recognized in net income(3) —
 —
 (5) (8)
Recognized in accumulated other comprehensive loss12
 —
 —
 —
 12
Purchases28
 —
 —
 25
 53
Sales(9) —
 —
 (19) (28)
Settlements(18) —
 —
 —
 (18)
Transfers into Level III4
 —
 —
 —
 4
Transfers out of Level III—
 —
 —
 —
 —
Ending balance at September 30, 2019$311
 $3
 $11
 $306
 $631
Change in unrealized losses included in net income related to assets still held at September 30, 2019$—
 $—
 $—
 $(4) $(4)
          
Three Months Ended September 30, 2018         
Beginning balance at July 1, 2018$304
 $4
 $26
 $312
 $646
Total gains (losses):         
Recognized in net income—
 —
 —
 4
 4
Recognized in accumulated other comprehensive loss(1) —
 —
 —
 (1)
Purchases32
 —
 3
 5
 40
Sales(2) —
 —
 (3) (5)
Settlements(30) —
 —
 —
 (30)
Transfers into Level III6
 —
 1
 —
 7
Transfers out of Level III(2) —
 (13) —
 (15)
Ending balance at September 30, 2018$307
 $4
 $17
 $318
 $646
Change in unrealized gains included in net income related to assets still held at September 30, 2018$—
 $—
 $—
 $9
 $9
 
 
 
 
 
 
 
 
 
 



-18-


A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level III inputs for the ninethree months ended September 30, 2019March 31, 2020 and 20182019 is as follows:
Corporate
Securities
 
Residential
Mortgage-
backed
Securities
 
Other 
Securities
 
Equity
Securities
 Total
Corporate
Securities
 
Residential
Mortgage-
backed
Securities
 
Other 
Securities
 
Equity
Securities
 
Total
Nine Months Ended September 30, 2019      
  
Three Months Ended March 31, 2020
 
 
 
 
 
 

 
 
Beginning balance at January 1, 2020
$
303

 
$
2

 
$
7

 
$
85

 
$
397

Total losses:
 
 
 
 
 
 
 
 
 
Recognized in net income
(2
)
 
—

 
—

 
(6
)
 
(8
)
Recognized in accumulated other comprehensive loss
(10
)
 
—

 
—

 
—

 
(10
)
Purchases
26

 
—

 
—

 
12

 
38

Sales
(3
)
 
—

 
—

 
(9
)
 
(12
)
Settlements
(11
)
 
—

 
(2
)
 
—

 
(13
)
Transfers into Level III
13

 
—

 
—

 
—

 
13

Ending balance at March 31, 2020
$
316

 
$
2

 
$
5

 
$
82

 
$
405

Change in unrealized losses included in net income related to assets still held at March 31, 2020
$
—

 
$
—

 
$
—

 
$
(7
)
 
$
(7
)
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 
 
 
 
 
 

 
 
Beginning balance at January 1, 2019$287
 $6
 $17
 $313
 $623
$
287

 
$
6

 
$
17

 
$
313

 
$
623

Total (losses) gains:         
 
 
 
 
 
 
 
 
 
Recognized in net income(7) —
 —
 (5) (12)
(1
)
 
—

 
—

 
(2
)
 
(3
)
Recognized in accumulated other comprehensive loss14
 —
 —
 —
 14
2

 
—

 
—

 
—

 
2

Purchases91
 —
 2
 46
 139
33

 
—

 
2

 
7

 
42

Sales(11) —
 —
 (48) (59)
(1
)
 
—

 
—

 
(21
)
 
(22
)
Settlements(58) (1) (2) —
 (61)
(21
)
 
—

 
(1
)
 
—

 
(22
)
Transfers into Level III4
 —
 3
 —
 7
—

 
—

 
3

 
—

 
3

Transfers out of Level III(9) (2) (9) —
 (20)
(2
)
 
—

 
(7
)
 
—

 
(9
)
Ending balance at September 30, 2019$311
 $3
 $11
 $306
 $631
Change in unrealized losses included in net income related to assets still held at September 30, 2019$—
 $—
 $—
 $(4) $(4)
         
Nine Months Ended September 30, 2018      
  
Beginning balance at January 1, 2018$229
 $5
 $16
 $287
 $537
Total (losses) gains:         
Recognized in net income1
 —
 —
 (228) (227)
Recognized in accumulated other comprehensive loss(3) —
 —
 —
 (3)
Purchases94
 —
 12
 263
 369
Sales(17) —
 —
 (4) (21)
Settlements(60) (1) (1) —
 (62)
Transfers into Level III65
 —
 5
 —
 70
Transfers out of Level III(2) —
 (15) —
 (17)
Ending balance at September 30, 2018$307
 $4
 $17
 $318
 $646
Change in unrealized gains included in net income related to assets still held at September 30, 2018$—
 $—
 $—
 $27
 $27
Ending balance at March 31, 2019
$
297

 
$
6

 
$
14

 
$
297

 
$
614

Change in unrealized gains included in net income related to assets still held at March 31, 2019
$
—

 
$
—

 
$
—

 
$
(2
)
 
$
(2
)

There were no individually material transfers into or out of Level III during the three and nine months ended September 30, 2019March 31, 2020 or 2018.2019.
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“Business Acquisitions,”” we completed our acquisition of America’s 1st ChoiceBeacon on February 15, 2018.28, 2020. The preliminary values of net assets acquired in our acquisition of America’s 1st ChoiceBeacon and resulting goodwill and other intangible assets were recorded at fair value primarily using Level III inputs. The majority of America’s 1st Choice’sBeacon’s assets acquired and liabilities assumed were recorded at their carrying values as of the respective date of acquisition, as their carrying values approximated their fair values due to their short-term nature. The preliminary fair values of goodwill and other intangible assets acquired in our acquisition of America’s 1st ChoiceBeacon were internally estimated based on the income approach. The income approach estimates fair value based on the present value of the cash flows that the assets could be expected to generate in the future. We developed internal estimates for the expected cash flows and discount rate in the present value calculation. Other than the assets acquired and liabilities assumed in our acquisition of America’s 1st ChoiceBeacon described above, there were no material assets or liabilities measured at fair value on a nonrecurring basis during the three and nine months ended September 30, 2019March 31, 2020 or 2018.2019.


-19-


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 partythird-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 a monthly analysis on the prices received from the pricing services to determine whether the prices are reasonable estimates of fair value. This analysis is performed by our internal treasury personnel who are familiar with our investment portfolios, the pricing services engaged and the valuation techniques and inputs used. Our analysis includes 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 and nine months ended September 30, 2019March 31, 2020 or 20182019.
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 our consolidated balance sheets for cash, and cash equivalents, accrued investment income, premium receivables, self-funded receivables, other receivables, income taxes receivable/payable, unearned income, accounts payable and accrued expenses, security trades pending payable, securities lending payable and certain other current liabilities approximate fair value because of the short term nature of these items. These assets and liabilities are not listed in the table below.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument that is recorded at its carrying value in our consolidated balance sheets:
Other invested assets, long-term:assets: Other invested assets long-term include primarily our investments in limited partnerships, joint ventures and other non-controlled corporations, as well as the cash surrender value of corporate-owned life insurance policies. Investments in limited partnerships, joint ventures and other non-controlled corporations are carried at our share in the entities’entities’ undistributed earnings, which approximates fair value. The carrying value of corporate-owned life insurance policies represents the cash surrender value as reported by the respective insurer, which approximates fair value.
Short-term borrowings: The fair value of our short-term borrowings is based on quoted market prices for the same or similar debt, or, if no quoted market prices were available, on the current market interest rates estimated to be available to us for debt of similar terms and remaining maturities.
Long-term debt –– senior revolving credit facility: The carrying amount for the senior revolving credit facility approximates fair value, and is based 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.

-20-


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 September 30, 2019March 31, 2020 and December 31, 20182019 is as follows:
Carrying
Value
 Estimated Fair Value
Carrying
Value
 
Estimated Fair Value
 Level I Level II Level III Total
 
Level I
 
Level II
 
Level III
 
Total
September 30, 2019         
March 31, 2020
 
 
 
 
 
 
 
 
 
Assets:         
 
 
 
 
 
 
 
 
 
Other invested assets, long-term$3,914
 $—
 $—
 $3,914
 $3,914
Other invested assets
$
4,181

 
$
—

 
$
—

 
$
4,181

 
$
4,181

Liabilities:
 
 
 
 
 
 
 
 
 
Debt:
 
 
 
 
 
 
 
 
 
Short-term borrowings
1,075

 
—

 
1,075

 
—

 
1,075

Senior revolving credit facility
300

 
—

 
300

 
—

 
300

Commercial paper
1,305

 
—

 
1,305

 
—

 
1,305

Notes
18,867

 
—

 
20,343

 
—

 
20,343

Convertible debentures
136

 
—

 
680

 
—

 
680

 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Other invested assets
$
4,258

 
$
—

 
$
—

 
$
4,258

 
$
4,258

Liabilities:         
 
 
 
 
 
 
 
 
 
Debt:         
 
 
 
 
 
 
 
 
 
Short-term borrowings710
 —
 710
 —
 710
700

 
—

 
700

 
—

 
700

Commercial paper500
 —
 500
 —
 500
400

 
—

 
400

 
—

 
400

Notes18,841
 —
 20,198
 —
 20,198
18,840

 
—

 
20,470

 
—

 
20,470

Convertible debentures179
 —
 893
 —
 893
145

 
—

 
904

 
—

 
904

         
December 31, 2018         
Assets:         
Other invested assets, long-term$3,726
 $—
 $—
 $3,726
 $3,726
Liabilities:         
Debt:         
Short-term borrowings1,145
 —
 1,145
 —
 1,145
Commercial paper697
 —
 697
 —
 697
Notes17,178
 —
 17,145
 —
 17,145
Convertible debentures191
 —
 1,030
 —
 1,030

7.
Income Taxes
During the three months ended September 30, 2019March 31, 2020 and 2018,2019, we recognized income tax expense of $306$566 and $282,$394, respectively, which represent effective tax rates of 20.6%27.1% and 22.7%20.3%, respectively. The increase in our effective income tax expenserate was primarily due to the 2018 remeasurement of deferred tax assets and liabilities against the prior year provisional estimates as required by the Tax Cuts and Jobs Act. The increase in income tax expense was partially offset by the suspensionreinstatement of the non-tax deductible Health Insurance Provider Fee, or HIP Fee, for 2020.
Income taxes payable totaled $159 at March 31, 2020. Income taxes receivable totaled $335 at December 31, 2019 which resulted in a decrease in. We recognize the income tax expense of $76. The decrease inpayable as a liability under the effective tax rate was primarily due tocaption “Other current liabilities” and the suspension of the non-tax deductible HIP Fee for 2019.
During the nine months ended September 30, 2019 and 2018, we recognized income tax expense of $1,014 and $1,200, respectively, which represent effective tax rates of 20.7% and 26.5%, respectively. The decreasereceivable as an asset under the caption “Other current assets” in income tax expense and effective tax rate was primarily due to the suspension of the non-tax deductible HIP Fee for 2019, which resulted in a decrease in income tax expense of $243.our consolidated balance sheets.

-21-


8.
Retirement Benefits

The components of net periodic benefit credit included in our consolidated statements of income for the three months ended September 30, 2019 and 2018 are as follows:
 Pension Benefits Other Benefits
 Three Months Ended 
 September 30		 Three Months Ended 
 September 30
 2019 2018 2019 2018
Service cost$—
 $2
 $1
 $—
Interest cost15
 14
 3
 4
Expected return on assets(35) (37) (6) (6)
Recognized actuarial loss5
 6
 1
 1
Settlement loss4
 6
 —
 —
Amortization of prior service credit—
 —
 (3) (3)
Net periodic benefit credit$(11) $(9) $(4) $(4)
 
 
 
 
 
 
 
 
The components of net periodic benefit credit included in our consolidated statements of income for the ninethree months ended September 30, 2019March 31, 2020 and 20182019 are as follows:
Pension Benefits Other Benefits
Pension Benefits
 
Other Benefits
Nine Months Ended 
 September 30		 Nine Months Ended 
 September 30
Three Months Ended 
 March 31
 
Three Months Ended 
 March 31
2019 2018 2019 2018
2020
 
2019
 
2020
 
2019
Service cost$—
 $6
 $1
 $1
Interest cost47
 41
 11
 11
$
12

 
$
16

 
$
3

 
$
4

Expected return on assets(104) (110) (17) (18)
(40
)
 
(34
)
 
(6
)
 
(5
)
Recognized actuarial loss13
 18
 2
 3
6

 
4

 
—

 
—

Settlement loss8
 19
 —
 —
5

 
2

 
—

 
—

Amortization of prior service credit—
 —
 (9) (9)
—

 
—

 
(2
)
 
(3
)
Net periodic benefit credit$(36) $(26) $(12) $(12)
$
(17
)
 
$
(12
)
 
$
(5
)
 
$
(4
)

For the year ending December 31, 20192020, no material contributions are expected to be necessary to meet the Employee Retirement Income Security Act of 1974, as amended, or ERISA, required funding levels; however, we may elect to make discretionary contributions up to the maximum amount deductible for income tax purposes. Contributions of $0 and $7No contributions were made to our retirement benefit plans during the ninethree months ended September 30, 2019March 31, 2020 and 2018.2019.


9. Medical Claims Payable
A reconciliation of the beginning and ending balances for medical claims payable, by segment (see Note 15, “Segment Information”“Segment Information”), for the ninethree months ended September 30, 2019March 31, 2020 is as follows:
Commercial
& Specialty
Business
 
Government
Business
 Total
Commercial
& Specialty
Business
 
Government
Business
 
Other
 
Total
Gross medical claims payable, beginning of period$2,586
 $4,680
 $7,266
$
3,039

 
$
5,608

 
$
—

 
$
8,647

Ceded medical claims payable, beginning of period(10) (24) (34)
(14
)
 
(19
)
 
—

 
(33
)
Net medical claims payable, beginning of period2,576
 4,656
 7,232
3,025

 
5,589

 
—

 
8,614

Business combinations and purchase adjustments
—

 
141

 
198

 
339

Net incurred medical claims:     
 
 
 
 
 
 
 
Current period18,986
 39,171
 58,157
6,090

 
15,010

 
130

 
21,230

Prior periods redundancies(162) (275) (437)
(293
)
 
(407
)
 
—

 
(700
)
Total net incurred medical claims18,824
 38,896
 57,720
5,797

 
14,603

 
130

 
20,530

Net payments attributable to:     
 
 
 
 
 
 
 
Current period medical claims16,277
 33,474
 49,751
3,908

 
9,698

 
138

 
13,744

Prior periods medical claims2,213
 4,253
 6,466
1,875

 
4,234

 
—

 
6,109

Total net payments18,490
 37,727
 56,217
5,783

 
13,932

 
138

 
19,853

Net medical claims payable, end of period2,910
 5,825
 8,735
3,039

 
6,401

 
190

 
9,630

Ceded medical claims payable, end of period8
 27
 35
37

 
23

 
—

 
60

Gross medical claims payable, end of period$2,918
 $5,852
 $8,770
$
3,076

 
$
6,424

 
$
190

 
$
9,690

Activity in the Other segment resulted from our acquisition of Beacon.
At September 30, 2019,March 31, 2020, the total of net incurred but not reported liabilities plus expected development on reported claims for the Commercial && Specialty Business was $30, $171$94, $763 and $2,709$2,182 for the claim years 20172018 and prior, 20182019 and 2019,2020, respectively.

-22-


At September 30, 2019,March 31, 2020, the total of net incurred but not reported liabilities plus expected development on reported claims for the Government Business was $23, $105$63, $885 and $5,697$5,453 for the claim years 20172018 and prior, 2019 and 2020, respectively.
At March 31, 2020, the total of net incurred but not reported liabilities plus expected development on reported claims for Other was $0, $0 and $190 for the claim years 2018 and prior, 2019 and 2020, respectively.


A reconciliation of the beginning and ending balances for medical claims payable, by segment (see Note 15, “Segment Information”“Segment Information”), for the ninethree months ended September 30, 2018March 31, 2019 is as follows:
Commercial
& Specialty
Business
 
Government
Business
 Total
Commercial
& Specialty
Business
 
Government
Business
 
Other
 
Total
Gross medical claims payable, beginning of period$3,383
 $4,431
 $7,814
$
2,586

 
$
4,680

 
$
—

 
$
7,266

Ceded medical claims payable, beginning of period(78) (27) (105)
(10
)
 
(24
)
 
—

 
(34
)
Net medical claims payable, beginning of period3,305
 4,404
 7,709
2,576

 
4,656

 
—

 
7,232

Business combinations and purchase adjustments—
 199
 199
Net incurred medical claims:     
 
 
 
 
 
 
 
Current period17,732
 33,664
 51,396
6,053

 
12,741

 
—

 
18,794

Prior periods redundancies(424) (434) (858)
(197
)
 
(258
)
 
—

 
(455
)
Total net incurred medical claims17,308
 33,230
 50,538
5,856

 
12,483

 
—

 
18,339

Net payments attributable to:     
 
 
 
 
 
 
 
Current period medical claims15,275
 29,236
 44,511
3,898

 
8,265

 
—

 
12,163

Prior periods medical claims2,671
 3,833
 6,504
1,766

 
3,648

 
—

 
5,414

Total net payments17,946
 33,069
 51,015
5,664

 
11,913

 
—

 
17,577

Net medical claims payable, end of period2,667
 4,764
 7,431
2,768

 
5,226

 
—

 
7,994

Ceded medical claims payable, end of period10
 27
 37
8

 
26

 
—

 
34

Gross medical claims payable, end of period$2,677
 $4,791
 $7,468
$
2,776

 
$
5,252

 
$
—

 
$
8,028


The reconciliation of net incurred medical claims to benefit expense included in our consolidated statements of income for periods in 20192020 are as follows:
 Three Months Ended Nine Months Ended 
 September 30, 2019
 
Three Months Ended 
 March 31, 2020
 
Three Months Ended 
 March 31, 2019
 March 31, 2019 June 30, 2019 September 30, 2019 
 
Net incurred medical claims:        
 
 
 
 
Commercial & Specialty Business $5,856
 $6,422
 $6,546
 $18,824
Commercial & Specialty Business
 
$
5,797

 
$
5,856

Government Business 12,483
 13,062
 13,351
 38,896
 
14,603

 
12,483

Other
 
130

 
—

Total net incurred medical claims 18,339
 19,484
 19,897
 57,720
 
20,530

 
18,339

Quality improvement and other claims expense 943
 884
 856
 2,683
 
959

 
943

Benefit expense $19,282
 $20,368
 $20,753
 $60,403
 
$
21,489

 
$
19,282


Net incurred medical claims for the three months ended March 31, 2019 and June 30, 2019 in the table above include a reclassification between the Commercial and Specialty Business and Government Business segments to adjust certain intercompany eliminations. This reclassification did not impact any other amounts presented in the consolidated financial statements.


The reconciliation of net incurred medical claims to benefit expense included in our consolidated statements of income for periods in 2018 are as follows:
  Three Months Ended Nine Months Ended 
 September 30, 2018
  March 31, 2018 June 30, 2018 September 30, 2018 
Net incurred medical claims:        
Commercial & Specialty Business $5,410
 $5,884
 $6,014
 $17,308
Government Business 10,794
 11,039
 11,397
 33,230
Total net incurred medical claims 16,204
 16,923
 17,411
 50,538
Quality improvement and other claims expense 842
 805
 774
 2,421
Benefit expense $17,046
 $17,728
 $18,185
 $52,959
 
 
 
 
 
 
 
 
 


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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 September 30, 2019,March 31, 2020, is as follows:
Commercial
& Specialty
Business
 
Government
Business
 Total
Commercial
& Specialty
Business
 
Government
Business
 
Other
 
Total
Net medical claims payable, end of period$2,910
 $5,825
 $8,735
$
3,039

 
$
6,401

 
$
190

 
$
9,630

Ceded medical claims payable, end of period8
 27
 35
37

 
23

 
—

 
60

Insurance lines other than short duration—
 207
 207
—

 
212

 
—

 
212

Gross medical claims payable, end of period$2,918
 $6,059
 $8,977
$
3,076

 
$
6,636

 
$
190

 
$
9,902


10.
Debt
 
 
 
 

We generally issue senior unsecured notes for long-term borrowing purposes. At September 30, 2019March 31, 2020 and December 31, 2018,2019, we had $18,816$18,842 and $17,153,$18,815, respectively, outstanding under these notes.
On September 9, 2019, we issued $850 aggregate principal amount of 2.375% Notes due 2025, or the 2025 Notes, $825 aggregate principal amount of 2.875% Notes due 2029, or the 2029 Notes, and $825 aggregate principal amount of 3.700% Notes due 2049, or the 2049 Notes, under our shelf registration statement. Interest on the 2025 Notes is payable semi-annually in arrears on January 15 and July 15 of each year, commencing January 15, 2020. Interest on the 2029 Notes and the 2049 Notes is payable semi-annually in arrears on March 15 and September 15 each year, commencing March 15, 2020. The proceeds are being used for working capital and general corporate purposes, including, but not limited to, the repurchase of our common stock pursuant to our share repurchase program, repayment of short-term and long-term debt and to fund acquisitions.
On May 1, 2018, we settled each of the Equity Units stock purchase contracts at a settlement rate of 0.2412 shares of our common stock, using a market value formula set forth in the Equity Units purchase contracts. This resulted in the issuance of approximately 6.0 shares. We had issued 25 Equity Units on May 12, 2015, pursuant to an underwriting agreement dated May 6, 2015, in an aggregate principal amount of $1,250. Each Equity Unit had a stated amount of $50 (whole dollars) and consisted of a purchase contract obligating the holder to purchase a certain number of shares of our common stock on May 1, 2018, subject to earlier termination or settlement, for a price in cash of $50 (whole dollars); and a 5% undivided beneficial ownership interest in $1,000 (whole dollars) principal amount of our 1.900% remarketable subordinated notes, or RSNs, due 2028. On March 2, 2018, we remarketed the RSNs and used the proceeds to purchase U.S. Treasury securities that were pledged to secure the stock purchase obligations of the holders of the Equity Units. The purchasers of the RSNs transferred the RSNs to us in exchange for $1,250 principal amount of our 4.101% senior notes due 2028, or the 2028 Notes, and a cash payment of $4. We cancelled the RSNs upon receipt and recognized a loss on extinguishment of debt of $18. At the remarketing, we also issued $850 aggregate principal amount of 4.550% notes due 2048, or the 2048 Notes, under our shelf registration statement. We used the proceeds from the 2048 Notes for working capital and general corporate purposes. Interest on the 2028 Notes and the 2048 Notes is payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2018.


We have an unsecured surplus note with an outstanding principal balance of $25$25 at both September 30, 2019March 31, 2020 and December 31, 2018.2019.
We have a senior revolving credit facility, or the 5-Year Facility, with a group of lenders for general corporate purposes. In June 2019, we amended and restated the credit agreement for theThe 5-Year Facility provides credit up to among other things, extend the maturity date of the 5-Year Facility from August 2020 to$2,500 and matures in June 2024 and decreased the amount of credit available under the 5-Year Facility from $3,500 to $2,500. In June 2019, we2024. We also entered intohave a 364-day senior revolving credit facility, or 364-Day Facility, with a group of lenders for general corporate purposes, which provides for credit in the amount of $1,000$1,000 and matures in June 2020. Our ability to borrow under these credit facilities 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 applicable credit agreement. As of March 31, 2020, our debt-to-capital ratio, as defined and calculated under the credit facilities, was 40.6%. We do not believe the restrictions contained in any of our credit facility covenants materially affect our financial or operating flexibility. As of March 31, 2020, we were in compliance with all of the debt covenants under these credit facilities.There were no amounts outstanding under the 5-Year Facility or the 364-Day Facility at any time during the ninethree months ended September 30, March 31, 2020 or the year ended December 31, 2019 or. At March 31, 2020 and December 31, 2019, $300 and $0, respectively, were outstanding under our 5-Year Facility. We repaid the $300 outstanding on the 5-Year Facility at December 31, 2018.on April 23, 2020.
Through certain subsidiaries, we have entered into multiple 364-day lines of credit, or the Subsidiary Credit Facilities, with separate lenders for general corporate purposes. The Subsidiary Credit Facilities provide combined credit of up to $600.$500. At September 30, 2019March 31, 2020 and December 31, 2018, $1502019, $300 and $500,$50, respectively, were outstanding under our Subsidiary Credit Facilities.
We have an authorized commercial paper program of up to $3,500,$3,500, the proceeds of which may be used for general corporate purposes. In August 2019, we increased the amount available under the commercial paper program from $2,500 to $3,500. At September 30, 2019March 31, 2020 and December 31, 2018,2019, we had $500$1,305 and $697,$400, respectively, outstanding under this program.
We have outstanding senior unsecured convertible debentures due 2042, or the Debentures, which are governed by an indenture between us and The Bank of New York Mellon Trust Company, N.A., as trustee, or the indenture. We have accounted for the Debentures in accordance with the FASB cash conversion guidance for debt with conversion and other options. As a result, the value of the embedded conversion option (net of deferred taxes and equity issuance costs) has been bifurcated from its debt host and recorded as a component of additional paid-in capital in our consolidated balance sheets. During the ninethree months ended September 30, 2019, $20March 31, 2020, $13 aggregate principal amount of the Debentures were surrendered for conversion by certain holders in accordance with the terms and provisions of the indenture. We elected to settle the excess of the principal amount of the conversions with cash for total payments of $73.$52. We recognized a gainloss of $1$1 on the extinguishment of debt related to the Debentures, based on the fair values of the debt on the conversion settlement dates.

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The following table summarizes at September 30, 2019March 31, 2020 the related balances, conversion rate and conversion price of the Debentures:
Outstanding principal amount$267
$
202

Unamortized debt discount$85
$
64

Net debt carrying amount$179
$
136

Equity component carrying amount$97
$
73

Conversion rate (shares of common stock per $1,000 of principal amount)13.9250
13.9862

Effective conversion price (per $1,000 of principal amount)$71.8129
$
71.4990


We are a member, through certain subsidiaries, of the Federal Home Loan Bank of Indianapolis, the Federal Home Loan Bank of Cincinnati and the Federal Home Loan Bank of Atlanta, or collectively, the FHLBs. As a member, we have the ability to obtain short-term cash advances, subject to certain minimum collateral requirements. We had $560$775 and $645$650 in outstanding short-term borrowings from the FHLBs at September 30, 2019March 31, 2020 and December 31, 20182019, respectively, with fixed interest rates of 1.990%0.679% and 2.458%1.664%, respectively.
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$0 to approximately $700$800 at September 30, 2019.March 31, 2020. 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, or Blue plans, across the country. The cases were consolidated into a single, multi-district proceeding captioned In re Blue Cross Blue Shield Antitrust Litigation that is pending in the United States District Court for the Northern District of Alabama, or the Court. Generally, the suits allege that the BCBSA and the Blue plans have conspired to

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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, or Sherman Act, and related state laws. The cases were brought by two putative nationwide classes of plaintiffs, health plan subscribers and providers, and actions filed in twenty-eight states have been consolidated into the multi-district proceeding.
In response to cross motions for partial summary judgment by plaintiffs and defendants, the Court issued an order in April 2018 determining that the defendants’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 defendants operate as a single entity with regard to the enforcement of the Blue Cross Blue Shield trademarks. No dates have been set for either the final pretrial conferences or trials in these actions. In March 2019, the Court issued a Fourth Amended Scheduling Order requiring that briefing on motions for class certification and related expert reports, merits and damages expert reports, and certain dispositive motions occur in 2019. In April 2019, plaintiffs filed their motions for class certification in conjunction with their supporting expert reports. Defendants filed their motions to exclude plaintiffs’plaintiffs’ experts, as well as their opposition to plaintiffs’plaintiffs’ motions for class certification, in July 2019. The case has been stayed by the court until January 2020. further notice.
We intend to vigorously defend these suits; however, their 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), or BCC, was named as a defendant in a California taxpayer action filed in Los Angeles County 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, or HCSP, is an “insurer”“insurer” for purposes of taxation despite acknowledging it is not an “insurer”“insurer” under regulatory law. At the time, under California law, “insurers”“insurers” were required to pay a gross premiums tax, or GPT, calculated as 2.35% on gross premiums. As a licensed HCSP, BCC has paid the California Corporate Franchise Tax, or CFT, the tax paid by California businesses generally. Plaintiff contends that BCC 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.
In March 2018, the Superior Court denied BCC’sBCC’s motion for judgment on the pleadings and similar motions brought by other entities. We filed a writ of mandate in the California Court of Appeal. Although the California Court of Appeal initially accepted our writ, it later indicated that it willwould not hear the issues raised by our writ until the case concludes in the Superior Court. The Superior Court has scheduledpostponed the March 2020 trial for March 23,date to July 2020. The parties are currently engaged in discovery and are in the process of retaining experts.discovery. Because GPT is constitutionally imposed in lieu of certain other taxes, BCC has filed protective tax refund claims with the City of Los Angeles, the California Department of Health Care Services and the Franchise Tax Board to protect its rights to recover certain taxes previously paid should BCC eventually be determined to be subject to the GPT for the tax periods at issue in the litigation. BCC intends to vigorously defend this suit; however, its ultimate outcome cannot be presently determined.
Express Scripts, Inc. Pharmacy Benefit Management Litigation
In March 2016, we filed a lawsuit against Express Scripts, Inc., or Express Scripts, our vendor at the time for pharmacy benefit management, or PBM services, captioned Anthem, Inc. v. Express Scripts, Inc., in the U.S. District Court for the Southern District of New York. The lawsuit seeks to recover over $14,800$14,800 in damages for pharmacy pricing that is higher than competitive benchmark pricing under the agreement between the parties, or the ESI PBM Agreement, over $158$158 in damages related to operational breaches, as well as various declarations under the ESI PBM Agreement between the parties, including that Express Scripts: (i) breached its obligation to negotiate in good faith and to agree in writing to new pricing terms; (ii) iswas 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.

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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$4,675 at the time we entered into the ESI PBM Agreement. In March 2017, the court granted our motion to dismiss Express Scripts’Scripts’ counterclaims for (i) breach of the implied covenant of good faith and fair dealing, and (ii) unjust enrichment with prejudice. The only remaining claims are for breach of contract and declaratory relief. Discovery is scheduledThe period of time for completing discovery has been extended to be completed in December 2019.August 2020 due to the recent outbreak of COVID-19. We intend to vigorously pursue our claims and defend against any 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 the presentDecember 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’Scripts’ pricing under the ESI


PBM Agreement and (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’sattorney’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 filed a notice of appeal with the United States Court of Appeals for the Second Circuit, which was heard in October 2018 but has not yet been decided. We intend to vigorously defend this suit; however, its ultimate outcome cannot be presently determined.
Cigna Corporation Merger Litigation
In July 2015, we and Cigna Corporation, or Cigna, announced that we entered into the Cigna Agreement and Plan of Merger, or Cigna Merger Agreement, pursuant to which we would acquire all outstanding shares of Cigna. In July 2016, the U.S. Department of Justice, or DOJ, along with certain state attorneys general, filed a civil antitrust lawsuit in the U.S. District Court for the District of Columbia, or District Court, seeking to block the merger. In February 2017, Cigna purported to terminate the Cigna Merger Agreement and commenced litigation against us in the Delaware Court of Chancery, or Delaware Court, seeking damages, including the $1,850$1,850 termination fee pursuant to the terms of the Cigna Merger Agreement, and a declaratory judgment that its purported termination of the Cigna Merger Agreement was lawful, among other claims, which is captioned Cigna Corp. v. Anthem Inc.
Also in February 2017, we initiated our own litigation against Cigna in the Delaware Court seeking a temporary restraining order to enjoin Cigna from terminating the Cigna Merger Agreement, specific performance compelling Cigna to comply with the Cigna Merger Agreement and damages, which is captioned Anthem Inc. v. Cigna Corp. In April 2017, the U.S. Circuit Court of Appeals for the District of Columbia affirmed the ruling of the District Court, which blocked the merger. In May 2017, after the Delaware Court denied our motion to enjoin Cigna from terminating the Cigna Merger Agreement, we delivered to Cigna a notice terminating the Cigna Merger Agreement.
In the Delaware Court litigation, trial commenced in late February 2019 and concluded in March 2019. The Delaware Court has setheld closing argument forin November 25, 2019.2019 and took the matter under consideration. In February 2020, the Delaware Court requested supplemental briefing which has been submitted. We believe Cigna’sCigna’s allegations are without merit and we intend to vigorously pursue our claims and defend against Cigna’sCigna’s allegations; however, the ultimate outcome of our litigation with Cigna cannot be presently determined.

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In October 2018, a shareholder filed a derivative lawsuit in the State of Indiana Marion County Superior Court, captioned Henry Bittmann, Derivatively, et al. v. Joseph R Swedish, et al., purportedly on behalf of us and our shareholders against certain current and former directors and officers alleging breaches of fiduciary duties, unjust enrichment and corporate waste associated with the Cigna Merger Agreement. This case has been stayed at the request of the parties pending the outcome of our litigation with Cigna in the Delaware Court. This lawsuit’slawsuit’s ultimate outcome cannot be presently determined.
U.S. Department of Justice (DOJ) Civil Investigative DemandsMedicare Risk Adjustment Litigation
Beginning in December 2016, the DOJ has issued civil investigative demands to us to discover information about our retrospective chart review and risk adjustment programs under Parts C and D of the Medicare Program.program. We understand the DOJ is investigating the programs of other Medicare Advantage health plans, along with providers and vendors. In March 2020, the DOJ filed a civil lawsuit against Anthem, Inc. in 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, or 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. We continuehave until the end of May 2020 to cooperate with the DOJ’s investigation, andrespond. We intend to vigorously defend this suit; however, the ultimate outcome cannot be presently be determined.
Investigations of CareMore and HealthSun
With the assistance of outside counsel, we are conducting investigations of risk-adjustment practices (unrelated to our retrospective chart review program) at CareMore Health Plans, Inc., or CareMore one of our California subsidiaries and HealthSun Health Plans, Inc., or 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 focuses 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 investigations to CMS, and the Criminal Division of the DOJ, which then initiated an investigation. We are cooperating with that investigation. We have also asserted indemnity claims for escrowed funds under the HealthSun purchase agreement for, among other things, breach of healthcare representation provisions, based on the conduct discovered during our investigation. We are in active litigation with one group of sellers regarding part of the escrowed funds in a case captioned LPPAS Representative, LLC v. ATH Holding Company, LLC in the Delaware Court.
Cyber Attack Regulatory Proceedings and Litigation
In February 2015, we reported that we were the target of a sophisticated external cyber attack. Theattack during which the attackers gained unauthorized access to certain of our information technology systems and obtained personal information related to many individuals and employees, such as names, birth dates, healthcare identification/social security numbers, street addresses, email addresses, phone numbers and employment information, including income data.employees. To date, there is no evidence that


credit card or medical information such as claims, test results or diagnostic codes, were targeted, accessed or obtained, although no assurance can be given that we will not identify additional information that was accessed or obtained.
Upon discovery of the cyber attack, we took immediate action to remediate the security vulnerability and retained a cybersecurity firm to evaluate our systems and identify solutions based on the evolving landscape. We have provided credit monitoring and identity protection services to those who have been affected by this cyber attack. We have continued to implement security enhancements since this incident. We have incurred expenses subsequent to the cyber attack to investigate and remediate this matter and expect to continue to incur expenses of this nature in the foreseeable future. We recognize these expenses in the periods in which they are incurred.
Federal and state agencies including state insurance regulators, state attorneys general, the Health and Human Services Office of Civil Rights and the Federal Bureau of Investigation, are investigating, or have investigated, events related to the cyber attack, including how it occurred, its consequences and our responses. The investigations have all been resolved with the exception of an ongoing investigation by a multi-state group of attorneys general, which remains outstanding. Although we are cooperating in this investigation, we may be subject to additional fines or other obligations. We intend to vigorously defend the remaining regulatory investigation; however, its ultimate outcome cannot be presently determined.
We have contingency plans and insurance coverage for certain expenses and potential liabilities of this nature and will pursue coverage for all applicable losses; however, the ultimate outcome of our pursuit of insurance coverage cannot be presently determined.

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Other Contingencies
From time to time, we and certain of our subsidiaries are parties to various legal proceedings, many of which involve claims for coverage encountered in the ordinary course of business. We, like HMOs and health insurers generally, exclude certain healthcare and other services from coverage under our HMO, PPO and other plans. We are, in the ordinary course of business, subject to the claims of our enrollees arising out of decisions to restrict or deny reimbursement for uncovered services. The loss of even one such claim, if it results in a significant punitive damage award, could have a material adverse effect on us. In addition, the risk of potential liability under punitive damage theories may increase significantly the difficulty of obtaining reasonable 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
Express Scripts,In March 2020, we entered into an agreement with a vendor for information technology infrastructure and related management and support services through our ESI PBM Agreement,June 2025. The new agreement supersedes certain prior agreements for services and includes provisions for additional services not provided under those agreements. Our aggregate commitment under this agreement is approximately $1,700. We will have the providerability to terminate the agreement upon the occurrence of certain PBM servicesevents, subject to our plans. early termination fees.
In October 2017,the second quarter of 2019, we established abegan using our new pharmacy benefits manager callednamed IngenioRx, Inc., or IngenioRx, to market and entered into a five-year agreement withoffer PBM services to fully-insured and self-funded Anthem health plan customers throughout the country, as well as to external customers outside of the health plans we own. The comprehensive prescription benefits management services portfolio includes, but is not limited to, formulary management, pharmacy networks, prescription drug database, member services and mail order capabilities. Also in the second quarter of 2019, IngenioRx began delegating certain PBM administrative functions, such as claims processing and prescription fulfillment, to CaremarkPCS Health, L.L.C., or CVS Health, which is a subsidiary of CVS Health Corporation, pursuant to begin offeringa 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. From December 2009 through December 2019, we delegated certain PBM solutions, orfunctions and administrative services to Express Scripts pursuant to the CVSESI PBM Agreement. In January 2019, we exercised our contractual right to terminate the ESI PBM Agreement earlier than the original expiration date of December 31, 2019, due to the recent acquisition of Express Scripts by Cigna. As a result of exercising our early termination right, the ESI PBM Agreement terminated on March 1, 2019, and on March 2, 2019, the twelve-month transition period to migrate the servicesWe began transitioning existing members from Express Scripts began. CVS Health began providing certain PBM services to IngenioRx pursuant to the CVS PBM Agreement in the second quarter of 2019.2019, and completed the transition of all of our members by January 1, 2020. Prior to the termination of the ESI PBM Agreement, Express Scripts managed the network of pharmacy providers, operated mail order pharmacies and processed prescription drug claims on our behalf, while we sold and supported the product for our members, made formulary decisions, sold drug benefit design strategy and provided front line member support. Express Scripts continues to provide certain audit and run out transition services related to our PBM business. Notwithstanding our termination of the ESI PBM Agreement, the litigation between us and Express Scripts regarding the ESI PBM Agreement continues. For additional information regarding this lawsuit, refer to the Litigation and Regulatory Proceedings-ExpressProceedings–Express Scripts, Inc. Pharmacy Benefit Management Litigation section above. We believe we have appropriately recognized all rights and obligations under the ESI PBM Agreement as of September 30, 2019.March 31, 2020.


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

-29-


at the discretion of our Board of Directors and depends upon our financial condition, results of operations, future liquidity needs, regulatory and capital requirements and other factors deemed relevant by our Board of Directors.
A summary of the cash dividend activity for the ninethree months ended September 30, 2019March 31, 2020 and 20182019 is as follows: 
Declaration Date Record Date Payment Date 
Cash
Dividend
per Share
 Total
Nine Months Ended September 30, 2019        
January 29, 2019
 
March 18, 2019
 
March 29, 2019
 $0.80 $206
April 23, 2019
 
June 10, 2019
 
June 25, 2019
 $0.80 $206
July 23, 2019
 
September 10, 2019
 
September 25, 2019
 $0.80 $204
         
Nine Months Ended September 30, 2018        
January 30, 2018
 
March 9, 2018
 
March 23, 2018
 $0.75 $192
April 24, 2018
 
June 8, 2018
 
June 25, 2018
 $0.75 $196
July 24, 2018
 
September 10, 2018
 
September 25, 2018
 $0.75 $195
Declaration Date
 
Record Date
 
Payment Date
 
Cash
Dividend
per Share
 
Total
Three Months Ended March 31, 2020
 
 
 
 
 
 
 
 
January 28, 2020
 
March 16, 2020
 
March 27, 2020
 
$0.95
 
$
240

 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
January 29, 2019
 
March 18, 2019
 
March 29, 2019
 
$0.80
 
$
206


On October 22, 2019,April 28, 2020, our Audit Committee declared a fourthsecond quarter 20192020 dividend to shareholders of $0.80$0.95 per share, payable on December 20, 2019June 25, 2020 to shareholders of record at the close of business on December 5, 2019June 10, 2020.
Under our Board of Directors’Directors’ authorization, we maintain a common stock repurchase program. On December 7, 2017, the Board of Directors authorized a $5,000$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. We have temporarily suspended our share repurchase program given the market volatility.
A summary of common stock repurchases from October 1, 2019 through October 16, 2019 (subsequent to September 30, 2019) and for the ninethree months ended September 30, 2019March 31, 2020 and 20182019 is as follows:
October 1, 2019 
 Through 
 October 16, 2019		 Nine Months Ended September 30
 
Three Months Ended March 31
 2019 2018
 
2020
 
2019
Shares repurchased0.4
 5.2
 5.0
 
1.9

 
1.1

Average price per share$238.71
 $270.42
 $240.15
 
$
275.38

 
$
275.23

Aggregate cost$104
 $1,396
 $1,192
 
$
529

 
$
294

Authorization remaining at the end of the period$3,994
 $4,098
 $5,986
 
$
3,263

 
$
5,199


For additional information regarding the use of capital for debt security repurchases, see Note 10, “Debt”“Debt” of this Form 10-Q and Note 12, “Debt,”“Debt,” to our audited consolidated financial statements as of and for the year ended December 31, 20182019 included in our 20182019 Annual Report on Form 10-K.


-30-


Stock Incentive Plans
A summary of stock option activity for the ninethree months ended September 30, 2019March 31, 2020 is as follows:
Number of
Shares
 
Weighted-
Average
Option Price
per Share
 
Weighted-
Average
Remaining
Contractual
Life (Years)
 
Aggregate
Intrinsic
Value
Number of
Shares
 
Weighted-
Average
Option Price
per Share
 
Weighted-
Average
Remaining
Contractual
Life (Years)
 
Aggregate
Intrinsic
Value
Outstanding at January 1, 20193.7
 $149.65
  
Outstanding at January 1, 2020
3.1

 
$
190.31

 
 
Granted0.7
 306.74
  
1.0

 
271.27

 
 
Exercised(0.9) 127.92
  
(0.3
)
 
107.46

 
 
Forfeited or expired(0.1) 238.81
  
—

 
256.05

 
 
Outstanding at September 30, 20193.4
 185.47
 6.28 $233
Exercisable at September 30, 20192.2
 142.26
 5.02 $220
Outstanding at March 31, 2020
3.8

 
216.40

 
7.15
 
$
139

Exercisable at March 31, 2020
2.2

 
171.44

 
5.57
 
$
139


A summary of the nonvested restricted stock activity, including restricted stock units, for the ninethree months ended September 30, 2019March 31, 2020 is as follows:
Restricted
Stock Shares
and Units
 
Weighted-
Average
Grant Date
Fair Value
per Share
Restricted
Stock Shares
and Units
 
Weighted-
Average
Grant Date
Fair Value
per Share
Nonvested at January 1, 20191.7
 $183.32
Nonvested at January 1, 2020
1.4

 
$
242.47

Granted0.5
 306.13
1.2

 
272.03

Vested(0.8) 152.97
(1.1
)
 
193.23

Forfeited—
 243.77
(0.1
)
 
264.40

Nonvested at September 30, 20191.4
 240.92
Nonvested at March 31, 2020
1.4

 
271.00


During the ninethree months ended September 30, 2019,March 31, 2020, we granted approximately 0.2 restricted stock units that are contingent upon us achieving earnings targets over the three year period from 20192020 to 2021.2022. These grants have been included in the activity shown above, but will be subject to adjustment at the end of 20212022 based on results in the three year period.
During the three months ended March 31, 2020, we granted an additional 0.6 restricted stock units associated with our 2017 grants that were earned as a result of satisfactory completion of performance measures between 2017 and 2019. These grants and vested shares have been included in the activity shown above.
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 14, “Capital“Capital Stock,”” to our audited consolidated financial statements as of and for the year ended December 31, 20182019 included in our 20182019 Annual Report on Form 10-K.
The following weighted-average assumptions were used to estimate the fair values of options granted during the ninethree months ended September 30, 2019March 31, 2020 and 20182019:
Nine Months Ended September 30
Three Months Ended March 31
2019 2018
2020
 
2019
Risk-free interest rate2.69% 2.90%
1.30
%
 
2.69
%
Volatility factor25.00% 30.00%
26.00
%
 
25.00
%
Quarterly dividend yield0.260% 0.323%
0.350
%
 
0.260
%
Weighted-average expected life (years)4.40
 3.70
4.30

 
4.40




-31-


The following weighted-average fair values per option or share were determined for the ninethree months ended September 30, 2019March 31, 2020 and 20182019: 
Nine Months Ended September 30
Three Months Ended March 31
2019 2018
2020
 
2019
Options granted during the period$68.69
 $55.44
$
54.03

 
$
68.92

Restricted stock awards granted during the period306.13
 233.27
272.03

 
307.59


13.
Accumulated Other Comprehensive Loss
A reconciliation of the components of accumulated other comprehensive loss at September 30, 2019March 31, 2020 and 20182019 is as follows:
September 30
March 31
2019 2018
2020
 
2019
Investments, excluding non-credit component of other-than-temporary impairments:   
Investments:
 
 
 
Gross unrealized gains$770
 $170
$
510

 
$
379

Gross unrealized losses(54) (289)
(729
)
 
(121
)
Net pre-tax unrealized gains (losses)716
 (119)
Deferred tax (liability) asset(164) 24
Net unrealized gains (losses) on investments552
 (95)
Non-credit components of other-than-temporary impairments on investments:   
Net pre-tax unrealized (losses) gains
(219
)
 
258

Deferred tax asset (liability)
51

 
(61
)
Net unrealized (losses) gains on investments
(168
)
 
197

Non-credit components of impairments on investments:
 
 
 
Unrealized losses(5) (2)
(44
)
 
(3
)
Deferred tax asset1
 —
10

 
1

Net unrealized non-credit component of other-than-temporary impairments on investments(4) (2)
Net unrealized non-credit component of impairments on investments
(34
)
 
(2
)
Cash flow hedges:   
 
 
 
Gross unrealized losses(340) (315)
(327
)
 
(308
)
Deferred tax asset63
 66
68

 
65

Net unrealized losses on cash flow hedges(277) (249)
(259
)
 
(243
)
Defined benefit pension plans:   
 
 
 
Deferred net actuarial loss(730) (587)
(724
)
 
(744
)
Deferred prior service credits(1) (1)
—

 
(1
)
Deferred tax asset188
 153
185

 
191

Net unrecognized periodic benefit costs for defined benefit pension plans(543) (435)
(539
)
 
(554
)
Postretirement benefit plans:   
 
 
 
Deferred net actuarial loss(57) (75)
(25
)
 
(57
)
Deferred prior service costs25
 37
18

 
31

Deferred tax asset8
 10
2

 
7

Net unrecognized periodic benefit costs for postretirement benefit plans(24) (28)
(5
)
 
(19
)
Foreign currency translation adjustments:   
 
 
 
Gross unrealized losses(4) (2)
(4
)
 
(3
)
Deferred tax asset1
 —
1

 
1

Net unrealized losses on foreign currency translation adjustments(3) (2)
(3
)
 
(2
)
Accumulated other comprehensive loss$(299) $(811)
$
(1,008
)
 
$
(623
)

 
 
 
 


-32-





Other comprehensive income (loss) reclassification adjustments for the three months ended September 30, 2019March 31, 2020 and 20182019 are as follows:
 Three Months Ended September 30
 2019 2018
Investments:   
Net holding gain (loss) on investment securities arising during the period, net of tax (expense) benefit of ($35) and $12, respectively$119
 $(45)
Reclassification adjustment for net realized (gain) loss on investment securities, net of tax expense (benefit) of $1 and ($3), respectively(3) 9
Total reclassification adjustment on investments116
 (36)
Non-credit component of other-than-temporary impairments on investments:   
Non-credit component of other-than-temporary impairments on investments, net of tax expense of ($0) and ($2), respectively(1) (2)
Cash flow hedges:   
Holding (loss) gain, net of tax expense of ($2) and ($1), respectively(34) 2
Other:   
Net change in unrecognized periodic benefit costs for defined benefit pension and postretirement benefit plans, net of tax expense of ($1) and ($2), respectively4
 7
Foreign currency translation adjustment, net of tax expense of ($0) and ($0), respectively(1) —
Net gain (loss) recognized in other comprehensive income, net of tax (expense) benefit of ($37) and $4, respectively$84
 $(29)

Other comprehensive income (loss) reclassification adjustments for the nine months ended September 30, 2019 and 2018 are as follows:
 Nine Months Ended September 30
 2019 2018
Investments:   
Net holding gain (loss) on investment securities arising during the period, net of tax (expense) benefit of ($205) and $109, respectively$705
 $(378)
Reclassification adjustment for net realized (gain) loss on investment securities, net of tax benefit of $(1) and $(7), respectively6
 25
Total reclassification adjustment on investments711
 (353)
Non-credit component of other-than-temporary impairments on investments:   
Non-credit component of other-than-temporary impairments on investments, net of tax expense of ($0) and ($2), respectively(2) (2)
Cash flow hedges:   
Holding (loss) gain, net of tax expense of ($2) and ($9), respectively(31) 34
Other:   
Net change in unrecognized periodic benefit costs for defined benefit pension and postretirement benefit plans, net of tax expense of ($3) and ($7), respectively10
 22
Foreign currency translation adjustment, net of tax expense of ($0) and ($1), respectively(1) —
Net gain (loss) recognized in other comprehensive income, net of tax (expense) benefit of ($211) and $83, respectively$687
 $(299)
 
Three Months Ended March 31
 
2020
 
2019
Investments:
 
 
 
Net holding (loss) gain on investment securities arising during the period, net of tax benefit (expense) of $213 and $(98), respectively
$
(716
)
 
$
350

Reclassification adjustment for net realized gains on investment securities, net of tax benefit of $7 and $2, respectively
27

 
7

Total reclassification adjustment on investments
(689
)
 
357

Non-credit component of impairments on investments:
 
 
 
Non-credit component of impairments on investments, net of tax benefit of $9
(32
)
 
—

Cash flow hedges:
 
 
 
Holding gain, net of tax expense of ($1) and ($0), respectively
3

 
3

Other:
 
 
 
Net change in unrecognized periodic benefit costs for defined benefit pension and postretirement benefit plans, net of tax expense of ($3) and ($1), respectively
7

 
3

Foreign currency translation adjustment, net of tax expense of ($0) and ($0), respectively
(1
)
 
—

Net (loss) gain recognized in other comprehensive income, net of tax benefit (expense) of $211 and $(101), respectively
$
(712
)
 
$
363




14.
Earnings per Share
The denominator for basic and diluted earnings per share for the three and nine months ended September 30, 2019March 31, 2020 and 20182019 is as follows:
 Three Months Ended 
 September 30
Nine Months Ended 
 September 30
 2019 2018 2019 2018
Denominator for basic earnings per share – weighted-average shares255.2
 259.5
 256.3
 258.0
Effect of dilutive securities – employee stock options, nonvested restricted stock awards, convertible debentures and equity units4.8
 5.9
 4.8
 6.3
Denominator for diluted earnings per share260.0
 265.4
 261.1
 264.3
 

Three Months Ended 
 March 31
 
 
2020
 
2019
Denominator for basic earnings per share – weighted-average shares
 
252.4

 
257.1

Effect of dilutive securities – employee stock options, nonvested restricted stock awards and convertible debentures
 
4.0

 
5.2

Denominator for diluted earnings per share
 
256.4

 
262.3


During the three months ended September 30, 2019March 31, 2020 and 2018,2019, weighted-average shares related to certain stock options of 0.70.9 and 0.0,0.2, respectively, were excluded from the denominator for diluted earnings per share because the stock options were anti-dilutive. During each of the nine months ended September 30, 2019 and 2018, weighted-average shares related to certain stock options of 0.6 and 0.4, respectively, were excluded from the denominator for diluted earnings per share because the stock options were anti-dilutive.
During the three and nine months ended September 30, 2019,March 31, 2020, we issued approximately 0.0 and 0.51.2 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 20192020 through 2021.2022. During the three and nine months ended September 30, 2018,March 31, 2019, we issued approximately 0.0 and 0.90.5 restricted stock units under our stock incentive plans, 0.30.2 of which vesting is contingent upon us meeting specified annual earnings targets for the three year period of 20182019 through 2020.2021. The contingent restricted stock units have been excluded from the denominator for diluted earnings per share and will be included only if and when the contingency is met.

-33-


15.
Segment Information
Beginning in 2020, IngenioRx meets the quantitative thresholds for a reportable segment based on the FASB guidance. The results of our operations are now described through 34 reportable segments: Commercial && Specialty Business, Government Business, IngenioRx and Other,Other.
Our Commercial & Specialty Business segment includes our Local Group, National Accounts, Individual and Specialty businesses. Business units in the Commercial & Specialty Business segment offer fully-insured health products; provide a broad array of managed care services to self-funded customers including claims processing, underwriting, stop loss insurance, actuarial services, provider network access, medical cost management, disease management, wellness programs and other administrative services; and provide an array of specialty and other insurance products and services such as further describeddental, vision, life and disability insurance benefits.
Our Government Business segment includes our Medicare and Medicaid businesses, National Government Services, or NGS, and services provided to the federal government in Note 19, “Segment Information,”connection with the FEHB program. Our Medicare business includes services such as Medicare Supplement plans; Medicare Advantage, including Special Needs Plans; Medicare Part D; and dual-eligible programs through Medicare-Medicaid Plans. Our Medicaid business includes our managed care alternatives through publicly funded healthcare programs, including Medicaid, Medicaid expansion programs related to our audited consolidated financial statementsthe Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, amended, Temporary Assistance for Needy Families, programs for seniors and people with disabilities, Children’s Health Insurance Programs, and specialty programs such as ofthose focused on long-term services and support, HIV/AIDS, foster care, behavioral health and/or substance abuse disorders, and intellectual disabilities or developmental disabilities. NGS acts as a Medicare contractor for the year ended December 31, 2018 includedfederal government in our 2018 Annual Report on Form 10-K.several regions across the nation.
Prior to the second quarter of 2019,Our IngenioRx segment includes our Other segment included certain eliminations and corporate expenses not allocated to either of our other reportable segments. Beginning in the second quarter of 2019, our Other segment also includes IngenioRx, our PBM business, which began its operations during the second quarter of 2019. In addition, duringIngenioRx markets and offers PBM services to fully-insured and self-funded Anthem health plan customers, as well as to external customers outside of the second quarter,health plans we reclassifiedown. IngenioRx has a comprehensive prescription benefits management 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, or DBG, which is our integrated health services business, certain eliminations and corporate expenses not allocated to our other reportable segments. We reclassified DBG from our Government Business segment to the Other segment during the second quarter of 2019 to reflect changes in how our segments are being managed. Amounts for 2018the three months ended March 31, 2019 have been reclassified to conform to the current year presentation for comparability. BasedAlso, beginning on the FASB guidance, as of September 30,February 28, 2020, DBG includes Beacon.
For our 2019 segment reporting, operating gains (losses) generated from IngenioRx and DBG do not collectively meetaffiliated activity were included in our Commercial & Specialty Business and Government Business segments based upon their utilization of services from IngenioRx and DBG, which aligns with the quantitative thresholds for anmethod by which we assessed the 2019 operating segment.performance of our reportable segments. Beginning January 1, 2020, we are managing the operating performance of each of our segments on a standalone basis.
Affiliated revenues represent revenues or cost for services provided by IngenioRx and DBG to our subsidiaries, are recorded at cost or management’smanagement’s estimate of fair market value, and are eliminated in consolidation.

For our segment reporting, operating gains (losses) generated from IngenioRx and DBG affiliated activity have been included in our Commercial & Specialty Business and Government Business based upon their utilization of services from IngenioRx and DBG.-34-



Financial data by reportable segment for the three and nine months ended September 30, 2019March 31, 2020 and 20182019 is as follows:
Commercial
& Specialty
Business
 
Government
Business
 Other Eliminations Total
Commercial
& Specialty
Business
 
Government
Business
 
IngenioRx
 
Other
 
Eliminations
 
Total
Three Months Ended September 30, 2019         
Three Months Ended March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
Operating revenue - unaffiliated
$
9,361

 
$
17,466

 
$
2,344

 
$
277

 
$
—

 
$
29,448

Operating revenue - affiliated
—

 
—

 
2,853

 
750

 
(3,603
)
 
—

Operating gain
1,420

 
411

 
349

 
14

 
—

 
2,194

Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Operating revenue - unaffiliated$9,284
 $15,955
 $1,205
 $—
 $26,444
$
9,392

 
$
14,925

 
$
—

 
$
71

 
$
—

 
$
24,388

Operating revenue - affiliated—
 —
 1,303
 (1,303) —
—

 
—

 
—

 
477

 
(477
)
 
—

Operating gain (loss)930
 616
 (18) —
 1,528
1,598

 
374

 
—

 
(32
)
 
—

 
1,940

Three Months Ended September 30, 2018         
Operating revenue - unaffiliated$8,933
 $13,979
 $68
 $—
 $22,980
Operating revenue - affiliated—
 —
 330
 (330) —
Operating gain (loss)834
 456
 (41) —
 1,249
Nine Months Ended September 30, 2019         
Operating revenue - unaffiliated$28,093
 $46,419
 $1,497
 $—
 $76,009
Operating revenue - affiliated—
 —
 2,353
 (2,353) —
Operating gain (loss)3,511
 1,471
 (81) —
 4,901
Nine Months Ended September 30, 2018         
Operating revenue - unaffiliated$26,939
 $40,951
 $147
 $—
 $68,037
Operating revenue - affiliated—
 —
 961
 (961) —
Operating gain (loss)3,284
 1,477
 (85) —
 4,676

The major product revenues for each of the reportable segments for the three and nine months ended September 30, 2019March 31, 2020 and 20182019 are as follows:
Three Months Ended 
 September 30		 Nine Months Ended 
 September 30
 
Three Months Ended 
 March 31
2019 2018 2019 2018
 
2020
 
2019
Commercial & Specialty Business       
Commercial & Specialty Business
 
 
 
 
Managed care products$7,542
 $7,211
 $22,806
 $21,852
 
$
7,569

 
$
7,618

Managed care services1,330
 1,332
 4,049
 3,913
 
1,381

 
1,366

Dental/Vision products and services325
 306
 975
 914
 
315

 
323

Other87
 84
 263
 260
 
96

 
85

Total Commercial & Specialty Business9,284
 8,933
 28,093
 26,939
Total Commercial & Specialty Business
 
9,361

 
9,392

Government Business       
 
 
 
 
Managed care products15,847
 13,860
 46,111
 40,610
 
17,375

 
14,821

Managed care services108
 119
 308
 341
 
91

 
104

Total Government Business15,955
 13,979
 46,419
 40,951
 
17,466

 
14,925

IngenioRx
 
 
 
 
Pharmacy products and services
 
5,197

 
—

Total IngenioRx
 
5,197

 
—

Other       
 
 
 
 
Other2,508
 398
 3,850
 1,108
 
1,027

 
548

Eliminations       
 
 
 
 
Eliminations(1,303) (330) (2,353) (961)
 
(3,603
)
 
(477
)
Total product revenues$26,444
 $22,980
 $76,009
 $68,037
 
$
29,448

 
$
24,388


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. 


-35-


A reconciliation of reportable segments’segments’ operating revenue to the amounts of total revenues included in our consolidated statements of income for the three and nine months ended September 30, 2019March 31, 2020 and 20182019 is as follows:
 Three Months Ended 
 September 30		 Nine Months Ended 
 September 30
 2019 2018 2019 2018
Reportable segments’ operating revenue$26,444
 $22,980
 $76,009
 $68,037
Net investment income242
 250
 737
 708
Net realized gains on financial instruments1
 27
 90
 5
Other-than-temporary impairment losses recognized in income(13) (6) (30) (18)
Total revenues$26,674
 $23,251
 $76,806
 $68,732
 
 
Three Months Ended 
 March 31
 
 
2020
 
2019
Reportable segments’ operating revenue
 
$
29,448

 
$
24,388

Net investment income
 
254

 
210

Net realized (losses) gains on financial instruments
 
(24
)
 
78

Impairment losses recognized in income
 
(57
)
 
(10
)
Total revenues
 
$
29,621

 
$
24,666


A reconciliation of reportable segments’segments’ operating gain to income before income tax expense included in our consolidated statements of income for the three and nine months ended September 30, 2019March 31, 2020 and 20182019 is as follows:
Three Months Ended 
 September 30		 Nine Months Ended 
 September 30
 
Three Months Ended 
 March 31
2019 2018 2019 2018
 
2020
 
2019
Reportable segments’ operating gain$1,528
 $1,249
 $4,901
 $4,676
Reportable segments’ operating gain
 
$
2,194

 
$
1,940

Net investment income242
 250
 737
 708
 
254

 
210

Net realized gains on financial instruments1
 27
 90
 5
Other-than-temporary impairment losses recognized in income(13) (6) (30) (18)
Net realized (losses) gains on financial instruments
 
(24
)
 
78

Impairment losses recognized in income
 
(57
)
 
(10
)
Interest expense(185) (188) (556) (564)
 
(194
)
 
(187
)
Amortization of other intangible assets(84) (91) (256) (265)
 
(83
)
 
(87
)
Gain (loss) on extinguishment of debt—
 1
 1
 (17)
(Loss) gain on extinguishment of debt
 
(1
)
 
1

Income before income tax expense$1,489
 $1,242
 $4,887
 $4,525
 
$
2,089

 
$
1,945



-36-


16.
Leases
We lease office space and certain computer and related equipment using noncancelable operating leases. Our leases have remaining lease terms of 1 year to 15 years.
The information related to our leases is as follows:
Balance Sheet Location September 30, 2019
Balance Sheet Location
 
March 31, 2020
 
December 31, 2019
Operating Leases  
 
 
 
 
Right-of-use assetsOther noncurrent assets $577
Other noncurrent assets
 
$
915

 
$
575

Lease liabilities, currentOther current liabilities 167
Other current liabilities
 
195

 
158

Lease liabilities, noncurrentOther noncurrent liabilities 473
Other noncurrent liabilities
 
801

 
482

 Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
Lease ExpenseLease Expense   
Lease Expense
 
 
 
 
Operating lease expenseOperating lease expense$48
 $138
Operating lease expense
 
$
47

 
$
45

Short-term lease expenseShort-term lease expense9
 33
Short-term lease expense
 
13

 
12

Sublease incomeSublease income(4) (12)
Sublease income
 
(3
)
 
(4
)
Total lease expenseTotal lease expense$53
 $159
Total lease expense
 
$
57

 
$
53

    
 
 
 
 
Other informationOther information   
Other information
 
 
 
 
Operating cash paid for amounts included in the measurement of lease liabilities, operating leasesOperating cash paid for amounts included in the measurement of lease liabilities, operating leases$43
 $132
Operating cash paid for amounts included in the measurement of lease liabilities, operating leases
 
$
44

 
$
44

Right-of-use assets obtained in exchange for new lease liabilities, operating leasesRight-of-use assets obtained in exchange for new lease liabilities, operating leases$33
 $33
Right-of-use assets obtained in exchange for new lease liabilities, operating leases
 
$
323

 
$
—

Weighted average remaining lease term, operating leasesWeighted average remaining lease term, operating leases6 years
 6 years
Weighted average remaining lease term, operating leases
 
7.2 years

 
6.5 years

Weighted average discount rate, operating leasesWeighted average discount rate, operating leases3.96% 3.96%
Weighted average discount rate, operating leases
 
3.57
%
 
3.97
%

At September 30, 2019,March 31, 2020, future lease payments for noncancellable operating leases with initial or remaining terms of one year or more are as follows:
2019 (excluding the nine months ended September 30, 2019)$60
2020163
2020 (excluding the three months ended March 31, 2020)
$
140

2021133
178

2022121
161

2023103
140

2024
110

Thereafter79
288

Total future minimum payments659
1,017

Less imputed interest(19)
(21
)
Total lease liabilities$640
$
996


As of September 30, 2019,March 31, 2020, 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 12 years and are expected to commence on various dates during 2020 and 2021 when the construction is complete and we take possession of the buildings.buildings. The undiscounted lease payments for these leases, which are not included in the tables above, aggregate $147.$226.

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ITEM 2.
MANAGEMENT’S
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In Millions, Except Per Share Data or as Otherwise Stated Herein)
This Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A,&A, should be read in conjunction with the accompanying consolidated financial statements and notes, our consolidated financial statements and notes as of and for the year ended December 31, 20182019 and the MD&A&A included in our 20182019 Annual Report on Form 10-K. References to the terms “we,” “our,” “us,”“we,” “our,” “us,” or “Anthem”“Anthem” used throughout this MD&A&A refer to Anthem, Inc., an Indiana corporation, and unless the context otherwise requires, its direct and indirect subsidiaries. References to the “states”“states” include the District of Columbia, unless the context otherwise requires.
Results of operations, cost of care trends, investment yields and other measures for the three and nine months ended September 30, 2019March 31, 2020 are not necessarily indicative of the results and trends that may be expected for the full year ending December 31, 2019,2020, or any other period.
Overview
We are one of the largest health benefits companies in the United States in terms of medical membership, serving approximately 41 42 million medical members through our affiliated health plans as of September 30, 2019. March 31, 2020. We serve our members as the Blue Cross licensee for California and as the Blue Cross and Blue Shield, or BCBS, licensee for Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri (excluding 30counties 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. We also conduct business through arrangements with other BCBS licensees.licensees as well as other strategic partners. Through our subsidiaries, we also serve customers in numerous states across the country as America’s 1st Choice,AIM Specialty Health, Amerigroup, Aspire Health, Beacon Health, CareMore, Freedom Health, HealthLink, HealthSun, Optimum HealthCare, Simply Healthcare, and/or Unicare. Also, beginning in the second quarter of 2019, we provide pharmacybegan providing prescription benefits management, or PBM, services through our IngenioRx subsidiary. We are licensed to conduct insurance operations in all 50 states and the District of Columbia through our subsidiaries.
For additional information about our organization, see Part I, Item 1, “Business”“Business” and Part II, Item 7 “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations,”” included in our 20182019 Annual Report on Form 10-K. Additional information on our segments can be found in this MD&A&A and in Note 15, “Segment Information”“Segment Information” of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
COVID-19
In March 2020, the World Health Organization declared the outbreak of a novel strain of coronavirus, or COVID-19, a global health pandemic and recommended containment and mitigation measures worldwide. Since then, the COVID-19 outbreak has also been declared a national health emergency in the United States and continues to spread domestically and in other countries globally. To prevent the spread of this virus, most states have issued shelter-in-place or stay-at-home orders, which generally require businesses not considered essential to close their physical offices. The virus and efforts to prevent its spread have also drastically impacted the global economy, causing market instability and increasing unemployment in the United States.
In response to the COVID-19 pandemic, federal and state legislation has been, and we expect will continue to be, enacted that will impact our business. For additional information on existing legislation related to the impact of the COVID-19 pandemic on our business, see “Regulatory Trends and Uncertainties” in this MD&A.
To better serve our members, we have introduced new resources and taken proactive steps that can help provide increased access to care for our members. We have launched an online COVID-19 symptom assessment tool and enhanced the digital capabilities of Sydney Care, our mobile app, to include a symptom checker feature, as well as virtual text visit and video visit features. The symptom checker feature guides users through the resulting action plan depending upon the results of the user’s assessment, and the virtual text feature connects users to certified physicians who can provide medical care

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including prescribing medication and ordering lab work during consults as necessary. We are providing virtual visits through our LiveHealth Online service, including visits for mental health, and waiving cost share until June 14, 2020 for telehealth visits for our members in fully-insured employer plans, Individual plans, Medicare plans and Medicaid plans, where permissible. Further, we have relaxed early prescription refill policies for maintenance and specialty medications and are encouraging the use of home delivery services to ensure access to necessary medications.
We have also made other changes to our membership benefits and business operations and may make additional changes in the future. We suspended select prior authorization requirements to allow care providers to focus on caring for our members diagnosed with COVID-19. While not mandated, on April 1, 2020, to meet the needs of those directly impacted by the COVID-19 disease, we expanded coverage for certain members in our affiliated health plans undergoing treatment related to a COVID-19 diagnosis. The expansion waives cost sharing for COVID-19 treatment received through May 31, 2020, and we will reimburse health care providers at in-network rates or Medicare rates, as applicable, for our affiliated health plan fully insured employer, Individual, Medicaid and Medicare Advantage members. In addition, government action required us to provide full coverage for COVID-19 testing to our members, and future governmental action could require us to provide additional coverage related to COVID-19 treatments. We are in frequent communication with our employer groups in an effort to support them in these unprecedented times and we serve as a resource for employers looking for health coverage options.
The safety, health and wellbeing of our employees remains a top priority as we face these challenges together, and continue our work in support of those we serve. To protect our employees and mitigate the spread of COVID-19, we have imposed travel limitations and directed our employees to work remotely whenever possible, with nearly all of our employees working remote. We have expanded our employee benefits to provide additional support, including up to 80 hours of paid emergency leave if employees are experiencing symptoms of COVID-19 or carrying for young children whose schools have been closed. We are also expanding the use of sick time to include caregiving related to COVID-19. Furthermore, we have taken additional precautions with regard to workspace modifications and sanitation of our facilities.
The COVID-19 pandemic, including the changes we made in response to and any further steps taken to expand or otherwise modify the services delivered to our members, could have a material adverse impact on our business, cash flows, financial condition and results of operations. These impacts include, but are not limited to, the following:
◦Our covered medical expenses may rise;
◦Our membership may decline;
◦Our membership mix may change to less profitable lines of business;
◦Premium receipts from our Commercial and Government customers may be delayed or uncollectable;
◦Reimbursements for benefit payments made on behalf of our self-insured customers may be delayed or uncollectable;
◦Our suppliers’ operations may be interrupted;
◦Our operations may be interrupted;
◦Our access to credit to meet liquidity may become limited and our credit rating may be negatively impacted; and
◦Our investment returns may be reduced and investment values may become impaired.
We are focused on navigating these challenges and have taken certain measures to address the impacts of the COVID-19 pandemic. In particular, we are taking several actions to preserve our liquidity and financial flexibility. Such measures include, but are not limited to, borrowing under our senior revolving credit facility, delaying certain tax payments as permitted by the Internal Revenue Service and the Coronavirus Aid, Relief, and Economic Security, or CARES, Act, increasing our borrowings from existing or new Federal Home Loan Bank memberships, reducing our discretionary spending and temporarily suspending our share repurchase activity.
We continue to closely monitor the COVID-19 pandemic as well as resulting legislative and regulatory changes that may impact our business. For additional discussion regarding our risk factors, see Part I, Item 1A, “Risk Factors” included in our 2019 Annual Report on Form 10-K and Part II, Item 1A, “Risk Factors” of this Form 10-Q.
Business Trends
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, as amended, or collectively, the ACA, has changed and may continue to make broad-based changes to the U.S. health care system, which wehealthcare system. We expect the ACA will continue to impact our business model and strategy. Also, the legal challenges regarding the

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ACA, including the ultimate outcome of the December 2018a federal district court decision of the U.S. District Court for the Northern District of Texas, Fort Worth Division invalidating the ACA, or the 2018 Texas District Court ACA Decision, which judgment has been stayed pending appeal, could significantly disrupt our business. During 2018,2019, we strategically reducedmodestly expanded our participation in the Individual ACA-compliant market. Our strategy has been, and will continue to be, to only participate in rating regions where we have an appropriate level of confidence that these markets are on a path toward sustainability, including, but not limited to, factors such as expected financial performance, regulatory environment, and underlying market characteristics. We currently offer Individual ACA-compliant products in 7391 of the 143 rating regions in which we operate. In addition, the continuing growth in our government-sponsored business exposes us to increased regulatory oversight.
In October 2017,the second quarter of 2019, we establishedbegan using IngenioRx to market and offer PBM services to fully-insured and self-funded Anthem health plan customers throughout the country, as well as to external customers outside of the health plans we own. The comprehensive PBM services portfolio includes services such as formulary management, pharmacy networks, prescription drug database, member services and mail order capabilities. In July 2019, we announced our first contract win with a new pharmacy benefits manager, orthird-party health insurer, Blue Cross of Idaho, and IngenioRx began providing PBM calledservices under that contract on January 1, 2020. Also in the second quarter of 2019, IngenioRx began delegating certain PBM administrative functions, such as claims processing and entered into a five-year agreement withprescription fulfillment, to CaremarkPCS Health, L.L.C., or CVS Health, which is a subsidiary of CVS Health Corporation, pursuant to begin offeringa 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. From December 2009 through December 2019, we delegated certain PBM solutions (the “CVS PBM Agreement”) upon the conclusion offunctions and administrative services to Express Scripts Inc., or Express Scripts, pursuant to our PBM agreement with Express Scripts, Inc., or Express Scripts (the “ESI PBM Agreement”). As a result of exercising our early termination right, the ESI PBM Agreement terminated on March 1, 2019, and on March 2, 2019, the twelve-month transition period to migrate the servicesAgreement. We began transitioning existing members from Express Scripts began. CVS Health began providing certain PBM services to IngenioRx in the second quarter of 2019,


pursuant to and completed the CVS PBM Agreement.transition of all of our members by January 1, 2020. We expect IngenioRx to provide our members with more cost-effective solutions and improve our ability to integrate pharmacy benefits within our medical and specialty platform.
Pricing Trends: We strive to price our healthcare benefit products consistent with anticipated underlying medical cost trends. We frequently make adjustments to respond to legislative and regulatory changes as well as pricing and other actions taken by existing competitors and new market entrants. Product pricing in our Commercial && Specialty Business segment, including our Individual and Small Group lines of business, remains competitive. Revenues from the Medicare and Medicaid programs are dependent, in whole or in part, upon annual funding from the federal government and/or applicable state governments.
The ACA imposed an annual Health Insurance Provider Fee, or HIP Fee, on health insurers that write certain types of health insurance on U.S. risks. We price our affected products to cover the impact of the HIP Fee.Fee, when applicable. The HIP Fee was suspended for 2019, has resumed for 2020 and is scheduled to resume for 2020.has been permanently eliminated beginning in 2021.
Medical Cost Trends: Our medical cost trends are primarily driven by increases in the utilization of services across all provider types and the unit cost increases of these services. We work to mitigate these trends through various medical management programs such as utilization management, condition management, program integrity and specialty pharmacy management, as well as benefit design changes. There are many drivers of medical cost trends whichthat can cause variancesvariance from our estimates, such as changes in the level and mix of services utilized, regulatory changes, aging of the population, health status and other demographic characteristics of our members, epidemics, pandemics, advances in medical technology, new high cost prescription drugs, and healthcare provider or member fraud. Our underlying Local Group medical cost trends reflect the “allowed“allowed amount,”” or contractual rate, paid to providers. We estimate thatThe COVID-19 pandemic has caused, and may continue to cause, deferral of non-emergent or elective health services, which could decrease our claim costs in the 2019 Local Groupshort-term and increase our claim costs in the long-term and affect our medical cost trend will betrends. Further, the amount and frequency of covered services related to the COVID-19 disease could have a material adverse effect on our claim costs. In response to the current crisis, we expanded coverage for certain members in our affiliated health plans undergoing treatment related to a COVID-19 diagnosis. The expansion waives cost sharing for COVID-19 treatment received through May 31, 2020. Governmental action has required us to provide full coverage for COVID-19 testing to our members, and future governmental action could require us to provide additional coverage. We continue to closely monitor the rangeCOVID-19 pandemic and its impacts to our business, financial condition, results of 5.5% to 6.5%.operations and medical cost trend.
For additional discussion regarding business trends, see Part I, Item 1, “Business”“Business” included in our 20182019 Annual Report on Form 10-K.

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Regulatory Trends and Uncertainties
Federal and state legislation has been enacted, and is likely to continue to be enacted, in response to the COVID-19 pandemic that have had, and we expect will continue to have, a significant impact on all of our lines of business, including mandates to waive cost-sharing on COVID-19 testing and related services. As of April 21, 2020, the federal government has enacted the following four pieces of legislation addressing the COVID-19 pandemic, among others:
◦
Signed into law on March 6, 2020, the Coronavirus Preparedness and Response Supplemental Appropriations Act provided supplemental appropriations for the Department of Health and Human Services, the State Department, and the Small Business Administration to respond to the COVID-19 pandemic, as well as certain reforms, including waiving Medicare originating site restrictions for qualified providers providing telehealth services.
◦
Signed into law on March 19, 2020, the Families and Workers First Act enacted a prohibition on prior authorization and cost-sharing for certain items and services related to COVID-19 tests.
◦
Signed into law on March 27, 2020, the CARES Act provided financial support to health care providers, including expansion of the Medicare accelerated payment program to all providers receiving Medicare payments. The CARES Act also provided a broad lending program for small businesses to help keep their workers employed and healthcare benefits covered in the group market.
◦
Signed into law on April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act allocated additional funds to replenish and administer small business loan programs and increased financial support to providers and bolstered COVID-19 testing.
In addition, these legislative reforms and the Internal Revenue Service Notice 2020-23, or IRS Notice 2020-23, issued inApril 2020 in response to the COVID-19 pandemic included tax deferrals and other beneficial provisions, including delay of certain payroll and federal income tax payments, which we expect to have a positive impact on our 2020 cash flows. For more information on measures we have taken to increase our cash on hand, see “Future Sources and Uses of Liquidity” in this MD&A.
Regulatory changes have also been enacted, and are likely to continue to be enacted, at the state and federal level in response to the COVID-19 pandemic. Those changes, which could have a significant impact on health benefits, consumer eligibility for public programs, and cash flows, include mandated expansion of premium payment terms including the time period for which claims can be denied for lack of payment, mandates related to prior authorizations and payment levels to providers, additional consumer enrollment windows, and increased ability to provide services through telehealth. We have begun providing extensions to premium payment terms in certain situations and continue to work closely with state regulators that are mandating or requesting such relief.
The ACA presented us with new growth opportunities, but also introduced new risks, regulatory challenges and uncertainties, and required changes in the way products are designed, underwritten, priced, distributed and administered. Changes to our business environment mayare likely to continue for the next several years as elected officials at the national and state levels continue to enact, and both elected officials and candidates for election continue to propose, significant modifications to existing laws and regulations, including the reduction of the individual mandate penalty to zero, effective January 1, 2019, elimination of funding for cost-sharing subsidies made available for qualified individuals, and changes to taxes and fees. In addition, the legal challenges regarding the ACA, including the ultimate outcome of the 2018 Texas District Court ACA Decision, which judgment has been stayed pending appeal, continue to contribute to this uncertainty. In a separate development, in April 2020, the U.S. Supreme Court ruled that the federal government is required to pay health insurance companies for amounts owed, as calculated under the risk corridor program of the ACA. We will review this ruling and recognize the impact, if any, in a future reporting period. We will continue to evaluate the impact of the ACA as additional guidance is made available and any further developments or judicial rulings occur.
The annual HIP Fee is allocated to health insurers based on the ratio of the amount of an insurer’sinsurer’s net premium revenues written during the preceding calendar year to the amount of health insurance premium for all U.S. health risk for those certain lines of business written during the preceding calendar year. We record our estimated liability for the HIP Fee in full at the beginning of the year with a corresponding deferred asset that is amortized on a straight-line basis to selling, general and administrative expense. The final calculation and payment of the annual HIP Fee is due by September 30th of each fee year. The HIP Fee is non-deductible for federal income tax purposes. We price ourOur affected products are priced to cover the increased selling, general and administrative and income tax expenses associated with the HIP Fee. The total amount due from allocations to all health insurers was $14,300is $15,523 for 2018.2020. For the three and nine months ended September 30, 2018,March 31, 2020, we estimated our portion

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of the HIP Fee to be $417, which was recognized $362 and $1,157, respectively, as general and administrative expense related to the HIP Fee.expense. There was no corresponding expense for 2019 due to the suspension of the HIP Fee for 2019. The HIP Fee is scheduled to resume for 2020.
For additional discussion regarding regulatory trends and uncertainties and risk factors, see Part I, Item 1, “Business“Business - Regulation”Regulation” and Part I, Item 1A, “Risk Factors”“Risk Factors”, and the “Regulatory“Regulatory Trends and Uncertainties”Uncertainties” section of Part II, Item 7, “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” included in our 20182019 Annual Report on Form 10-K.10-K and Part II, Item 1A, “Risk Factors” of this Form 10-Q.


Other Significant Items
In June 2019,On February 28, 2020, we announcedcompleted our entrance into an agreement to acquireacquisition of Beacon Health Options, Inc., or Beacon, the largest independently held behavioral health organization in the country. At the time of acquisition, Beacon serves approximately fortyserved more than thirty-four million individuals across all fifty states. This acquisition aligns with our strategy to diversify into health services and deliver both integrated solutions and care delivery models that personalize care for people with complex and chronic conditions. The acquisition is expectedFor additional information, see Note 3, “Business Acquisitions,” of the Notes to close lateConsolidated Financial Statements included in the fourth quarterPart 1, Item 1 of 2019 and is subject to standard closing conditions and customary approvals.this Form 10-Q.
In October 2017,January 2019, we established IngenioRx and entered into the CVS PBM Agreement, which coincides with the conclusion of the ESI PBM Agreement. We exercised our contractual right and terminatedto terminate the ESI PBM Agreement, on March 1, 2019. The twelve-monthand we completed the transition period to migrate the servicesof our members from Express Scripts began on March 2, 2019. CVS Health began providing certain PBM services to IngenioRx in the second quarter of 2019 pursuant to the CVS PBM Agreement.on January 1, 2020. Notwithstanding our termination of the ESI PBM Agreement, the litigation between us and Express Scripts regarding the ESI PBM Agreement continues. For additional information regarding this lawsuit, see Note 11, “Commitments“Commitments and Contingencies - Litigation and Regulatory Proceedings - Express Scripts, Inc. Pharmacy Benefit Management Litigation,”” of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
In February 2018, we completed our acquisition of Freedom Health, Inc., Optimum HealthCare, Inc., America’s 1st Choice of South Carolina, Inc. and related entities, or collectively, America’s 1st Choice, a Medicare Advantage organization that offers health maintenance organization products, including Chronic Special Needs Plans and Dual-Eligible Special Needs Plans under its Freedom Health and Optimum HealthCare brands in Florida and its America’s 1st Choice of South Carolina brand in South Carolina. For additional information, see Note 3, “Business Acquisitions,” of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
In May 2017, we announced that we were terminating the Agreement and Plan of Merger, or Cigna Merger Agreement, between us and Cigna Corporation. For additional information about ongoing litigation related to the Cigna Merger Agreement, see Note 11, “Commitments“Commitments and Contingencies - Litigation and Regulatory Proceedings - Cigna Corporation Merger Litigation,”” of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Selected Operating Performance
For the twelve months ended September 30, 2019,March 31, 2020, total medical membership increased 1.1,1.3, or 2.7%3.2%. Our medical membership grew across our reportable businessin both Government Business and Commercial & Specialty Business segments. The increase in medical membership in our Government Business segment was primarily due to fully-insured membership growth in our Medicaid and Medicare businesses. The increase in medical membership in our Commercial && Specialty Business segment was primarily due todriven by growth in our National business.self-funded business, partially offset by declines in our fully-insured membership.
Operating revenue for the three months ended September 30, 2019March 31, 2020 was $26,444, $29,448, an increase of $3,464,$5,060, or 15.1%20.7%, from the three months ended September 30, 2018.March 31, 2019. The increase in operating revenue for the three months ended September 30, 2019 compared to 2018 was primarily driven by pharmacy product revenue related to the launch of IngenioRx. The increase was further attributable to higher premiumspremium revenue from rate increases across our businesses designed to cover overall cost trends and the impact of the HIP Fee reinstatement for 2020, and membership growth in our Government Business segment and increased administrative fees and other revenue in our Other segment. Operating revenue for the nine months ended September 30, 2019 was $76,009, an increase of $7,972, or 11.7%, from the nine months ended September 30, 2018. The increase in operating revenue for the nine months ended September 30, 2019 compared to 2018 was primarily a result of higher premiums in our Government Business segment and, to a lesser extent, increased administrative fees and other revenue in our Other segment and higher premiums in our Commercial & Specialty Business segment.
Net income for the three months ended September 30, 2019March 31, 2020 was $1,183, an increase$1,523, a decrease of $223,$28, or 23.2%1.8%, from the three months ended September 30, 2018.March 31, 2019. The increasedecrease in net income for the three months ended September 30, 2019 compared to 2018 was driven by improved operating results in our Government Business and Commercial & Specialty Business segments. Net income for the nine months ended September 30, 2019 was $3,873, an increase of $548, or 16.5%, from the nine months ended September 30, 2018. The increase in net income for the nine months ended September 30, 2019 compared to 2018 wasprimarily due to improvedlower operating results in our Commercial && Specialty Business segment, and lowerhigher income tax expense.expense due to the HIP Fee reinstatement for 2020 and net realized losses on financial instruments compared to net realized gains on financial instruments in the three months ended March 31, 2019. The decrease in net income was partially offset by favorable operating results in our IngenioRx segment and higher operating results in our Other and Government Business segments.
Our diluted earnings per share, or EPS, was $4.55$5.94 for the three months ended September 30, 2019,March 31, 2020, which represented a 25.7% 0.5%increase from EPS of $3.62$5.91 for the three months ended September 30, 2018. Our fully-diluted EPS was $14.83 for the


nine months ended September 30,March 31, 2019 which represented a 17.9% . This increase from fully-diluted EPS of $12.58 for the nine months ended September 30, 2018. The increase in EPS for the three and nine months ended September 30, 2019 compared to 2018 resulted from the increase in net income in 2019, and toimpact of a lesser extent, the lower number of shares outstanding in 2019.2020, partially offset by the decrease in net income.

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Operating cash flow for the ninethree months ended September 30, 2019March 31, 2020 and 20182019 was $4,734$2,515 and $3,364,$1,630, respectively. This increase was primarily dueattributable to the impact of membership increases in our Medicaid and Medicare businesses. These increases were partially offset by lowerhigher premium receipts as a result of the suspension of the HIP Fee for 2019.reinstatement in 2020 as well as other changes in working capital.


Membership
The following table presents our medical membership by customer type, funding arrangement and reportable segment as of September 30, 2019March 31, 2020 and 2018.2019. Also included below is other membership by product. At this time, the following table does not include membership resulting from our acquisition of Beacon. The medical membership and other membership data presented are unaudited and in certain instances include estimates of the number of members represented by each contract at the end of the period. For a more detailed description of our medical membership, see the “Membership”“Membership” section of Part II, Item 7, “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” included in our 20182019 Annual Report on Form 10-K.
 September 30
 
 
 
March 31

 

 
(In thousands)(In thousands)2019 
2018 1

Change
% Change
(In thousands)
2020
 
2019

Change

% Change
Medical MembershipMedical Membership






Medical Membership







Customer TypeCustomer Type






Customer Type







Local GroupLocal Group15,659
 15,688
 (29) (0.2)%
Local Group
15,848

 
15,697

 
151

 
1.0
 %
IndividualIndividual711
 692
 19
 2.7 %
Individual
717

 
773

 
(56
)
 
(7.2
)%
National:National:       
National:
 
 
 
 
 
 
 
National AccountsNational Accounts7,666
 7,610
 56
 0.7 %
National Accounts
7,898

 
7,757

 
141

 
1.8
 %
BlueCard®
5,967
 5,794
 173
 3.0 %
BlueCard®
BlueCard®
6,197

 
5,981

 
216

 
3.6
 %
Total NationalTotal National13,633
 13,404
 229
 1.7 %
Total National
14,095

 
13,738

 
357

 
2.6
 %
Medicare:Medicare:       
Medicare:
 
 
 
 
 
 
 
Medicare AdvantageMedicare Advantage1,203
 992
 211
 21.3 %
Medicare Advantage
1,341

 
1,144

 
197

 
17.2
 %
Medicare SupplementMedicare Supplement893
 837
 56
 6.7 %
Medicare Supplement
914

 
867

 
47

 
5.4
 %
Total MedicareTotal Medicare2,096
 1,829
 267
 14.6 %
Total Medicare
2,255

 
2,011

 
244

 
12.1
 %
MedicaidMedicaid7,293
 6,731
 562
 8.3 %
Medicaid
7,615

 
7,033

 
582

 
8.3
 %
Federal Health Products & Services1,592
 1,557
 35
 2.2 %
Federal Employees Health Benefits
Federal Employees Health Benefits
1,614

 
1,591

 
23

 
1.4
 %
Total Medical Membership by Customer TypeTotal Medical Membership by Customer Type40,984
 39,901
 1,083
 2.7 %
Total Medical Membership by Customer Type
42,144

 
40,843

 
1,301

 
3.2
 %
Funding ArrangementFunding Arrangement       
Funding Arrangement
 
 
 
 
 
 
 
Self-FundedSelf-Funded25,368
 25,253
 115
 0.5 %
Self-Funded
26,120

 
25,495

 
625

 
2.5
 %
Fully-InsuredFully-Insured15,616
 14,648
 968
 6.6 %
Fully-Insured
16,024

 
15,348

 
676

 
4.4
 %
Total Medical Membership by Funding ArrangementTotal Medical Membership by Funding Arrangement40,984
 39,901
 1,083
 2.7 %
Total Medical Membership by Funding Arrangement
42,144

 
40,843

 
1,301

 
3.2
 %
Reportable SegmentReportable Segment       
Reportable Segment
 
 
 
 
 
 
 
Commercial & Specialty Business30,003
 29,784
 219
 0.7 %
Commercial & Specialty Business
Commercial & Specialty Business
30,660

 
30,208

 
452

 
1.5
 %
Government BusinessGovernment Business10,981
 10,117
 864
 8.5 %
Government Business
11,484

 
10,635

 
849

 
8.0
 %
Total Medical Membership by Reportable SegmentTotal Medical Membership by Reportable Segment40,984
 39,901
 1,083
 2.7 %
Total Medical Membership by Reportable Segment
42,144

 
40,843

 
1,301

 
3.2
 %
Other MembershipOther Membership       
Other Membership
 
 
 
 
 
 
 
Life and Disability MembersLife and Disability Members4,970
 4,701
 269
 5.7 %
Life and Disability Members
5,158

 
4,849

 
309

 
6.4
 %
Dental MembersDental Members5,942
 5,804
 138
 2.4 %
Dental Members
6,172

 
5,955

 
217

 
3.6
 %
Dental Administration MembersDental Administration Members5,526
 5,367
 159
 3.0 %
Dental Administration Members
1,311

 
5,491

 
(4,180
)
 
(76.1
)%
Vision MembersVision Members7,232
 6,906
 326
 4.7 %
Vision Members
7,510

 
7,169

 
341

 
4.8
 %
Medicare Part D Standalone MembersMedicare Part D Standalone Members285
 312
 (27) (8.7)%
Medicare Part D Standalone Members
383

 
289

 
94

 
32.5
 %
        
 
 
 
 
 
 
 
 
1During the fourth quarter of 2018, we made a number of changes to our membership reporting to better align our reported membership to the appropriate type, funding arrangement and segment. Accordingly, certain types of membership have been reclassified to conform to the current year presentation.




-43-


Medical Membership
Total medical membership increased across our reportable businessgrew in both Government Business and Commercial & Specialty Business segments and the increase was driven primarilyas well as by growth in our fully-insured businesses.funding arrangement. Fully-insured membership increased primarily due to growth in our Medicaid and Medicare businesses, partially offset by the membership decreases in our fully-insured Local Group business resulting from lapses and National Accounts businesses.in-group change exceeding sales and in our Individual business resulting from attrition in our non-ACA-compliant off-exchange product offerings. Self-funded medical membership increased primarily due to higher activity from BlueCard® membership, partially offset by the decrease in our Large Group self-funded membership, which declined as a result of competitive pressures. Medicaid membership increased primarily due to new businesses and expansions, partially offset by the membership decrease resulting from the loss of a contract. Medicare membership increased primarily due to higher sales during open enrollment exceeding lapses. BlueCard®® membership increased due to higher membership activity at other Blue Cross and Blue Shield Association, or BCBSA, plans whose members reside in or travel to our licensed areas. The increase in self-funded membership was further attributable to membership increases in our National Accounts business resulting from our acquisition of a third-party administrator, or TPA, and in our Local Group self-funded business resulting from in-group change. Medicaid membership increased primarily due to our acquisition of Medicaid plans in Missouri and Nebraska and organic growth in existing markets. Medicare membership increased primarily due to higher sales during open enrollment exceeding lapses. Local Group membership increased due to our TPA acquisition, new sales and favorable in-group change exceeding lapses. National Accounts membership increased primarily due to new sales.our TPA acquisition.
Other Membership
Our other membership can be impacted by changes in our medical membership, as our medical members often purchase our other products that are ancillary to our health business. We have experienced growth in our life and disability and dental memberships primarily due to higher sales in our LargeLocal Group business. Dental administration membership increased primarilydecreased due to in-group changes.the lapse of a large dental administration services contract. Vision membership increased due to higher sales in our Medicare and LargeLocal Group businesses.

-44-


Consolidated Results of Operations
Our consolidated summarized results of operations and other financial information for the three and nine months ended September 30, 2019March 31, 2020 and 20182019 are as follows: 
 Three Months Ended 
 September 30		 Nine Months Ended 
 September 30
Change
 
 
Three Months Ended 
 March 31

 
 
 
 
 Three Months Ended 
 September 30
Nine Months Ended 
 September 30
 

 
 2019 vs. 2018 2019 vs. 2018
 
 
 2019 2018 2019 2018
$
%
$
%
 
2020
 
2019


$ Change

% Change
Total operating revenueTotal operating revenue$26,444

$22,980

$76,009

$68,037

$3,464
 15.1 % $7,972
 11.7 %
Total operating revenue

$
29,448


$
24,388


 
$
5,060

 
20.7
 %
Net investment incomeNet investment income242

250

737

708

(8) (3.2)% 29
 4.1 %
Net investment income

254


210


 
44

 
21.0
 %
Net realized gains on financial instruments1

27

90

5

(26) (96.3)% 85
 1,700.0 %
Other-than-temporary impairment losses recognized in income(13)
(6)
(30)
(18)
(7) 116.7 % (12) 66.7 %
Net realized (losses) gains on financial instruments
Net realized (losses) gains on financial instruments

(24
)

78


 
(102
)
 
(130.8
)%
Impairment losses recognized in income
Impairment losses recognized in income

(57
)

(10
)

 
(47
)
 
470.0
 %
Total revenuesTotal revenues26,674

23,251

76,806

68,732

3,423
 14.7 % 8,074
 11.7 %
Total revenues

29,621


24,666


 
4,955

 
20.1
 %
Benefit expenseBenefit expense20,753

18,185

60,403

52,959

2,568
 14.1 % 7,444
 14.1 %
Benefit expense

21,489


19,282


 
2,207

 
11.4
 %
Cost of products soldCost of products sold745
 —
 843
 —
 745
 NM
 843
 NM
Cost of products sold
 
1,984

 
—

 
1,984

 
NM

Selling, general and administrative expenseSelling, general and administrative expense3,418

3,546

9,862

10,402

(128) (3.6)% (540) (5.2)%
Selling, general and administrative expense

3,781


3,166


 
615

 
19.4
 %
Other expense1
Other expense1
269

278

811

846

(9) (3.2)% (35) (4.1)%
Other expense1

278


273


 
5

 
1.8
 %
Total expensesTotal expenses25,185

22,009

71,919

64,207

3,176
 14.4 % 7,712
 12.0 %
Total expenses

27,532


22,721


 
4,811

 
21.2
 %
Income before income tax expenseIncome before income tax expense1,489

1,242

4,887

4,525

247
 19.9 % 362
 8.0 %
Income before income tax expense

2,089


1,945


 
144

 
7.4
 %
Income tax expenseIncome tax expense306

282

1,014

1,200

24
 8.5 % (186) (15.5)%
Income tax expense

566


394


 
172

 
43.7
 %
Net incomeNet income$1,183
 $960
 $3,873
 $3,325
 $223
 23.2 % $548
 16.5 %
Net income
 
$
1,523

 
$
1,551

 
$
(28
)
 
(1.8
)%
               
 
 
 
 
 
 
 
 
Average diluted shares outstandingAverage diluted shares outstanding260.0

265.4

261.1

264.3

(5.4) (2.0)% (3.2) (1.2)%
Average diluted shares outstanding

256.4


262.3


 
(5.9
)
 
(2.2
)%
Diluted net income per shareDiluted net income per share$4.55
 $3.62
 $14.83
 $12.58
 $0.93
 25.7 % $2.25
 17.9 %
Diluted net income per share
 
$
5.94

 
$
5.91

 
$
0.03

 
0.5
 %
Effective tax rateEffective tax rate20.6% 22.7% 20.7% 26.5%   
(210)bp3

   
(580)bp3

Effective tax rate
 
27.1
%
 
20.3
%
 
 
 
680bp3

Benefit expense ratio2
Benefit expense ratio2
87.2%
84.8%
86.1%
83.3%


240bp3




280bp3

Benefit expense ratio2

84.2
%

84.4
%




(20)bp3

Selling, general and administrative expense ratio4
Selling, general and administrative expense ratio4
12.9%
15.4%
13.0%
15.3%


(250)bp3




(230)bp3

Selling, general and administrative expense ratio4

12.8
%

13.0
%




(20)bp3

Income before income tax expense as a percentage of total revenuesIncome before income tax expense as a percentage of total revenues5.6%
5.3%
6.4%
6.6%


30bp3




(20)bp3

Income before income tax expense as a percentage of total revenues

7.1
%

7.9
%




(80)bp3

Net income as a percentage of total revenuesNet income as a percentage of total revenues4.4%
4.1%
5.0%
4.8%


30bp3




20bp3

Net income as a percentage of total revenues

5.1
%

6.3
%




(120)bp3

               
 
 
 
 
 
 
 
 
Certain of the following definitions are also applicable to all other results of operations tables in this discussion:
NM
Not meaningful.
1
Includes interest expense, amortization of other intangible assets and (gain) loss on extinguishment of debt.
2
Benefit expense ratio represents benefit expense as a percentage of premium revenue. Premiums for the three months ended September 30, 2019March 31, 2020 and 20182019 were $23,793$25,517 and $21,451, respectively. Premiums for the nine months ended September 30, 2019 and 2018 were $70,137 and $63,602,$22,843, respectively. Premiums are included in total operating revenue presented above.
3
bp = basis point; one hundred basis points = 1%.
4
Selling, general and administrative expense ratio represents selling, general and administrative expense as a percentage of total operating revenue.
Three Months Ended September 30, 2019March 31, 2020 Compared to the Three Months Ended September 30, 2018March 31, 2019
The increase in total operating revenue was primarily due to product revenue and higher premiumspremiums. Product revenue represents services performed by our IngenioRx pharmacy benefit manager for unaffiliated PBM customers as well as ingredient costs (net of any rebates or discounts), including co-payments made by or on behalf of the customer, and increased administrative fees and other revenue.fees. There was no product revenue recognized in the three months ended March 31, 2019, as IngenioRx began its operations during the second quarter of 2019. The higher premiums were due to membership growth primarily in our Government Business segment. The increase was further attributable to rate increases across our businesses designed to cover overall cost trends. These increases in premiums were partially offset bytrends and the impact of the HIP Fee suspensionreinstatement for 2019. The increase2020, and membership growth in administrative fees and other revenue was primarily driven by IngenioRx, which began its operations duringour Government Business segment.

-45-


We recognized net realized losses on financial instruments in the secondfirst quarter of 2020 compared to net realized gains on financial instruments in the first quarter of 2019.


Benefit expense increased This change was primarily due to a decrease in net realized gains on equity securities reflecting the changes in their fair values during the three months ended March 31, 2020.
Benefit expense increased primarily due to increased costs as a result of growth in our Medicare and Medicaid membership growthand overall cost trends across our reportable business segments.businesses.
Our benefit expense ratio increaseddecreased largely due to the lossimpact of revenue associated with the HIP Fee suspensionreinstatement for 2019.2020. This decrease was partially offset by the leap year impact of an extra day of claims in the three months ended March 31, 2020 as associated premiums are recognized ratably throughout the year, and margin normalization in our Individual business.
Cost of products sold reflects the cost of pharmaceuticals dispensed by IngenioRx for our self-funded customers. IngenioRx began operations during the second quarter of 2019, so thereIngenioRx. There was no cost of products sold recognized in 2018.the three months ended March 31, 2019, as IngenioRx began its operations during the second quarter of 2019.
Our selling, general and administrative expense decreasedincreased primarily due to the suspensionreinstatement of the HIP Fee for 2019. This decrease was partially offset by2020, and to a net increase inlesser extent, increased spend to support growth in our businesses.
Our selling, general and administrative expense ratio decreased due to the growth in operating revenue andrevenue. This decrease was partially offset by the suspensionreinstatement of the HIP Fee for 2019.2020 and increased spend to support growth in our businesses.
Our effective income tax expense rate increased primarily due to the 2018 remeasurement of deferred tax assets and liabilities against the prior year provisional estimates pursuant to the Tax Cuts and Jobs Act. This increase was partially offset by the suspensionreinstatement of the non-tax deductible HIP Fee for 2019. Our effective2020, which resulted in additional income tax rate decreased primarily due to the suspensionexpense of the non-tax deductible HIP Fee for 2019.$87.
Our net income as a percentage of total revenue increased in 2019decreased during the three months ended March 31, 2020 as compared to 2018the three months ended March 31, 2019 as a result of all factors discussed above.
Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018
The increase in total operating revenue was primarily from higher premiums, and, to a lesser extent, increased administrative fees and other revenue. The higher premiums were largely due to new Medicaid businesses and expansions and membership growth in our Medicare business. The increase in premiums was further attributable to rate increases across our businesses designed to cover overall cost trends. These increases were partially offset by the impact of the HIP Fee suspension for 2019. The increase in administrative fees and other revenue was primarily driven by Ingenio Rx, which began its operations during the second quarter of 2019.
Net realized gains on financial instruments increased due to an increase in net realized gains on sales of equity securities.
Benefit expense increased due to membership growth across our businesses and higher medical cost experience in our Medicaid business.
Our benefit expense ratio increased largely due to the loss of revenue associated with the HIP Fee suspension for 2019. Our benefit expense ratio was further impacted by higher medical cost experience in our Medicaid business.
Cost of products sold reflects the cost of pharmaceuticals dispensed by IngenioRx for our self-funded customers. IngenioRx began operations during the second quarter of 2019, so there was no cost of products sold recognized in 2018.
Our selling, general and administrative expense decreased primarily due to the suspension of the HIP Fee for 2019. This decrease was partially offset by a net increase in spend to support growth in our businesses.
Our selling, general and administrative expense ratio decreased due to the growth in operating revenue and the suspension of the HIP Fee for 2019.
Our income tax expense and effective tax rate decreased primarily due to the suspension of the non-tax deductible HIP Fee for 2019.
Our net income as a percentage of total revenue increased in 2019 as compared to 2018 as a result of all factors discussed above.
Reportable Segments Results of Operations
Our results of operations discussed throughout this MD&A&A are determined in accordance with U.S. generally accepted accounting principles, or GAAP. We also calculate operating gain and operating margin non-GAAP measures, to further aid investors in understanding and analyzing our core operating results and comparing them among periods. We define operating


revenue as premium income, product revenue and administrative fees and other revenue. Operating gain is calculated as total operating revenue less benefit expense, cost of products sold and selling, general and administrative expense. It does not include net investment income, net realized (losses) gains on financial instruments, other than temporary impairment losses recognized in income, interest expense, amortization of other intangible assets, loss (gain) loss on extinguishment of debt or income taxes, as these items are managed in our corporate shared service environment and are not the responsibility of operating segment management. Operating margin is calculated as operating gain divided by operating revenue. We use these measures as a basis for evaluating segment performance, allocating resources, forecasting future operating periods and setting incentive compensation targets. This information is not intended to be considered in isolation or as a substitute for income before income tax expense, net income or EPS, prepared in accordance with GAAP, and may not be comparable to similarly titled measures reported by other companies. For a reconciliation of reportable segments’segments’ operating revenue to the amounts of total revenue included in the consolidated statements of income and a reconciliation of reportable segments’segments’ operating gain to income before income tax expense, see Note 15, “Segment“Segment Information,”” of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Prior to the second quarter of 2019, our Other segment included certain eliminations and corporate expenses not allocated to either of our other reportable segments. Beginning in the second quarter of 2019, our Other segment also includes2020, IngenioRx our PBM, which began its operations during the second quarter of 2019. In addition, during the second quarter, we reclassified our Diversified Business Group, or DBG, our integrated health services business, from our Government Business segment to the Other segment to reflect changes in how our segments are being managed. Amounts for 2018 have been reclassified to conform to the current year presentation for comparability. Based on the Financial Accounting Standards Board guidance, as of September 30, 2019, IngenioRx and DBG do not collectively meetmeets the quantitative thresholds for an operating segment.
Affiliated revenues represent revenues or cost for services provided bya reportable segment and the results of our operations are now described through four reportable segments: Commercial & Specialty Business, Government Business, IngenioRx and DBGOther. For additional information, see Note 15, “Segment Information,” of the Notes to our subsidiaries, are recorded at cost or management’s estimateConsolidated Financial Statements included in Part I, Item 1 of fair market value, and are eliminated in consolidation.this Form 10-Q.

For our segment reporting, operating gains (losses) generated from IngenioRx and DBG affiliated activity have been included in our Commercial & Specialty Business and Government Business based upon their utilization of services from IngenioRx and DBG.
-46-



The following table presents a summary of the reportable segment financial information for the three and nine months ended September 30, 2019March 31, 2020 and 2018:2019:
 Three Months Ended 
 September 30		 Nine Months Ended 
 September 30		 Change
 Three Months Ended 
 September 30		 Nine Months Ended 
 September 30
 2019 vs. 2018 2019 vs. 2018
 
Three Months Ended 
 March 31
 
 
 2019 
2018 1
 2019 
2018 1
 $ % $ %
 
2020
 
2019 1
 
$ Change
 
% Change
Operating RevenueOperating Revenue














Operating Revenue







Commercial & Specialty Business$9,284
 $8,933
 $28,093
 $26,939
 $351
 3.9 % $1,154
 4.3 %
Commercial & Specialty Business
Commercial & Specialty Business
$
9,361

 
$
9,392

 
$
(31
)
 
(0.3
)%
Government BusinessGovernment Business15,955
 13,979
 46,419
 40,951
 1,976
 14.1 % 5,468
 13.4 %
Government Business
17,466

 
14,925

 
2,541

 
17.0
 %
IngenioRx
IngenioRx
5,197

 
—

 
5,197

 
NM

OtherOther2,508
 398
 3,850
 1,108
 2,110
 530.2 % 2,742
 247.5 %
Other
1,027

 
548

 
479

 
87.4
 %
EliminationsEliminations(1,303) (330) (2,353) (961) (973) NM
 (1,392) NM
Eliminations
(3,603
)
 
(477
)
 
(3,126
)
 
NM

Total operating revenueTotal operating revenue$26,444
 $22,980
 $76,009
 $68,037
 $3,464
 15.1 % $7,972
 11.7 %
Total operating revenue
$
29,448

 
$
24,388

 
$
5,060

 
20.7
 %
               
 
 
 
 
 
 
 
Operating Gain (Loss)Operating Gain (Loss)               
Operating Gain (Loss)
 
 
 
 
 
 
 
Commercial & Specialty Business$930
 $834
 $3,511
 $3,284
 $96
 11.5 % $227
 6.9 %
Commercial & Specialty Business
Commercial & Specialty Business
$
1,420

 
$
1,598

 
$
(178
)
 
(11.1
)%
Government BusinessGovernment Business616
 456
 1,471
 1,477
 160
 35.1 % (6) (0.4)%
Government Business
411

 
374

 
37

 
9.9
 %
IngenioRx
IngenioRx
349

 
—

 
349

 
NM

OtherOther(18) (41) (81) (85) 23
 (56.1)% 4
 (4.7)%
Other
14

 
(32
)
 
46

 
NM

               
 
 
 
 
 
 
 
Operating MarginOperating Margin               
Operating Margin
 
 
 
 
 
 
 
Commercial & Specialty Business10.0% 9.3% 12.5% 12.2%



70 bp



30 bp
Commercial & Specialty Business
Commercial & Specialty Business
15.2
%
 
17.0
%
 



(180
)bp
Government BusinessGovernment Business3.9% 3.3% 3.2% 3.6%



60 bp



(40)bp
Government Business
2.4
%
 
2.5
%
 



(10
)bp
IngenioRx
 
6.7
%
 
—
%
 
 
 
NM

                
 
 
 
 
 
 
 
 
1
During the second quarter of 2019, we reclassified DBG from our Government Business segment to our Other segment to reflect changes in how our segments are being managed. Accordingly, certain amounts for the three and nine months ended September 30, 2018March 31, 2019 have been reclassified to conform to the current year presentation for comparability.

Three Months Ended September 30, 2019March 31, 2020 Compared to the Three Months Ended September 30, 2018March 31, 2019
Commercial && Specialty Business
Operating revenue increased primarilydecreased due to higher premium revenue resulting from rate increasesmembership declines in our Individual and Local Group businessgroup fully-insured businesses and the absence of pharmacy administrative fee revenue that is now recognized within the IngenioRx segment. These decreases were partially offset by the rate increases designed to cover overall cost trends and due to membership increases in our fully-insured National Accounts and Individual ACA businesses. These increases were partially offset by the impact of the HIP Fee suspensionreinstatement for 2019.2020.
The increasedecrease in operating gain was primarily driven by greater penetrationmargin normalization in our Individual business and the shift of value-added services, includingpharmacy earnings to our pharmacy and integrated health offerings. This increaseIngenioRx segment. The decrease was further due to the leap year impact of an extra day of claims in the three months ended March 31, 2020. These decreases were partially offset by unfavorable reserve development.growth in our value-added services.
Government Business
Operating revenue increased primarily due to higher premium revenue as a result of organic growth, acquisitions and new expansions in our Medicaid businesses and expansions, including specialized service populations,business and membership growth in our Medicare business. The increase in premium revenue was further attributable to rate increases designed to cover overall cost trends and the HIP Fee reinstatement for 2020.
The increase in operating gain was primarily driven by premium rate adjustments and membership growth in our Medicaid and Medicare businesses, and increased reimbursed benefit utilization in our Federal Health Products and Services, or FHPS, business. These increases were partially offset bybusiness, as well as the impact of the HIP Fee suspensionreinstatement for 2019.2020. These increases in operating gain were partially offset by an increase in selling, general and administrative spend to support growth in our businesses and the leap year impact of an extra day of claims in the three months ended March 31, 2020.

-47-


IngenioRx
Operating revenue and operating gain increased as a result of improved medical cost performance inIngenioRx commencing operations during the second quarter of 2019. Operating revenue represents product revenues from services performed for our Medicaid business. The increase was partially offset by the impactfully-insured Anthem health plans and self-funded customers and external customers outside of the HIP Fee suspensionhealth plans we own. Product revenues and cost of goods sold for 2019.Anthem health plans are eliminated in consolidation. Operating gain represents operating revenue less cost of products sold and selling, general and administrative expenses.


Other
Operating revenue increased primarily due to higher administrative fees and other revenue from IngenioRxservices performed by DBG in certain markets and DBG. The increase was primarily driven by growthour acquisition of Beacon in our pharmacy services provided by IngenioRx, which commenced operations during the second quarter of 2019 and continued migrating pharmacy services from Express Scripts during the third quarter of 2019.February 2020.
Operating loss increased primarily as a result of changes in unallocated corporate expenses.
Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018
Commercial & Specialty Business
Operating revenue increased primarily due to higher premium revenue, and to a lesser extent, increased administrative fees and other revenue. Premium revenue was higher as a result of rate increases in our Local Group business designed to cover overall cost trends and membership increases in our fully-insured National Accounts and Individual ACA businesses. These increases in premium revenue were partially offset by the impact of the HIP Fee suspension for 2019. The increase in administrative fees and other revenues was due to higher penetration of value-added services for self-funded members in our Large Group and National Accounts businesses.
The increase in operating gain was primarily driven by greater penetration ofdue to growth in value-added services includingperformed by DBG for our pharmacy and integrated health offerings. This increase was partially offset by the impact of the HIP Fee suspension for 2019 and higher favorable adjustments recognized in 2018 related to estimates for the ACA risk adjustment premium stabilization program.
Government Business
Operating revenue increased primarily due to higher premium revenue as a result of new Medicaid businesses and expansions, including specialized service populations, and membership growth in our Medicare business. The increase in premium revenue was further attributable to rate increases designed to cover overall cost trends in our Medicare and Medicaid businesses as well as increased reimbursed benefit utilization in our FHPS business. These increases were partially offset by the impact of the HIP Fee suspension for 2019.
Operating gain decreased due to the impact of the HIP Fee suspension for 2019 and continued elevated medical cost experience in our Medicaid business in certain states. These decreases were mostly offset by the membership growth in our Medicaid and Medicare businesses.
Other
Operating revenue increased due to higher administrative fees and other revenue from IngenioRx and DBG. The increase was primarily driven by growth in our pharmacy services provided by IngenioRx, which commenced operations during the second quarter of 2019 and continued migrating pharmacy services from Express Scripts during the third quarter of 2019.
Operating loss decreased primarily as a result of changes in unallocated corporate expenses.segments.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with GAAP. Application of GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes and within this MD&A.&A. We consider our most important accounting policies that require significant estimates and management judgment to be those policies with respect to liabilities for medical claims payable, income taxes, goodwill and other intangible assets, investments and retirement benefits. Our accounting policies related to these items are discussed in our 20182019 Annual Report on Form 10-K in Note 2, “Basis“Basis of Presentation and Significant Accounting Policies,”” to our audited consolidated financial statements as of and for the year ended December 31, 2018,2019, as well as in the “Critical“Critical Accounting Policies and Estimates”Estimates” section of Part II, Item 7, “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”” As of September 30, 2019,March 31, 2020, our critical accounting policies and estimates have not changed from those described in our 20182019 Annual Report on Form 10-K.10-K, except for the policies related to investments and receivables, which changed as a result of the adoption of a new accounting pronouncement.


Medical Claims Payable
The most subjective accounting estimate in our consolidated financial statements is our liability for medical claims payable. Our accounting policies related to medical claims payable are discussed in the references cited above. As of September 30, 2019,March 31, 2020, our critical accounting policies and estimates related to medical claims payable have not changed from those described in our 20182019 Annual Report on Form 10-K. For a reconciliation of the beginning and ending balance for medical claims payable for the ninethree months ended September 30, 2019March 31, 2020 and 2018,2019, see Note 9, “Medical“Medical Claims Payable,”” of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
The following table provides a summary of the two key assumptions having the most significant impact on our incurred but not paid liability estimates for the ninethree months ended September 30, 2019March 31, 2020 and 2018,2019, which are the trend and completion factors. These two key assumptions can be influenced by utilization levels, unit costs, mix of business, benefit plan designs, provider reimbursement levels, processing system conversions and changes, claim inventory levels, claim processing patterns, claim submission patterns and operational changes resulting from business combinations. 
 Favorable Developments by 
Changes in Key Assumptions
 
Favorable Developments by 
Changes in Key Assumptions
 Nine Months Ended 
 September 30
 
Three Months Ended 
 March 31
 2019 2018
 
2020
 
2019
Assumed trend factors $311
 $477
 
$
510

 
$
345

Assumed completion factors 126
 381
 
190

 
110

Total $437
 $858
 
$
700

 
$
455

The favorable development recognized in the ninethree months ended September 30, 2019March 31, 2020 and 20182019 resulted primarily from trend factors in late 20182019 and late 2017,2018, respectively, developing more favorably than originally expected. Favorable

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development in the completion factors resulting from the latter parts of 20182019 and 20172018 developing faster than expected also contributed to the favorability.
The ratio of current year medical claims paid as a percent of current year net medical claims incurred was 85.5% and 86.6%64.7% for both the ninethree months ended September 30, 2019March 31, 2020 and 2018, respectively.2019. This ratio serves as an indicator of claims processing speed whereby claims were processed slightly fasterat approximately the same speed during the ninethree months ended September 30, 2018.March 31, 2020 and 2019.
We calculate the percentage of prior year redundancies in the current period as a percent of prior year net medical claims payable less prior year redundancies in the current period in order to demonstrate the development of the prior year reserves. For the ninethree months ended September 30, 2019,March 31, 2020, this metric was 6.4%8.8%, largely driven by favorable trend factor development at the end of 2018.2019 as well as favorable completion factor development from 2019. For the ninethree months ended September 30, 2018,March 31, 2019, this metric was 12.5%6.7%, largely driven by favorable trend factor development at the end of 20172018 as well as favorable completion factor development from 2017.2018.
We calculate the percentage of prior year redundancies in the current period as a percent of prior year net incurred medical claims to indicate the percentage of redundancy included in the preceding year calculation of current year net incurred medical claims. We believe this calculation supports the reasonableness of our prior year estimate of incurred medical claims and the consistency in our methodology. For the ninethree months ended September 30, 2019,March 31, 2020, this metric was 0.6%0.9%, which was calculated using the redundancy of $437.$700. For the ninethree months ended September 30, 2018,March 31, 2019, the comparable metric was 1.2%0.7%, which was calculated using the redundancy of $858.$455. We believe these metrics demonstrate a generally consistent level of reserve conservatism.
Investments
On January 1, 2020, we adopted Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. The amendments in ASU 2016-13 replaced the incurred loss model for measuring expected credit losses and require expected losses on available-for-sale fixed maturity securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities. There were no other changes to our accounting policy for investments, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019. For additional information, see Note 4, “Investments” of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
The COVID-19 pandemic and efforts to prevent its spread have drastically impacted the global economy, causing market instability and significantly decreasing the worldwide demand for energy. We regularly evaluate our fixed maturity securities for declines and impairment, as well as industry risk, and as a result of our evaluation, we recognized a $49 credit loss allowance for our energy sector fixed maturity securities for the three months ended March 31, 2020. At March 31, 2020, we held $888 of these securities, which have the potential to be further impaired if oil and natural gas prices stay at current levels or further decline. At March 31, 2020, we also held $249 of equity investments in certain energy sector joint ventures, for which the fair value is estimated based on each security’s current condition and future cash flow projections. Given the uncertainty of changes in market conditions, there is a risk that declines in fair value of these investments may occur in the near future and further impairment losses may need to be recorded.
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. Given the recent market volatility, there is a risk that the value of some of these investments may decline in future periods.
Additional discussion regarding the impact of COVID-19 on our business, cash flows, financial condition and results of operations can be found elsewhere in this MD&A.
New Accounting Pronouncements
For information regarding new accounting pronouncements that were adopted and new accounting pronouncements that were issued during the ninethree months ended September 30, 2019,March 31, 2020, see the ““Recently Adopted Accounting Guidance”” and ““Recent Accounting Guidance Not Yet Adopted”” sections of Note 2, “Basis“Basis of Presentation and Significant Accounting Policies”Policies” of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

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Liquidity and Capital Resources
Sources and Uses of Capital
Our cash receipts result primarily from premiums, product revenue, administrative fees and other revenue, investment income, proceeds from the sale or maturity of our investment securities, proceeds from borrowings, and proceeds from the issuance of common stock under our employee stock plans. Cash disbursements result mainly from claims payments, administrative expenses, taxes, purchases of investment securities, interest expense, payments on borrowings, acquisitions, capital expenditures, repurchases of our debt securities and common stock and the payment of cash dividends. Cash outflows fluctuate with the amount and timing of settlement of these transactions. Any future decline in our profitability would likely have an unfavorable impact on our liquidity.
The COVID-19 pandemic and efforts to prevent its spread have drastically impacted the economy, causing market instability and increasing unemployment in the United States. While the full impact of COVID-19 on our business is currently uncertain, it could have a material adverse effect on our claim payments, collection of our premiums, product or administrative fee revenues, investments and our ability to access credit. Additional discussion regarding the impact of COVID-19 can be found elsewhere in this MD&A.
For a more detailed overview of our liquidity and capital resources management, see the ““Introduction”” section included in the “Liquidity“Liquidity and Capital Resources”Resources” section of Part II, Item 7, “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” included in our 20182019 Annual Report on Form 10-K.
For additional information regarding our sources and uses of capital during the three and nine months ended September 30, 2019,March 31, 2020, see Note 5, “Derivative“Derivative Financial Instruments,”” Note 10, “Debt,”“Debt,” and Note 12, “Capital“Capital Stock - Use of Capital - Dividends and Stock Repurchase Program,”” of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Liquidity
A summary of our major sources and uses of cash and cash equivalents for the ninethree months ended September 30, 2019March 31, 2020 and 20182019 is as follows:
Nine Months Ended 
 September 30		 2019 vs. 2018
Three Months Ended 
 March 31
 
2020 vs. 2019
2019 2018 Change
2020
 
2019
 
Change
Sources of Cash:     
 
 
 
 
 
Net cash provided by operating activities$4,734
 $3,364
 $1,370
$
2,515

 
$
1,630

 
$
885

Issuance of common stock under Equity Units stock purchase contracts—
 1,250
 (1,250)
Issuances of commercial paper and short- and long-term debt, net of repayments918
 —
 918
1,528

 
67

 
1,461

Proceeds from sales, maturities, calls and redemptions of investments, net of purchases—
 857
 (857)
Proceeds from issuance of common stock under employee stock plans137
 133
 4
44

 
76

 
(32
)
Changes in bank overdrafts250
 97
 153
Other sources of cash, net139
 326
 (187)
—

 
28

 
(28
)
Total sources of cash6,178
 6,027
 151
4,087

 
1,801

 
2,286

Uses of Cash:     
 
 
 
 
 
Purchases of investments, net of proceeds from sales, maturities, calls and redemptions(2,895) —
 (2,895)
(571
)
 
(440
)
 
(131
)
Purchases of subsidiaries, net of cash acquired—
 (1,732) 1,732
(1,908
)
 
—

 
(1,908
)
Repurchase and retirement of common stock(1,396) (1,192) (204)
(529
)
 
(294
)
 
(235
)
Purchases of property and equipment(726) (888) 162
(204
)
 
(234
)
 
30

Repayments of commercial paper and short- and long-term debt, net of issuances
—
 (617) 617
Cash dividends(616) (583) (33)
(240
)
 
(206
)
 
(34
)
Other uses of cash, net(288) (363) 75
(225
)
 
(78
)
 
(147
)
Total uses of cash(5,921) (5,375) (546)
(3,677
)
 
(1,252
)
 
(2,425
)
Effect of foreign exchange rates on cash and cash equivalents(1) (1) —
(2
)
 
(1
)
 
(1
)
Net increase in cash and cash equivalents$256
 $651
 $(395)
$
408

 
$
548

 
$
(140
)


The increase in cash provided by operating activities was primarily dueattributable to the impact of membership increases in our Medicaid and Medicare businesses. These increases were partially offset by lowerhigher premium receipts as a result of the suspension of the HIP Fee for 2019.reinstatement in 2020 as well as other changes in working capital.

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Other significant changes in sources or uses of cash year-over-year included an increaseincreases in net purchasescash paid for acquisitions, cash paid for repurchase and retirement of investments in 2019 compared to net proceeds from sales, maturities, callscommon stock and redemptionsreceipt of investments in 2018, an increase in net proceeds from the issuanceissuances of commercial paper and short- and long-term debt in 2019 compared to net repayments in 2018, a decrease in cash received from the issuance of common stock under Equity Units stock purchase contracts and a decrease in cash paid for acquisitions.debt.
Financial Condition
We maintained a strong financial condition and liquidity position, with consolidated cash, cash equivalents and investments in fixed maturity and equity securities of $26,997$26,301 at September 30, 2019.March 31, 2020. Since December 31, 2018,2019, total cash, cash equivalents and investments in fixed maturity and equity securities increased by $4,358,$174, primarily due to cash generated from operations.operations and net proceeds from borrowings. These increases were partially offset by cash paid for acquisitions, common stock repurchases, cash dividends paid to shareholders and purchases of property and equipment.
Many of our subsidiaries are subject to various government regulations that restrict the timing and amount of dividends and other distributions that may be paid to their respective parent companies. Certain accounting practices prescribed by insurance regulatory authorities, or statutory accounting practices, differ from GAAP. Changes that occur in statutory accounting practices, if any, could impact our subsidiaries’subsidiaries’ future dividend capacity. In addition, we have agreed to certain undertakings to regulatory authorities, including requirements to maintain certain capital levels in certain of our subsidiaries.
At September 30, 2019,March 31, 2020, we held $2,998$1,689 of cash, cash equivalents and investments at the parent company, which are available for general corporate use, including investment in our businesses, acquisitions, potential future common stock repurchases and dividends to shareholders, repurchases of debt securities and debt and interest payments.
Debt
Periodically, we access capital markets and issue debt, or Notes, for long-term borrowing purposes, for example, to refinance debt, to finance acquisitions or for share repurchases. Certain of these Notes may have a call feature that allows us to redeem the Notes at any time at our option and/or a put feature that allows a Note holder to redeem the Notes upon the occurrence of both a change in control event and a downgrade of the Notes below an investment grade rating. For more information on our debt, including redemptions and issuances, see Note 10, “Debt”“Debt” of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
We calculate our consolidated debt-to-capital ratio, a non-GAAP measure, from the amounts presented on our consolidated balance sheets included in Part I, Item 1 of this Form 10-Q. Our debt-to-capital ratio is calculated as total debt divided by total debt plus total shareholders’shareholders’ equity. Total debt is the sum of short-term borrowings, current portion of long-term debt, long-term debt, less current portion and beginning January 1, 2019, lease liabilities. We believe our debt-to-capital ratio assists investors and rating agencies in measuring our overall leverage and additional borrowing capacity. In addition, our bank covenants include a maximum debt-to-capital ratio that we cannot and did not exceed. Our debt-to-capital ratio may not be comparable to similarly titled measures reported by other companies. Our consolidated debt-to-capital ratio was 40.0%41.7% and 40.2%39.5% as of September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.
Our senior debt is rated “A”“A” by S&P&P Global Ratings, “BBB”“BBB” by Fitch Ratings, Inc., “Baa2”“Baa2” by Moody’sMoody’s Investor Service, Inc. and “bbb+”“bbb+” by AM Best Company, Inc. We intend to maintain our senior debt investment grade ratings. If our credit ratings are downgraded, our business, liquidity, financial condition and results of operations could be adversely impacted by limitations on future borrowings and a potential increase in our borrowing costs.
Future Sources and Uses of Liquidity
The COVID-19 pandemic and efforts to prevent its spread have drastically impacted the global economy and caused increased volatility in the securities and credit markets. While the full impact of COVID-19 on our business is currently uncertain, it could have a material adverse effect on our financial condition and our liquidity.
We have taken several recent actions to preserve our liquidity and financial flexibility. As a precautionary measure, we borrowed $300 on our senior revolving credit facility in March 2020. This $300 was repaid in April 2020. Should commercial paper issuance become unavailable, we intend to use a combination of cash on hand and/or our senior revolving credit facilities, which provide for combined credit up to $3,500, to redeem any outstanding commercial paper upon maturity. Inaddition, in the second quarter of 2020, we expect to extend the term of our 364-day senior revolving credit facility to expire in June 2021.

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While there is no assurance in the current economic environment, we believe the lenders participating in our senior credit facilities, if market conditions allow, will be willing to provide financing in accordance with their legal obligations.
Other measures we have taken include reducing our discretionary spending and temporarily suspending our share repurchase activity. To increase our cash on hand, we are delaying our quarterly estimated federal income tax payments normally due during the second quarter of 2020 until July 15, 2020, as provided for by IRS Notice 2020-23. We are also delaying certain payroll tax payments as permitted by the CARES Act. We may take additional actions going forward to maximize our liquidity, including increasing our borrowings from existing or new Federal Home Loan Bank memberships and other available borrowings. We will continue to monitor the market conditions and act in a prudent manner. Additional discussion regarding the impact of COVID-19 can be found elsewhere in this MD&A.
We have a shelf registration statement on file with the U.S. Securities and Exchange Commission to register an unlimited amount of any combination of debt or equity securities in one or more offerings. Specific information regarding terms and securities being offered will be provided at the time of an offering. Proceeds from future offerings are expected to be used for


general corporate purposes, including, but not limited to, the repayment of debt, investments in or extensions of credit to our subsidiaries and the financing of possible acquisitions or business expansions.
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.
For additional information regarding our sources and uses of capital at September 30, 2019,March 31, 2020, see Note 4, “Investments,”“Investments,” Note 5, “Derivative“Derivative Financial Instruments,”” Note 10, “Debt”“Debt” and Note 12, “Capital“Capital Stock - Use of Capital - Dividends and Stock Repurchase Program”” of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Risk-Based Capital
Our regulated subsidiaries’subsidiaries’ states of domicile have statutory risk-based capital, or RBC, requirements for health and other insurance companies and health maintenance organizations largely based on the National Association of Insurance Commissioners, or NAIC, RBC Model Act. These RBC requirements are intended to measure capital adequacy, taking into account the risk characteristics of an insurer’sinsurer’s investments and products. The NAIC sets forth the formula for calculating the RBC requirements, which are designed to take into account asset risks, insurance risks, interest rate risks and other relevant risks with respect to an individual insurance company’scompany’s business. In general, under the RBC Model Act, an insurance company must submit a report of its RBC level to the state insurance department or insurance commissioner, as appropriate, at the end of each calendar year. Our regulated subsidiaries’subsidiaries’ respective RBC levels as of December 31, 2018,2019, which was the most recent date for which reporting was required, were in excess of all mandatory RBC requirements. In addition to exceeding the RBC requirements, we are in compliance with the liquidity and capital requirements for a licensee of the BCBSA and with the tangible net equity requirements applicable to certain of our California subsidiaries.
For additional information, see Note 21, “Statutory“Statutory Information,”” in our audited consolidated financial statements as of and for the year ended December 31, 20182019 included in our 20182019 Annual Report on Form 10-K.
Contractual Obligations and Commitments
We believe that funds from future operating cash flows, cash and investments and funds available under our 5-year and 364-day senior revolving credit facilities and/or from public or private financing sources will be sufficient for future operations and commitments, and for capital acquisitions and other strategic transactions.
There have been no material changes to our Contractual Obligations and Commitments disclosure in our 20182019 Annual Report on Form 10-K other than debt issuances.our entry into a vendor agreement for information technology infrastructure and related management and support services and an increase in our borrowings. For additional information regarding our estimated contractual obligations and commitments, see Note 5, “Derivative“Derivative Financial Instruments,”” Note 10, “Debt,”“Debt,” and the ““Other Contingencies”” and ““Contractual Obligations and Commitments”” sections of Note 11, “Commitments“Commitments and Contingencies,”” of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.


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FORWARD-LOOKING STATEMENTS
This document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect our views about future events and financial performance and are generally not historical facts. Words such as “expect,” “feel,” “believe,” “will,” “may,” “should,” “anticipate,” “intend,” “estimate,” “project,” “forecast,” “plan”“expect,” “feel,” “believe,” “will,” “may,” “should,” “anticipate,” “intend,” “estimate,” “project,” “forecast,” “plan” and similar expressions are intended to identify forward-looking statements. These statements include, but are not limited to: financial projections and estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to future operations, products and services; and statements regarding future performance. Such statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking statements. You are cautioned not to place undue reliance on these forward- looking statements that speak only as of the date hereof. You are also urged to carefully review and consider the various risks and other disclosures discussed in our reports filed with the U.S. Securities and Exchange Commission from time to time, which attempt to advise interested parties of the factors that affect our business. Except to the extent otherwise required by federal securities laws, we do not undertake any obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof. These risks and uncertainties include, but are not limited to: the impact of large scale medical emergencies, such as public health epidemics and pandemics, including COVID-19, and catastrophes; trends in healthcare costs and utilization rates; our ability to secure sufficient premium rates, including regulatory approval for and implementation of such rates; the impact of federal and state regulation, including ongoing changes in the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, as amended, or collectively, the ACA, and the ultimate outcome of legal challenges to the ACA; trendschanges in healthcare costseconomic and utilization rates;market conditions, as well as regulations that may negatively affect our liquidity and investment portfolios; our ability to contract with providers on cost-effective and competitive terms; our ability to secure sufficient premium rates, including regulatory approval for and implementation of such rates; competitive pressures and our ability to adapt to changes in the industry and develop and implement strategic growth opportunities; reduced enrollment; unauthorized disclosure of member or employee sensitive or confidential information, including the impact and outcome of any investigations, inquiries, claims and litigation related thereto; risks and uncertainties regarding Medicare and Medicaid programs, including those related to non-compliance with the complex regulations imposed thereon; our ability to maintain and achieve improvement in Centers for Medicare and Medicaid Services, or CMS, Star ratings and other quality scores and funding risks with respect to revenue received from participation therein; a negative change in our healthcare product mix; costs and other liabilities associated with litigation, government investigations, audits or reviews; the ultimate outcome of litigation between Cigna Corporation or Cigna, and us related to the merger agreement between the parties including our claim for damages against Cigna, Cigna’s claim for payment of a termination fee and other damages against us, and the potential for such litigation to cause us to incur substantial additional costs, materially distractincluding potential settlement and judgment costs; risks and uncertainties related to our pharmacy benefit management, and negatively impact our reputation and financial condition;or PBM, business including non-compliance by any party with the pharmacy benefit managementPBM services agreementsagreement between us and each of Express Scripts, Inc., or Express Scripts, and CaremarkPCS Health, L.L.C., or CVS Health, as well as any agreements governing the transition of pharmacy benefit management services provided to us from Express Scripts to CVS Health, which could result in financial penalties, our inability to meet customer demands, and sanctions imposed by governmental entities, including CMS;; medical malpractice or professional liability claims or other risks related to healthcare services and pharmacy benefit managementPBM services provided by our subsidiaries; general risks associated with mergers, acquisitions, joint ventures and strategic alliances; possible impairment of the value of our intangible assets if future results do not adequately support goodwill and other intangible assets; possible restrictions in the payment of dividends from our subsidiaries and increases in required minimum levels of capital; our ability to repurchase shares of our common stock and pay dividends on our common stock due to the adequacy of our cash flow and earnings and other considerations; the potential negative effect from our substantial amount of outstanding indebtedness; a downgrade in our financial strength ratings; the effects of any negative publicity related to the health benefits industry in general or us in particular; failure to effectively maintain and modernize our information systems; events that may negatively affect our licenses with the Blue Cross and Blue Shield Association; large scale medical emergencies, such as future public health epidemicsthe impact of international laws and catastrophes; general risks associated with mergers, acquisitions, joint ventures and strategic alliances; possible impairment of the value of our intangible assets if future results do not adequately support goodwill and other intangible assets; changes in economic and market conditions, as well as regulations that may negatively affect our liquidity and investment portfolios;regulations; changes in U.S. tax laws; intense competition to attract and retain employees; and various laws and provisions in our governing documents that may prevent or discourage takeovers and business combinations.

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ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of our market risks, refer to Item 7A, “Quantitative“Quantitative and Qualitative Disclosures about Market Risk,”” included in our 20182019 Annual Report on Form 10-K. There have been no material changes to any of these risks since December 31, 20182019.
ITEM 4.
CONTROLS AND PROCEDURES
We carried out an evaluation as of September 30, 2019March 31, 2020, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be disclosed in our reports under the Exchange Act. In addition, based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
During the three months ended September 30, 2019,March 31, 2020, we implemented certain additional internal controls associated with our new IngenioRx pharmacyPBM business. Other than these new controls, there have been no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2019March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
For information regarding legal proceedings at September 30, 2019March 31, 2020, see the ““Litigation and Regulatory Proceedings,”” and ““Other Contingencies”” sections of Note 11, “Commitments“Commitments and Contingencies”Contingencies” of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
ITEM 1A.
RISK FACTORS
ThereExcept as set forth below, there have been no material changes to the risk factors disclosed in our 20182019 Annual Report on Form 10-K.
The following risk factor has been added:
The outbreak of the COVID-19 pandemic and measures taken to prevent its spread are adversely affecting our business in a number of ways, and we are unable to predict the full extent of those impacts on our business, cash flows, financial condition and results of operations, but the impact could be material.
The ongoing COVID-19 pandemic has caused illness, deaths, quarantines, business and school shutdowns, reductions in business activity, travel and financial transactions, unemployment, labor shortages, supply chain interruptions and overall economic and financial market instability, and it underscores and may heighten certain risks we face in our business, including those discussed in our 2019 Annual Report on Form 10-K.
We are closely monitoring developments related to the COVID-19 pandemic to assess its ongoing impact on our business. While we expect the impacts of COVID-19, and the actions taken to contain its spread or address its impacts, to have an adverse effect on our business, cash flows, financial condition and results of operations, the extent of those impacts will depend on future developments, which are highly uncertain and cannot be predicted at this time, including, but not limited to, the transmission rate, duration and spread of the outbreak, its severity, the extent and effectiveness of the actions taken to contain the spread of the virus and address its impacts, and how quickly and to what extent normal economic and operating conditions can resume. Factors that could negatively

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impact our ability to operate successfully during or following the COVID-19 pandemic, or that could otherwise significantly adversely impact and disrupt our business, cash flows, financial condition and results of operations include, but are not limited to, the following:
•
Increased healthcare costs due to higher utilization rates of medical facilities and services, medical expenses and other increases in associated hospital and pharmaceutical costs. We have begun to offer our members expanded benefit coverage, such as providing full coverage for COVID-19 testing and treatment, and governmental action has required, and may continue to require, us to provide additional coverage.
•
A reduction in enrollment in our health benefits and pharmacy benefit management products and services, or a change in membership mix to less profitable lines of business, as a result of reductions in workforce by existing customers and other impacts of an economic downturn.
•
Cash flow volatility or shortfalls caused by an increase in delayed, delinquent or non-collectable payments from customers and government payers.
•
Reductions in our operating effectiveness as our employees work from home or otherwise are impacted by COVID-19. We have transitioned nearly all of our employee population to a remote work environment in an effort to mitigate the spread of COVID-19, which may exacerbate certain risks to our business, including an increased demand for information technology resources, increased risk of phishing and other cybersecurity attacks, and increased risk of unauthorized dissemination of sensitive personal information or proprietary or confidential information about us, our members or other third parties.
•
Disruptions in our normal business operations due to disruptions in public and private infrastructure,including communications, financial services and supply chains.
•
Loss of functionality due to the disruption of services provided to us by third-party vendors, including as a result of financial difficulties experienced by such vendors and the impact of vendor employees working from home or otherwise being impacted by COVID-19.
•
Increased cost of capital and limited ability to access the capital markets due to disruption and volatility in global financial markets or a downgrade in our credit rating.
•
A further decrease in the value of our investments, which may result in additional losses charged to income.
•
An increase in our effective income tax rate due to the impacts of COVID-19 on our income and other factors described above and the non-tax deductibility of the HIP Fee.
For more information on how these and other risks may further affect our business, please see Part I, Item 1A, “Risk Factors” in our 2019 Annual Report on Form 10-K.

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ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table presents information related to our repurchases of common stock for the periods indicated:
Period
Total Number
of Shares
Purchased1 
 
Average
Price Paid
per Share
 
Total Number
of Shares
Purchased
as Part
of Publicly
Announced
Programs2
 
Approximate
Dollar Value
of Shares
that May Yet
Be Purchased
Under the
Programs
(in millions, except share and per share data)       
July 1, 2019 to July 31, 2019434,343
 $291.21
 431,500
 $4,616
August 1, 2019 to August 31, 2019753,321
 276.59
 752,268
 4,408
September 1, 2019 to September 30, 20191,234,527
 251.71
 1,230,971
 4,098
 2,422,191
   2,414,739
  
Period
Total Number
of Shares
Purchased1 
 
Average
Price Paid
per Share
 
Total Number
of Shares
Purchased
as Part
of Publicly
Announced
Programs2
 
Approximate
Dollar Value
of Shares
that May Yet
Be Purchased
Under the
Programs
(in millions, except share and per share data)
 
 
 
 
 
 
 
January 1, 2020 to January 31, 2020
509,949

 
$
298.71

 
509,300

 
$
3,640

February 1, 2020 to February 29, 2020
671,852

 
278.76

 
670,900

 
3,453

March 1, 2020 to March 31, 2020
1,135,798

 
261.46

 
740,058

 
3,263

 
2,317,599

 
 
 
1,920,258

 
 
1
Total number of shares purchased includes 7,452397,341 shares delivered to or withheld by us in connection with employee payroll tax withholding upon exercise or vesting of stock awards. Stock grants to employees and directors and stock issued for stock option plans and stock purchase plans in the consolidated statements of shareholders’shareholders’ equity are shown net of these shares purchased.
2
Represents the number of shares repurchased through the common stock repurchase program authorized by our Board of Directors, which the Board of Directors evaluates periodically. During the three months ended September 30, 2019March 31, 2020, we repurchased 2,414,7391,920,258 shares at a cost of $644$529 under the program, including the cost of options to purchase shares. The Board of Directors has authorized our common stock repurchase program since 2003. The Board of Director’sDirector’s most recent authorized increase to the program was $5,000$5,000 on December 7, 2017. Between October 1, 2019 and October 16, 2019, we repurchased 434,700 shares at a cost of $104 bringing our current availability to $3,994 at October 16, 2019. No duration has been placed on our common stock repurchase program, and we reserve the right to discontinue the program at any time.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURES
None.
ITEM 5.
OTHER INFORMATION
None.

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ITEM 6.
EXHIBITS
Exhibit
Number
 
Exhibit
 
 
 
 
3.1

  
 
 
 
 
3.2

  
4.6 (h)
Form of 2.375% Notes due 2025, incorporated by reference to Exhibit 4.1 to the Company’sCompany’s Current Report on Form 8-K filed on September 9, 2019.April 8, 2020.
(i)
 
 
 
(j)
4.7
 
4.7
Upon the request of the U.S. Securities and Exchange Commission, the Company will furnish copies of any other instruments defining the rights of holders of long-term debt of the Company or its subsidiaries.
 
 
 
 
10.2
4.8

*
 
 
 
 
 
10.2

*
(l)
 
 
 
 
10.3
 

*
*
(m)
 
 
 
 
31.1
 

*
(n)
 
 
 
 
31.1

  
 
 
 
 
31.2

  
 
 
 
 
32.1

  
 
 
 
 
32.2

  
 
 
 
 
101

  
The following material from Anthem, Inc.’s’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019,March 31, 2020, formatted in Inline XBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows; (v) the Consolidated Statements of Shareholders’Shareholders’ Equity; and (vi) Notes to Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
 
 
 
 
104

 
Cover Page Interactive Data File formatted in Inline XBRL and contained in Exhibit 101.
 
 
 
 
 
 
 
 
*

 
Indicates management contracts or compensatory plans or arrangements.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
ANTHEM, INC. 
Registrant 
 
 
ANTHEM, INC.
Registrant
 
 
 
 
 
 
 
 
 
 
 
Date: October 23, 2019April 29, 2020
By:
 
/S/  JOHN E. GALLINA
 
 
 
John E. Gallina
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
 
 
 
 
 
 
 
 
Date: October 23, 2019April 29, 2020
By:
 
/S/  RONALD W. PENCZEK
 
 
 
Ronald W. Penczek
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)

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