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ANTM Anthem

 
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 March 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’s telephone number, including area code: (800331-1476
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 accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth 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 April 22, 2020, 252,116,097 shares of the Registrant’s Common Stock were outstanding.



Anthem, Inc.
Quarterly Report on Form 10-Q
For the Period Ended March 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.

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

 
$
4,937

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 receivables
5,786

 
5,014

Self-funded receivables
2,613

 
2,570

Other receivables
2,926

 
2,807

Other current assets
4,135

 
3,020

Total current assets
41,256

 
39,033

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

 
505

Other invested assets
4,181

 
4,258

Property and equipment, net
3,350

 
3,133

Goodwill
21,661

 
20,500

Other intangible assets
9,613

 
8,674

Other noncurrent assets
1,833

 
1,350

Total assets
$
82,399

 
$
77,453

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Liabilities
 
 
 
Current liabilities:
 
 
 
Medical claims payable
$
9,902

 
$
8,842

Other policyholder liabilities
3,252

 
3,050

Unearned income
947

 
1,017

Accounts payable and accrued expenses
5,058

 
4,198

Short-term borrowings
1,075

 
700

Current portion of long-term debt
1,603

 
1,598

Other current liabilities
5,202

 
4,127

Total current liabilities
27,039

 
23,532

Long-term debt, less current portion
19,005

 
17,787

Reserves for future policy benefits
754

 
759

Deferred tax liabilities, net
2,213

 
2,227

Other noncurrent liabilities
1,695

 
1,420

Total liabilities
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 –
252,020,028 and 252,922,161
3

 
3

Additional paid-in capital
9,338

 
9,448

Retained earnings
23,360

 
22,573

Accumulated other comprehensive loss
(1,008
)
 
(296
)
Total shareholders’ equity
31,693

 
31,728

Total liabilities and shareholders’ equity
$
82,399

 
$
77,453








See accompanying notes.

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Anthem, Inc.
Consolidated Statements of Income
(Unaudited) 
 
 
Three Months Ended 
 March 31
(In millions, except per share data)
 
2020
 
2019
Revenues
 
 
 
 
Premiums
 
$
25,517

 
$
22,843

Product revenue
 
2,344

 

Administrative fees and other revenue
 
1,587

 
1,545

Total operating revenue
 
29,448

 
24,388

Net investment income
 
254

 
210

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 revenues
 
29,621

 
24,666

Expenses
 
 
 
 
Benefit expense
 
21,489

 
19,282

Cost of products sold
 
1,984

 

Selling, general and administrative expense
 
3,781

 
3,166

Interest expense
 
194

 
187

Amortization of other intangible assets
 
83

 
87

Loss (gain) on extinguishment of debt
 
1

 
(1
)
Total expenses
 
27,532

 
22,721

Income before income tax expense
 
2,089

 
1,945

Income tax expense
 
566

 
394

Net income
 
$
1,523

 
$
1,551

Net income per share
 
 
 
 
Basic
 
$
6.03

 
$
6.03

Diluted
 
$
5.94

 
$
5.91

Dividends per share
 
$
0.95

 
$
0.80














See accompanying notes.

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Anthem, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited) 
 
 
Three Months Ended 
 March 31
(In millions)
 
2020
 
2019
Net income
 
$
1,523

 
$
1,551

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
 
7

 
3

Foreign currency translation adjustments
 
(1
)
 

Other comprehensive (loss) income
 
(712
)
 
363

Total comprehensive income
 
$
811

 
$
1,914



































See accompanying notes.

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

 
$
1,551

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net realized losses (gains) on financial instruments
24

 
(78
)
Depreciation and amortization
270

 
289

Deferred income taxes
57

 
55

Share-based compensation
67

 
70

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

 
(21
)
Other assets
(525
)
 
(125
)
Policy liabilities
692

 
791

Unearned income
(109
)
 
96

Accounts payable and other liabilities
588

 
(354
)
Income taxes
491

 
115

Other, net
13

 
(6
)
Net cash provided by operating activities
2,515

 
1,630

Investing activities
 
 
 
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
(1,908
)
 

Purchases of property and equipment
(204
)
 
(234
)
Other, net
(101
)
 
22

Net cash used in investing activities
(2,784
)
 
(652
)
Financing activities
 
 
 
Net proceeds from commercial paper borrowings
905

 
178

Proceeds from long-term borrowings
300

 
2

Repayments of long-term borrowings
(52
)
 
(63
)
Proceeds from short-term borrowings
1,075

 
2,710

Repayments of short-term borrowings
(700
)
 
(2,760
)
Repurchase and retirement of common stock
(529
)
 
(294
)
Cash dividends
(240
)
 
(206
)
Proceeds from issuance of common stock under employee stock plans
44

 
76

Taxes paid through withholding of common stock under employee stock plans
(107
)
 
(78
)
Other, net
(17
)
 
6

Net cash provided by (used in) financing activities
679

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

 
548

Cash and cash equivalents at beginning of period
4,937

 
3,934

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

 
$
4,482















See accompanying notes.

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Anthem, Inc.
Consolidated Statements of Shareholders’ Equity
(Unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
(In millions)
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

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

 

 

 
26

 

 
26

January 1, 2019
257.4

 
3

 
9,536

 
20,014

 
(986
)
 
28,567

Net income

 

 

 
1,551

 

 
1,551

Other comprehensive income

 

 

 

 
363

 
363

Repurchase and retirement of common stock
(1.1
)
 

 
(71
)
 
(223
)
 

 
(294
)
Dividends and dividend equivalents

 

 

 
(206
)
 

 
(206
)
Issuance of common stock under employee stock plans, net of related tax benefits
1.1

 

 
69

 

 

 
69

Convertible debenture repurchases and conversions

 

 
(52
)
 

 

 
(52
)
March 31, 2019
257.4

 
$
3

 
$
9,482

 
$
21,136

 
$
(623
)
 
$
29,998


 
 
 
 
 
 
 
 
 
 
 
 








See accompanying notes.

-6-


Anthem, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2020
(In Millions, Except Per Share Data or As Otherwise Stated Herein)
 
1.
Organization
References to the terms “we,” “our,” “us” or “Anthem” used throughout these Notes to Consolidated Financial Statements refer to Anthem, Inc., an Indiana corporation, and unless the context otherwise requires, its direct and indirect subsidiaries. References to the “states” include the District of Columbia, unless the context otherwise requires.
We are one of the largest health benefits companies in the United States in terms of medical membership, serving approximately 42 million medical members through our affiliated health plans as of March 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; 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 healthcare. We also provide services to the federal government in connection with our Federal Health Products & Services 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 as well as other strategic partners. Through our subsidiaries, we also serve customers in numerous states across the country as AIM Specialty Health, Amerigroup, Aspire Health, Beacon Health, CareMore, Freedom Health, HealthLink, HealthSun, Optimum HealthCare, Simply Healthcare, and/or Unicare. Also, in the second quarter of 2019, we began 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 2019 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. For additional information on prior year reclassifications, see Note 15, “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 months ended March 31, 2020 and 2019 have been recorded. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2020, 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, 2019 included in our 2019 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 currency translation adjustments” in our consolidated statements of comprehensive income.
Cash and Cash Equivalents: We control a number of bank accounts that are used exclusively to hold customer funds for the administration of customer benefits and we have cash and cash equivalents on deposit to meet certain regulatory requirements. These amounts totaled $221 and $215 at March 31, 2020 and December 31, 2019, respectively, and are included in the cash and cash equivalents line on our consolidated balance sheets.
Investments: Prior 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 we have the intent to sell the fixed maturity security, or it is more likely than not that we will have to sell the fixed maturity security before recovery of its amortized cost basis, we write down the fixed maturity security’s cost basis to fair value and record an impairment loss in our consolidated statements of income. For impaired fixed maturity securities that we do not intend to sell or if it is more likely than not that we will not have to sell such securities, but we expect that we will not fully recover the amortized cost basis, we recognize the credit component of the impairment as an allowance for credit loss in our consolidated balance sheets and record an impairment loss in our consolidated statements of income. The non-credit component of the impairment is recognized in accumulated other comprehensive loss. Furthermore, unrealized losses entirely caused by non-credit related factors related to fixed maturity securities for which we expect to fully recover the amortized cost basis continue to be recognized in accumulated other comprehensive loss.
The credit component of an impairment is determined primarily by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed maturity security. The net present value is calculated by discounting our best estimate of projected future cash flows at the effective interest rate implicit in the fixed maturity security at the date of purchase. For mortgage-backed and asset-backed securities, cash flow estimates are based on assumptions regarding the underlying collateral, including prepayment speeds, vintage, type of underlying asset, geographic concentrations, default rates, recoveries and changes in value. For all other securities, cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings and estimates regarding timing and amount of recoveries associated with a default.
For asset-backed securities included in fixed maturity securities, we recognize income using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The net investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied since the purchase date of the securities. Such adjustments are reported within net investment income.
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 obligation to return the collateral to the borrower, which is reported under the caption “Other current liabilities” in our consolidated balance sheets. The securities on loan are reported in the applicable investment category on our consolidated balance sheets. Unrealized gains or losses on securities lending collateral are included in accumulated other comprehensive loss as a separate component of shareholders’ equity. The market value of loaned securities and that of the collateral pledged can fluctuate in non-synchronized fashions. To the extent the loaned securities’ value appreciates faster or depreciates slower than the value of the collateral pledged, we are exposed to the risk of the shortfall. As a primary mitigating mechanism, the loaned securities and collateral pledged are marked to market on a daily basis and the shortfall, if any, is collected accordingly. Secondarily, the collateral level is set at 102% of the value of the loaned securities, which provides a cushion before any shortfall arises. The investment of the cash collateral is subject to market risk, which is managed by limiting the investments to higher quality and shorter duration instruments.
Receivables: 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: 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 March 31, 2020. For the three months ended 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 November 2019, the FASB issued Accounting Standards Update No. 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. In May 2019, the FASB issued Accounting Standards Update No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. 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 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 on January 1, 2020, and

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recognized a cumulative-effect adjustment of $35 to our opening retained earnings for credit related allowances on receivables. The adoption did not have an impact on our consolidated statements of income or cash flows.
In August 2018, the FASB issued Accounting Standards Update No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, or ASU 2018-15. The amendments in ASU 2018-15 require implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance. The amendments also require an entity to disclose the nature of its hosting arrangements and adhere to certain presentation requirements in its balance sheet, income statement and statement of cash flows. We adopted ASU 2018-15 on January 1, 2020 using a prospective approach for all implementation costs incurred after the date of adoption, and the adoption did 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.
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 contract 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 basis) related to the amendments depends on the applicable guidance, and all amendments for which there is no transition guidance specified are to be applied on a prospective basis. We are currently evaluating the effects the adoption of ASU 2019-12 will have on our consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update No. 2018-14, Compensation—Retirement Benefits - Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, or ASU 2018-14. The amendments in ASU 2018-14 eliminate, add, and modify certain disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments are effective for our annual reporting periods beginning after December 15, 2020, with early adoption permitted. The guidance is to be applied on a retrospective basis to all periods presented. We are currently evaluating the effects the adoption of ASU 2018-14 will have on our disclosures.
In August 2018, the FASB issued Accounting Standards Update No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, or ASU 2018-12. The amendments in ASU

-10-



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, 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.
There were no other new accounting pronouncements that were issued or became effective since the issuance of our 2019 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 Acquisition
Beacon Health Options, Inc.
On February 28, 2020, we completed our acquisition of Beacon Health Options, Inc., or Beacon, the largest independently held behavioral health organization in the country. At the time of acquisition, Beacon served 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.
In accordance with FASB accounting guidance for business combinations, the consideration transferred was allocated to the preliminary fair value of Beacon’s assets acquired and liabilities assumed, including identifiable intangible assets. The excess of the consideration transferred over the preliminary fair value of net assets acquired resulted in preliminary goodwill of $1,049 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 from Beacon includes $752 of other intangible assets at March 31, 2020, which primarily consist of finite-lived customer relationships with amortization periods ranging from 9 to 21 years. The results of operations of Beacon are included in our consolidated financial statements within our Other segment for the period following February 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 declines based on qualitative and quantitative factors. Our fixed maturity securities have been negatively impacted by the significant market 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. We continue to review our investment portfolios under our impairment review policy. Given the inherent uncertainty of changes in market conditions and the significant judgments involved, there is a continuing risk that declines in fair value may occur and additional material impairment losses on investments may be recorded in future periods.

-11-



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

 
$
24

 
$

 
$

 
$

 
$
474

 
$

Government sponsored securities
369

 
5

 
(48
)
 

 

 
326

 

States, municipalities and political subdivisions
4,768

 
233

 
(14
)
 

 

 
4,987

 

Corporate securities
9,609

 
148

 
(450
)
 
(44
)
 
(51
)
 
9,212

 
(44
)
Residential mortgage-backed securities
3,731

 
93

 
(95
)
 
(7
)
 

 
3,722

 

Commercial mortgage-backed securities
81

 
1

 
(3
)
 
(1
)
 

 
78

 

Other securities
1,692

 
6

 
(97
)
 
(14
)
 

 
1,587

 

Total fixed maturity securities
$
20,700

 
$
510

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

 
$
(44
)
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
$
524

 
$
4

 
$
(3
)
 
$

 
$

 
$
525

 
$

Government sponsored securities
136

 
5

 

 

 

 
141

 

States, municipalities and political subdivisions
4,592

 
262

 
(3
)
 

 

 
4,851

 

Corporate securities
8,870

 
339

 
(9
)
 
(15
)
 

 
9,185

 
(3
)
Residential mortgage-backed securities
3,654

 
87

 
(6
)
 
(3
)
 

 
3,732

 

Commercial mortgage-backed securities
84

 
2

 

 

 

 
86

 

Other securities
1,648

 
21

 
(3
)
 
(5
)
 

 
1,661

 

Total fixed maturity securities
$
19,508

 
$
720

 
$
(24
)
 
$
(23
)
 
$

 
$
20,181

 
$
(3
)



-12-



For fixed maturity securities in an unrealized loss position at March 31, 2020 and December 31, 2019, the following table summarizes the aggregate fair values and gross unrealized losses by length of time those securities have continuously been in an unrealized loss position: 
 
Less than 12 Months
 
12 Months or Greater
(Securities are whole amounts)
Number of
Securities
 
Estimated
Fair Value
 
Gross
Unrealized
Loss
 
Number of
Securities
 
Estimated
Fair Value
 
Gross
Unrealized
Loss
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
1

 
$

 
$

 

 
$

 
$

Government sponsored securities
278

 
224

 
(48
)
 
1

 

 

States, municipalities and political subdivisions
239

 
509

 
(14
)
 
3

 
4

 

Corporate securities
2,773

 
5,003

 
(450
)
 
170

 
176

 
(44
)
Residential mortgage-backed securities
603

 
1,182

 
(95
)
 
63

 
57

 
(7
)
Commercial mortgage-backed securities
14

 
29

 
(3
)
 
3

 
6

 
(1
)
Other securities
520

 
1,175

 
(97
)
 
58

 
142

 
(14
)
Total fixed maturity securities
4,428

 
$
8,122

 
$
(707
)
 
298

 
$
385

 
$
(66
)
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
27

 
$
250

 
$
(3
)
 
2

 
$
1

 
$

Government sponsored securities
14

 
12

 

 
3

 
1

 

States, municipalities and political subdivisions
114

 
306

 
(3
)
 
14

 
11

 

Corporate securities
386

 
558

 
(9
)
 
224

 
286

 
(15
)
Residential mortgage-backed securities
321

 
635

 
(6
)
 
189

 
237

 
(3
)
Commercial mortgage-backed securities
1

 
3

 

 
4

 
8

 

Other securities
166

 
415

 
(3
)
 
113

 
358

 
(5
)
Total fixed maturity securities
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 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
Due in one year or less
$
520

 
$
511

Due after one year through five years
5,730

 
5,583

Due after five years through ten years
6,035

 
5,882

Due after ten years
4,603

 
4,610

Mortgage-backed securities
3,812

 
3,800

Total fixed maturity securities
$
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 months ended March 31, 2020 and 2019 are as follows:
 
 
Three Months Ended 
 March 31
 
 
2020
 
2019
Proceeds
 
$
1,931

 
$
1,468

Gross realized gains
 
43

 
18

Gross realized losses
 
(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 marketable equity securities at March 31, 2020 and December 31, 2019 is as follows:
 
March 31, 2020
 
December 31, 2019
Equity securities:
 
 
 
Exchange traded funds
$
245

 
$
44

Fixed maturity mutual funds
211

 
643

Common equity securities
32

 
237

Private equity securities
82

 
85

Total
$
570

 
$
1,009


The gains and losses related to equity securities for the three months ended March 31, 2020 and 2019 are as follows:
 
 
Three Months Ended March 31
 
 
2020
 
2019
Net realized (losses) gains recognized on equity securities
 
$
(50
)
 
$
79

Less: Net realized gains recognized on equity securities sold during the period
 
(18
)
 
(21
)
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 $427 and $351 at March 31, 2020 and December 31, 2019, respectively. The value of the collateral represented 103% of the market value of the securities on loan at each of March 31, 2020 and December 31, 2019. We recognize the collateral as an asset under the caption “Other current assets” in our consolidated balance sheets, and we recognize a corresponding liability for the obligation to return the collateral to the borrower under the caption “Other current liabilities.” The securities on loan are reported in the applicable investment category on our consolidated balance sheets.
The remaining contractual maturity of our securities lending agreements at March 31, 2020 is as follows:
 
Overnight and Continuous
Securities lending transactions
 
Cash
$
354

United States Government securities
69

Other securities
4

Total
$
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’ 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 captions “Other current or noncurrent assets” or “Other current or noncurrent liabilities” in our consolidated balance sheet.
Prior to 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 $259 and $262 at March 31, 2020 and December 31, 2019, respectively.
For additional information relating to the fair value of our derivative assets and liabilities, see Note 6, “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’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
The following methods, assumptions and inputs were used to determine the fair value of each class of the following assets and liabilities recorded at fair value in our consolidated balance sheets:
Cash equivalents: Cash equivalents primarily consist of highly rated money market funds with maturities of three months or less and are purchased daily at par value with specified yield rates. Due to the high ratings and short-term nature of the funds, we designate all cash equivalents as Level I.
Fixed maturity securities, available-for-sale: Fair values of available-for-sale fixed maturity securities are based on quoted market prices, where available. These fair values are obtained primarily from third-party pricing services, which generally use Level I or Level II inputs for the determination of fair value to facilitate fair value measurements and disclosures. Level II securities primarily include corporate securities, securities from states, municipalities and political subdivisions, mortgage-backed securities, United States Government securities and certain other asset-backed securities. For securities not actively traded, the pricing services may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. We have controls in place to review the pricing services’ qualifications and procedures used to determine fair values. In addition, we periodically review the pricing services’ pricing methodologies, data sources and pricing inputs to ensure the fair values obtained are reasonable. Inputs that are often used in the valuation methodologies include, but are not limited to, broker quotes, benchmark yields, credit spreads, default rates and prepayment speeds. We also have certain fixed maturity securities, primarily corporate debt securities, which are designated Level III securities. For these securities, the valuation methodologies may incorporate broker quotes or discounted cash flow analyses using assumptions for inputs such as expected cash flows, benchmark yields, credit spreads, default rates and prepayment speeds that are not observable in the markets.
Equity securities: Fair values of equity securities are generally designated as Level I and are based on quoted market prices. For certain equity securities, quoted market prices for the identical security are not always available, and the fair value is estimated by reference to similar securities for which quoted prices are available. These securities are designated Level II. We also have certain equity securities, including private equity securities, for which the fair value is estimated based on each security’s current condition and future cash flow projections. Such securities are designated Level III. The fair values of these private equity securities are generally based on either broker quotes or discounted cash flow projections using assumptions for inputs such as the weighted-average cost of capital, long-term revenue growth rates and earnings before interest, taxes, depreciation and amortization, and/or revenue multiples that are not observable in the markets.
Securities lending collateral: Fair values of securities lending collateral are based on quoted market prices, where available. These fair values are obtained primarily from third-party pricing services, which generally use Level I or Level II inputs for the determination of fair value, to facilitate fair value measurements and disclosures.
Derivatives: Fair values are based on the quoted market prices by the financial institution that is the counterparty to the derivative transaction. We independently verify prices provided by the counterparties using valuation models that incorporate observable market inputs for similar derivative transactions. Derivatives are designated as Level II securities. Derivatives presented within the fair value hierarchy table below are presented on a gross basis and not on a master netting basis by counterparty.


-17-



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

 
$

 
$

 
$
2,363

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

 
474

 

 
474

Government sponsored securities

 
326

 

 
326

States, municipalities and political subdivisions, tax-exempt

 
4,987

 

 
4,987

Corporate securities

 
8,896

 
316

 
9,212

Residential mortgage-backed securities

 
3,720

 
2

 
3,722

Commercial mortgage-backed securities

 
78

 

 
78

Other securities

 
1,582

 
5

 
1,587

Total fixed maturity securities, available-for-sale

 
20,063

 
323

 
20,386

Equity securities:


 


 


 


Exchange traded funds
245

 

 

 
245

Fixed maturity mutual funds

 
211

 

 
211

Common equity securities
2

 
30

 

 
32

Private equity securities

 

 
82

 
82

Total equity securities
247

 
241

 
82

 
570

Securities lending collateral

 
426

 

 
426

Derivatives

 
49

 

 
49

Total assets
$
2,610

 
$
20,779

 
$
405

 
$
23,794

Liabilities:
 
 
 
 
 
 
 
Derivatives
$

 
$
(5
)
 
$

 
$
(5
)
Total liabilities
$

 
$
(5
)
 
$

 
$
(5
)
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
2,015

 
$

 
$

 
$
2,015

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

 
525

 

 
525

Government sponsored securities

 
141

 

 
141

States, municipalities and political subdivisions, tax-exempt

 
4,851

 

 
4,851

Corporate securities

 
8,882

 
303

 
9,185

Residential mortgage-backed securities

 
3,730

 
2

 
3,732

Commercial mortgage-backed securities

 
86

 

 
86

Other securities

 
1,654

 
7

 
1,661

Total fixed maturity securities, available-for-sale

 
19,869

 
312

 
20,181

Equity securities:


 


 


 


Exchange traded funds
44

 

 

 
44

Fixed maturity mutual funds

 
643

 

 
643

Common equity securities
206

 
31

 

 
237

Private equity securities

 

 
85

 
85

Total equity securities
250

 
674

 
85

 
1,009

Securities lending collateral

 
353

 

 
353

Derivatives

 
23

 

 
23

Total assets
$
2,265

 
$
20,919

 
$
397

 
$
23,581

Liabilities:
 
 
 
 
 
 
 
Derivatives
$

 
$
(1
)
 
$

 
$
(1
)
Total liabilities
$

 
$
(1
)
 
$

 
$
(1
)

 
 
 
 
 
 
 
 
 
 


-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 three months ended March 31, 2020 and 2019 is as follows:
 
Corporate
Securities
 
Residential
Mortgage-
backed
Securities
 
Other 
Securities
 
Equity
Securities
 
Total
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

Total (losses) gains:
 
 
 
 
 
 
 
 
 
Recognized in net income
(1
)
 

 

 
(2
)
 
(3
)
Recognized in accumulated other comprehensive loss
2

 

 

 

 
2

Purchases
33

 

 
2

 
7

 
42

Sales
(1
)
 

 

 
(21
)
 
(22
)
Settlements
(21
)
 

 
(1
)
 

 
(22
)
Transfers into Level III

 

 
3

 

 
3

Transfers out of Level III
(2
)
 

 
(7
)
 

 
(9
)
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 months ended March 31, 2020 or 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 Acquisitions,” we completed our acquisition of Beacon on February 28, 2020. The preliminary values of net assets acquired in our acquisition of Beacon and resulting goodwill and other intangible assets were recorded at fair value primarily using Level III inputs. The majority of Beacon’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 Beacon 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 Beacon described above, there were no material assets or liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2020 or 2019.

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Our valuation policy is determined by members of our treasury and accounting departments. Whenever possible, our policy is to obtain quoted market prices in active markets to estimate fair values for recognition and disclosure purposes. Where quoted market prices in active markets are not available, fair values are estimated using discounted cash flow analyses, broker quotes, unobservable inputs or other valuation techniques. These techniques are significantly affected by our assumptions, including discount rates and estimates of future cash flows. The use of assumptions for unobservable inputs for the determination of fair value involves a level of judgment and uncertainty. Changes in assumptions that reasonably could have been different at the reporting date may result in a higher or lower determination of fair value. Changes in fair value measurements, if significant, may affect performance of cash flows.
Potential taxes and other transaction costs are not considered in estimating fair values. Our valuation policy is generally to obtain quoted prices for each security from third-party pricing services, which are derived through recently reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information. As we are responsible for the determination of fair value, we perform analysis on the prices received from the pricing services to determine whether the prices are reasonable estimates of fair value. This analysis is performed by our internal treasury personnel who are familiar with our investment portfolios, the pricing services engaged and the valuation techniques and inputs used. Our analysis includes procedures such as a review of month-to-month price fluctuations and price comparisons to secondary pricing services. There were no adjustments to quoted market prices obtained from the pricing services during the three months ended March 31, 2020 or 2019.
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 for cash, 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: 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. 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 March 31, 2020 and December 31, 2019 is as follows:
 
Carrying
Value
 
Estimated Fair Value
 
 
Level I
 
Level II
 
Level III
 
Total
March 31, 2020
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
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 borrowings
700

 

 
700

 

 
700

Commercial paper
400

 

 
400

 

 
400

Notes
18,840

 

 
20,470

 

 
20,470

Convertible debentures
145

 

 
904

 

 
904


7.
Income Taxes
During the three months ended March 31, 2020 and 2019, we recognized income tax expense of $566 and $394, respectively, which represent effective tax rates of 27.1% and 20.3%, respectively. The increase in our effective income tax rate was primarily due to the reinstatement 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. We recognize the income tax payable as a liability under the caption “Other current liabilities” and the income tax receivable as an asset under the caption “Other current assets” in our consolidated balance sheets.

-21-



8.
Retirement Benefits
 
 
 
 
 
 
 
 
The components of net periodic benefit credit included in our consolidated statements of income for the three months ended March 31, 2020 and 2019 are as follows:
 
Pension Benefits
 
Other Benefits
 
Three Months Ended 
 March 31
 
Three Months Ended 
 March 31
 
2020
 
2019
 
2020
 
2019
Interest cost
$
12

 
$
16

 
$
3

 
$
4

Expected return on assets
(40
)
 
(34
)
 
(6
)
 
(5
)
Recognized actuarial loss
6

 
4

 

 

Settlement loss
5

 
2

 

 

Amortization of prior service credit

 

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

For the year ending December 31, 2020, 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. No contributions were made to our retirement benefit plans during the three months ended March 31, 2020 and 2019.
9. Medical Claims Payable
A reconciliation of the beginning and ending balances for medical claims payable, by segment (see Note 15, “Segment Information”), for the