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EX-32.2 - EXHIBIT 32.2 - Anthem, Inc.exhibit322-20140930x10q.htm
EX-31.2 - EXHIBIT 31.2 - Anthem, Inc.exhibit312-20140930x10q.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2014
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
WELLPOINT, 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)
 
 
120 MONUMENT CIRCLE
INDIANAPOLIS, INDIANA
(Address of principal executive offices)
 
46204-4903
(Zip Code)
Registrant’s telephone number, including area code: (317) 488-6000
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 x No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer
x
 
  
Accelerated filer
¨
Non-accelerated filer
¨
 (Do not check if a smaller reporting company)
  
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Title of Each Class
 
Outstanding at October 15, 2014
Common Stock, $0.01 par value
 
269,941,385 shares
 
 
 




WellPoint, Inc.
Quarterly Report on Form 10-Q
For the Period Ended September 30, 2014
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

WellPoint, Inc.
Consolidated Balance Sheets
 
September 30,
2014
 
December 31,
2013
(In millions, except share data)
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,717.9

 
$
1,582.1

Investments available-for-sale, at fair value:
 
 
 
Fixed maturity securities (amortized cost of $17,845.3 and $16,826.7)
18,284.7

 
17,038.2

Equity securities (cost of $1,289.8 and $1,168.5)
1,848.3

 
1,735.5

Other invested assets, current
19.0

 
16.3

Accrued investment income
172.7

 
168.8

Premium and self-funded receivables
4,438.1

 
3,968.7

Other receivables
1,680.7

 
1,063.3

Income taxes receivable
200.6

 
235.7

Securities lending collateral
1,698.6

 
969.8

Deferred tax assets, net
244.4

 
383.0

Other current assets
1,922.1

 
1,677.5

Assets held for sale

 
906.9

Total current assets
32,227.1

 
29,745.8

Long-term investments available-for-sale, at fair value:
 
 
 
Fixed maturity securities (amortized cost of $498.5 and $455.9)
501.3

 
449.9

Equity securities (cost of $26.8 and $27.4)
31.7

 
31.3

Other invested assets, long-term
1,691.8

 
1,542.6

Property and equipment, net
1,848.9

 
1,801.5

Goodwill
17,082.0

 
16,917.2

Other intangible assets
8,010.6

 
8,441.0

Other noncurrent assets
664.8

 
645.2

Total assets
$
62,058.2

 
$
59,574.5

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Liabilities
 
 
 
Current liabilities:
 
 
 
Policy liabilities:
 
 
 
Medical claims payable
$
6,794.2

 
$
6,127.2

Reserves for future policy benefits
68.8

 
63.1

Other policyholder liabilities
2,598.0

 
2,073.2

Total policy liabilities
9,461.0

 
8,263.5

Unearned income
1,003.5

 
822.7

Accounts payable and accrued expenses
3,447.6

 
3,426.3

Security trades pending payable
156.1

 
95.2

Securities lending payable
1,698.2

 
969.7

Short-term borrowings
100.0

 
400.0

Current portion of long-term debt
625.0

 
518.0

Other current liabilities
1,903.6

 
1,674.7

Liabilities held for sale

 
181.4

Total current liabilities
18,395.0

 
16,351.5

Long-term debt, less current portion
14,538.3

 
13,573.6

Reserves for future policy benefits, noncurrent
655.7

 
723.0

Deferred tax liabilities, net
3,284.2

 
3,325.2

Other noncurrent liabilities
891.0

 
836.0

Total liabilities
37,764.2

 
34,809.3

 
 
 
 
Commitment and contingencies – Note 9


 


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 –
270,512,468 and 293,273,830
2.7

 
2.9

Additional paid-in capital
10,094.4

 
10,765.2

Retained earnings
13,863.8

 
13,813.9

Accumulated other comprehensive income
333.1

 
183.2

Total shareholders’ equity
24,294.0

 
24,765.2

Total liabilities and shareholders’ equity
$
62,058.2

 
$
59,574.5

See accompanying notes.

-2-



WellPoint, Inc.
Consolidated Statements of Income
(Unaudited) 
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
(In millions, except per share data)
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
Premiums
$
17,226.0

 
$
16,580.9

 
$
50,811.9

 
$
49,509.5

Administrative fees
1,134.4

 
1,027.8

 
3,404.3

 
3,006.4

Other revenue
10.3

 
10.0

 
29.3

 
29.8

Total operating revenue
18,370.7

 
17,618.7

 
54,245.5

 
52,545.7

Net investment income
174.4

 
167.6

 
546.6

 
482.8

Net realized gains on investments
25.7

 
95.4

 
133.2

 
166.4

Other-than-temporary impairment losses on investments:
 
 
 
 
 
 
 
Total other-than-temporary impairment losses on investments
(19.4
)
 
(27.1
)
 
(41.9
)
 
(74.0
)
Portion of other-than-temporary impairment losses recognized in other comprehensive income
5.6

 
0.9

 
6.4

 
0.9

Other-than-temporary impairment losses recognized in income
(13.8
)
 
(26.2
)
 
(35.5
)
 
(73.1
)
Total revenues
18,557.0

 
17,855.5

 
54,889.8

 
53,121.8

Expenses
 
 
 
 
 
 
 
Benefit expense
14,211.1

 
14,075.0

 
41,997.0

 
41,656.3

Selling, general and administrative expense:
 
 
 
 
 
 
 
Selling expense
374.3

 
377.3

 
1,133.8

 
1,139.9

General and administrative expense
2,594.0

 
2,165.4

 
7,581.8

 
6,167.5

Total selling, general and administrative expense
2,968.3

 
2,542.7

 
8,715.6

 
7,307.4

Interest expense
155.3

 
151.5

 
447.1

 
456.9

Amortization of other intangible assets
60.3

 
61.3

 
168.3

 
185.6

Loss on extinguishment of debt
74.8

 
145.3

 
80.8

 
145.3

Total expenses
17,469.8

 
16,975.8

 
51,408.8

 
49,751.5

Income from continuing operations before income tax expense
1,087.2

 
879.7

 
3,481.0

 
3,370.3

Income tax expense
456.3

 
225.9

 
1,427.6

 
1,044.9

Income from continuing operations
630.9

 
653.8

 
2,053.4

 
2,325.4

Income from discontinued operations, net of tax

 
2.4

 
9.6

 
16.1

Net income
$
630.9

 
$
656.2

 
$
2,063.0

 
$
2,341.5

Basic net income per share:
 
 
 
 
 
 
 
Basic - continuing operations
$
2.31

 
$
2.20

 
$
7.39

 
$
7.75

Basic - discontinued operations

 
0.01

 
0.03

 
0.06

Basic net income per share
$
2.31

 
$
2.21

 
$
7.42

 
$
7.81

Diluted net income per share:
 
 
 
 
 
 
 
Diluted - continuing operations
$
2.22

 
$
2.15

 
$
7.15

 
$
7.64

Diluted - discontinued operations

 
0.01

 
0.03

 
0.05

Diluted net income per share
$
2.22

 
$
2.16

 
$
7.18

 
$
7.69

Dividends per share
$
0.4375

 
$
0.3750

 
$
1.3125

 
$
1.1250


See accompanying notes.

-3-



WellPoint, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
(In millions)
2014
 
2013
 
2014
 
2013
Net income
$
630.9

 
$
656.2

 
$
2,063.0

 
$
2,341.5

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Change in net unrealized gains/losses on investments
(133.3
)
 
16.3

 
151.6

 
(327.0
)
Change in non-credit component of other-than-temporary impairment losses on investments
(3.3
)
 
(0.6
)
 
(3.3
)
 
1.6

Change in net unrealized gains/losses on cash flow hedges
(5.9
)
 
0.7

 
(4.4
)
 
2.2

Change in net periodic pension and postretirement costs
3.0

 
4.8

 
8.9

 
18.6

Foreign currency translation adjustments
(2.4
)
 
1.2

 
(2.9
)
 
0.7

Other comprehensive (loss) income
(141.9
)
 
22.4

 
149.9

 
(303.9
)
Total comprehensive income
$
489.0

 
$
678.6

 
$
2,212.9

 
$
2,037.6


































See accompanying notes.

-4-


WellPoint, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended 
 September 30
(In millions)
2014
 
2013
Operating activities
 
 
 
Net income
$
2,063.0

 
$
2,341.5

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net realized gains on investments
(133.2
)
 
(166.4
)
Other-than-temporary impairment losses recognized in income
35.5

 
73.1

Loss on extinguishment of debt
80.8

 
145.3

Gain on disposal from discontinued operations
(3.2
)
 

Loss on disposal of assets
0.4

 
5.1

Deferred income taxes
108.1

 
(12.0
)
Amortization, net of accretion
563.0

 
592.7

Depreciation expense
79.9

 
78.4

Impairment of property and equipment
3.9

 

Share-based compensation
125.7

 
103.7

Excess tax benefits from share-based compensation
(39.9
)
 
(23.5
)
Changes in operating assets and liabilities:
 
 
 
Receivables, net
(1,020.7
)
 
(368.0
)
Other invested assets
(17.6
)
 
1.7

Other assets
(309.2
)
 
51.6

Policy liabilities
1,130.2

 
(130.3
)
Unearned income
180.5

 
42.9

Accounts payable and accrued expenses
(10.5
)
 
95.9

Other liabilities
231.4

 
(78.0
)
Income taxes
68.0

 
87.5

Other, net
(71.9
)
 
(61.7
)
Net cash provided by operating activities
3,064.2

 
2,779.5

Investing activities
 
 
 
Purchases of fixed maturity securities
(7,498.8
)
 
(11,494.1
)
Proceeds from fixed maturity securities:
 
 
 
Sales
5,536.0

 
8,756.4

Maturities, calls and redemptions
1,016.4

 
1,490.0

Purchases of equity securities
(530.2
)
 
(464.6
)
Proceeds from sales of equity securities
370.8

 
575.2

Purchases of other invested assets
(138.9
)
 
(207.9
)
Proceeds from sales of other invested assets
76.4

 
53.0

Settlement of non-hedging derivatives
(67.4
)
 
(109.8
)
Changes in securities lending collateral
(728.6
)
 
(273.1
)
Proceeds from sale of subsidiary, net of cash sold
740.0

 

Purchases of property and equipment
(410.6
)
 
(408.1
)
Other, net
(0.1
)
 
(3.8
)
Net cash used in investing activities
(1,635.0
)
 
(2,086.8
)
Financing activities
 
 
 
Net proceeds from commercial paper borrowings
46.5

 
224.1

Proceeds from long-term borrowings
2,700.0

 
1,250.0

Repayments of long-term borrowings
(1,730.8
)
 
(1,801.9
)
Proceeds from short-term borrowings
1,750.0

 
600.0

Repayments of short-term borrowings
(2,050.0
)
 
(500.0
)
Changes in securities lending payable
728.5

 
273.0

Changes in bank overdrafts
(27.2
)
 
72.3

Repurchase and retirement of common stock
(2,655.8
)
 
(1,170.4
)
Cash dividends
(363.1
)
 
(337.5
)
Proceeds from issuance of common stock under employee stock plans
268.4

 
374.9

Excess tax benefits from share-based compensation
39.9

 
23.5

Net cash used in financing activities
(1,293.6
)
 
(992.0
)
Effect of foreign exchange rates on cash and cash equivalents
(4.6
)
 
0.4

Change in cash and cash equivalents
131.0

 
(298.9
)
Cash and cash equivalents at beginning of period
1,586.9

 
2,484.6

Cash and cash equivalents at end of period
1,717.9

 
2,185.7

Less cash and cash equivalents of discontinued operations at end of period

 
(3.7
)
Cash and cash equivalents of continuing operations at end of period
$
1,717.9

 
$
2,182.0

See accompanying notes.

-5-


WellPoint, Inc.
Consolidated Statements of Shareholders’ Equity
(Unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
(In millions)
Number of
Shares
 
Par
Value
 
January 1, 2014
293.3

 
$
2.9

 
$
10,765.2

 
$
13,813.9

 
$
183.2

 
$
24,765.2

Net income

 

 

 
2,063.0

 

 
2,063.0

Other comprehensive income

 

 

 

 
149.9

 
149.9

Settlement of equity options

 

 
(30.5
)
 

 

 
(30.5
)
Repurchase and retirement of common stock
(27.6
)
 
(0.2
)
 
(1,009.7
)
 
(1,645.9
)
 

 
(2,655.8
)
Dividends and dividend equivalents

 

 

 
(367.2
)
 

 
(367.2
)
Issuance of common stock under employee stock plans, net of related tax benefits
4.8

 

 
369.4

 

 

 
369.4

September 30, 2014
270.5

 
$
2.7

 
$
10,094.4

 
$
13,863.8

 
$
333.1

 
$
24,294.0

 
 
 
 
 
 
 
 
 
 
 
 
January 1, 2013
304.7

 
$
3.0

 
$
10,853.5

 
$
12,647.1

 
$
299.1

 
$
23,802.7

Net income

 

 

 
2,341.5

 

 
2,341.5

Other comprehensive loss

 

 

 

 
(303.9
)
 
(303.9
)
Repurchase and retirement of common stock
(15.6
)
 
(0.1
)
 
(566.2
)
 
(607.4
)
 

 
(1,173.7
)
Convertible debenture tax adjustment

 

 
(3.3
)
 

 

 
(3.3
)
Dividends and dividend equivalents

 

 

 
(340.7
)
 

 
(340.7
)
Issuance of common stock under employee stock plans, net of related tax benefits
7.1

 
0.1

 
485.4

 

 

 
485.5

September 30, 2013
296.2

 
$
3.0

 
$
10,769.4

 
$
14,040.5

 
$
(4.8
)
 
$
24,808.1





















See accompanying notes.

-6-


WellPoint, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2014
(In Millions, Except Per Share Data or As Otherwise Stated Herein)
 
1.
Organization
References to the terms “we”, “our”, “us”, “WellPoint” or the “Company” used throughout these Notes to Consolidated Financial Statements refer to WellPoint, Inc., an Indiana corporation, and unless the context otherwise requires, its direct and indirect subsidiaries. On November 5, 2014, a Special Meeting of Shareholders will be held to vote on an amendment of our articles of incorporation to change our name to Anthem, Inc. Shareholders of record on September 12, 2014 are entitled to vote. If approved, the change will occur in December 2014.
We are one of the largest health benefits companies in terms of medical membership in the United States, serving 37.5 medical members through our affiliated health plans and approximately 68.5 individuals through our subsidiaries as of September 30, 2014. We offer a broad spectrum of network-based managed care plans to large and small employer, individual, Medicaid and Medicare markets. Our managed care plans include: preferred provider organizations, or PPOs; health maintenance organizations, or HMOs; point-of-service, or POS, plans; traditional indemnity plans and other hybrid plans, including consumer-driven health plans, or CDHPs; and hospital only and limited benefit products. In addition, we provide a broad array of managed care services to self-funded customers, including claims processing, underwriting, stop loss insurance, actuarial services, provider network access, medical cost management, disease management, wellness programs and other administrative services. We provide an array of specialty and other insurance products and services such as behavioral health benefit services, dental, vision, life and disability insurance benefits, radiology benefit management, analytics-driven personal health care guidance and long-term care insurance. We also provide services to the Federal Government in connection with the Federal Employee Program, or FEP, and various Medicare programs. We also sold contact lenses, eyeglasses and other ocular products through our 1-800 CONTACTS, Inc., or 1-800 CONTACTS, business, which was divested on January 31, 2014.
We are an independent licensee of the Blue Cross and Blue Shield Association, or BCBSA, an association of independent health benefit plans. We serve our members as the Blue Cross licensee for California and as the Blue Cross and Blue Shield, or BCBS, licensee for Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri (excluding 30 counties in the Kansas City area), Nevada, New Hampshire, New York (as BCBS in 10 New York City metropolitan and surrounding counties, and as Blue Cross or BCBS in selected upstate counties only), Ohio, Virginia (excluding the Northern Virginia suburbs of Washington, D.C.) and Wisconsin. In a majority of these service areas we do business as Anthem Blue Cross, Anthem Blue Cross and Blue Shield, Blue Cross and Blue Shield of Georgia, and Empire Blue Cross Blue Shield, or Empire Blue Cross (in our New York service areas). We also conduct business through our AMERIGROUP Corporation, or Amerigroup, subsidiary in Florida, Georgia, Kansas, Kentucky, Louisiana, Maryland, Nevada, New Jersey, New Mexico, New York, Tennessee, Texas and Washington. We also serve customers throughout the country as HealthLink, UniCare, and in certain Arizona, California, Nevada, New York and Virginia markets, through our CareMore Health Group, Inc., or CareMore, subsidiary. We are licensed to conduct insurance operations in all 50 states through our subsidiaries.
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 2013 Annual Report on Form 10-K, unless the information contained in those disclosures materially changed or is required by GAAP. Unless otherwise specified, all financial information presented in the accompanying consolidated financial statements and in the notes to consolidated financial statements relates only to our continuing operations, other than cash flows presented on the consolidated statements of cash flows. 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, 2014 and 2013 have been recorded. The results of operations for the three and nine months ended September 30, 2014 are not

-7-


necessarily indicative of the results that may be expected for the full year ending December 31, 2014. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2013 included in our 2013 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 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.
Revenue Recognition: Premiums for fully-insured contracts are recognized as revenue over the period insurance coverage is provided and, if applicable, net of amounts recognized for minimum medical loss ratio rebates, and the risk adjustment, reinsurance, and risk corridor premium stabilization programs of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, or collectively, Health Care Reform. Premiums related to the unexpired contractual coverage periods are reflected in the accompanying consolidated balance sheets as unearned income. Premiums include revenue from retrospectively rated contracts where revenue is based on the estimated ultimate loss experience of the contract. Premium revenue includes an adjustment for retrospectively rated refunds based on an estimate of incurred claims. Premium rates for certain lines of business are subject to approval by the Department of Insurance of each respective state.
Administrative fees include revenue from certain group contracts that provide for the group to be at risk for all or, with supplemental insurance arrangements, a portion of their claims experience. We charge these self-funded groups an administrative fee, which is based on the number of members in a group or the group’s claim experience. In addition, administrative fees include amounts received for the administration of Medicare or certain other government programs. Under our self-funded arrangements, revenue is recognized as administrative services are performed. All benefit payments under these programs are excluded from benefit expense.
Adoption of New Accounting Pronouncement: Effective January 1, 2014, we adopted the provisions of Accounting Standards Update No. 2011-06, Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers (a consensus of the FASB Emerging Issues Task Force), or ASU 2011-06. Health Care Reform imposes a mandatory annual Health Insurance Provider Fee, or HIP Fee, on health insurers that write certain types of health insurance on U.S. risks. The annual HIP Fee is allocated to health insurers based on the ratio of the amount of an insurer's net premium revenues written during the preceding calendar year to an adjusted amount of health insurance for all U.S. health risk for those certain lines of business written during the preceding calendar year. The HIP Fee is non-deductible for federal income tax purposes. The total amount to be collected from allocations to health insurers in 2014 is $8,000.0, and our portion of the HIP Fee for 2014 is $893.3. ASU 2011-06 addresses how the HIP Fee should be recognized and classified in the financial statements of health insurers. In accordance with ASU 2011-06, we recorded our estimated liability for the HIP Fee in full at the beginning of the year with a corresponding deferred asset that is being amortized to expense on a straight-line basis. The deferred asset is recorded within other current assets on the consolidated balance sheets. The final calculation and payment of the HIP Fee occurred in the third quarter of 2014. We recognized $210.0 and $670.0 as general and administrative expense related to the HIP Fee for the three and nine months ended September 30, 2014, respectively.
Reclassifications: Certain prior period amounts have been reclassified to conform to the current period presentation. In addition, certain other immaterial reclassifications have been made in the current year.
3.
Business Divestiture
In December 2013, we entered into a definitive agreement to sell our 1-800 CONTACTS business to the private equity firm Thomas H. Lee Partners, L.P. Additionally, we entered into an asset purchase agreement with Luxottica Group to sell our glasses.com related assets (collectively, 1-800 CONTACTS). The operating results for 1-800 CONTACTS are reported as discontinued operations in the accompanying consolidated statements of income. These results were previously reported in the Commercial and Specialty Business segment. Additionally, the assets and liabilities of 1-800-CONTACTS are reported as held for sale in the accompanying consolidated balance sheets as of December 31, 2013. The sales were completed on January 31, 2014 and did not result in any material difference to the loss on disposal from discontinued operations recorded during the year ended December 31, 2013.

-8-


4.
Investments
We evaluate our investment securities for other-than-temporary declines based on qualitative and quantitative factors. Other-than-temporary impairment losses recognized in income totaled $13.8 and $26.2 for the three months ended September 30, 2014 and 2013, respectively. Other-than-temporary impairment losses recognized in income totaled $35.5 and $73.1 for the nine months ended September 30, 2014 and 2013, respectively. There were no individually significant other-than-temporary impairment losses on investments by issuer during the three and nine months ended September 30, 2014 and 2013. We continue to review our investment portfolios under our impairment review policy. Given the current market conditions and the significant judgments involved, there is a continuing risk that further declines in fair value may occur and additional material other-than-temporary impairment losses on investments may be recorded in future periods.

-9-


A summary of current and long-term investments, available-for-sale, at September 30, 2014 and December 31, 2013 is as follows:
 
 
 
 
 
 
 
 
 
Non-Credit
Component of
Other-Than-
Temporary
Impairments
Recognized in
AOCI
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized Losses
 
Estimated
Fair Value
 
 
 
 
Less than
12 Months
 
12 Months
or Greater
 
 
September 30, 2014:
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
$
342.6

 
$
3.5

 
$
(0.1
)
 
$
(0.2
)
 
$
345.8

 
$

Government sponsored securities
127.1

 
0.7

 
(0.1
)
 
(0.7
)
 
127.0

 

States, municipalities and political subdivisions, tax-exempt
5,725.1

 
300.2

 
(1.5
)
 
(6.1
)
 
6,017.7

 

Corporate securities
8,667.5

 
180.5

 
(56.2
)
 
(34.5
)
 
8,757.3

 
(5.9
)
Options embedded in convertible debt securities
100.4

 

 

 

 
100.4

 

Residential mortgage-backed securities
2,173.3

 
62.6

 
(2.0
)
 
(16.4
)
 
2,217.5

 

Commercial mortgage-backed securities
502.7

 
7.9

 
(0.5
)
 
(0.7
)
 
509.4

 

Other debt securities
705.1

 
7.7

 
(0.7
)
 
(1.2
)
 
710.9

 

Total fixed maturity securities
18,343.8

 
563.1

 
(61.1
)
 
(59.8
)
 
18,786.0

 
$
(5.9
)
Equity securities
1,316.6

 
577.1

 
(13.7
)
 

 
1,880.0

 
 
Total investments, available-for-sale
$
19,660.4

 
$
1,140.2

 
$
(74.8
)
 
$
(59.8
)
 
$
20,666.0

 
 
December 31, 2013:
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
$
300.8

 
$
2.5

 
$
(3.4
)
 
$

 
$
299.9

 
$

Government sponsored securities
174.4

 
0.4

 
(1.3
)
 

 
173.5

 

States, municipalities and political subdivisions, tax-exempt
5,899.5

 
202.9

 
(90.1
)
 
(9.6
)
 
6,002.7

 
(0.6
)
Corporate securities
7,614.1

 
205.2

 
(95.2
)
 
(15.5
)
 
7,708.6

 
(0.1
)
Options embedded in convertible debt securities
89.2

 

 

 

 
89.2

 

Residential mortgage-backed securities
2,269.4

 
48.0

 
(41.4
)
 
(7.1
)
 
2,268.9

 

Commercial mortgage-backed securities
479.0

 
10.5

 
(2.6
)
 
(0.3
)
 
486.6

 

Other debt securities
456.2

 
5.8

 
(2.5
)
 
(0.8
)
 
458.7

 
(0.1
)
Total fixed maturity securities
17,282.6

 
475.3

 
(236.5
)
 
(33.3
)
 
17,488.1

 
$
(0.8
)
Equity securities
1,195.9

 
578.9

 
(8.0
)
 

 
1,766.8

 
 
Total investments, available-for-sale
$
18,478.5

 
$
1,054.2

 
$
(244.5
)
 
$
(33.3
)
 
$
19,254.9

 
 
At September 30, 2014, we owned $2,726.9 of mortgage-backed securities and $625.8 of asset-backed securities out of a total available-for-sale investment portfolio of $20,666.0. These securities included sub-prime and Alt-A securities with fair values of $24.8 and $88.4, respectively. These sub-prime and Alt-A securities had accumulated net unrealized gains of $1.6 and $6.5, respectively. The average credit rating of the sub-prime and Alt-A securities was “B” and “CC”, respectively.

-10-


The following tables summarize for available-for-sale fixed maturity securities and available-for-sale equity securities in an unrealized loss position at September 30, 2014 and December 31, 2013, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position: 
 
Less than 12 Months
 
12 Months or Greater
(Securities are whole amounts)
Number of
Securities
 
Estimated
Fair Value
 
Gross
Unrealized
Loss
 
Number of
Securities
 
Estimated
Fair Value
 
Gross
Unrealized
Loss
September 30, 2014:
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
12

 
$
53.6

 
$
(0.1
)
 
3

 
$
5.0

 
$
(0.2
)
Government sponsored securities
10

 
27.0

 
(0.1
)
 
16

 
31.8

 
(0.7
)
States, municipalities and political subdivisions, tax-exempt
95

 
253.6

 
(1.5
)
 
126

 
320.4

 
(6.1
)
Corporate securities
1,828

 
3,281.2

 
(56.2
)
 
336

 
579.7

 
(34.5
)
Residential mortgage-backed securities
132

 
318.7

 
(2.0
)
 
251

 
483.9

 
(16.4
)
Commercial mortgage-backed securities
37

 
123.9

 
(0.5
)
 
17

 
53.5

 
(0.7
)
Other debt securities
51

 
189.8

 
(0.7
)
 
28

 
74.1

 
(1.2
)
Total fixed maturity securities
2,165

 
4,247.8

 
(61.1
)
 
777

 
1,548.4

 
(59.8
)
Equity securities
510

 
161.5

 
(13.7
)
 

 

 

Total fixed maturity and equity securities
2,675

 
$
4,409.3

 
$
(74.8
)
 
777

 
$
1,548.4

 
$
(59.8
)
December 31, 2013:
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
27

 
$
179.2

 
$
(3.4
)
 

 
$

 
$

Government sponsored securities
22

 
73.4

 
(1.3
)
 

 

 

States, municipalities and political subdivisions, tax-exempt
806

 
2,070.9

 
(90.1
)
 
42

 
82.4

 
(9.6
)
Corporate securities
1,448

 
2,586.6

 
(95.2
)
 
107

 
81.3

 
(15.5
)
Residential mortgage-backed securities
605

 
1,243.0

 
(41.4
)
 
80

 
116.2

 
(7.1
)
Commercial mortgage-backed securities
52

 
177.7

 
(2.6
)
 
4

 
5.6

 
(0.3
)
Other debt securities
65

 
185.3

 
(2.5
)
 
17

 
16.2

 
(0.8
)
Total fixed maturity securities
3,025

 
6,516.1

 
(236.5
)
 
250

 
301.7

 
(33.3
)
Equity securities
426

 
120.8

 
(8.0
)
 

 

 

Total fixed maturity and equity securities
3,451

 
$
6,636.9

 
$
(244.5
)
 
250

 
$
301.7

 
$
(33.3
)
The amortized cost and fair value of available-for-sale fixed maturity securities at September 30, 2014, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations.
 
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
$
613.5

 
$
619.9

Due after one year through five years
4,875.4

 
4,991.3

Due after five years through ten years
5,439.9

 
5,588.8

Due after ten years
4,739.0

 
4,859.1

Mortgage-backed securities
2,676.0

 
2,726.9

Total available-for-sale fixed maturity securities
$
18,343.8

 
$
18,786.0


-11-


Proceeds from fixed maturity securities, equity securities and other invested assets and the related gross realized gains and gross realized losses for the three and nine months ended September 30, 2014 and 2013 are as follows:
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
 
2014
 
2013
 
2014
 
2013
Proceeds
$
2,038.2

 
$
5,442.0

 
$
6,999.6

 
$
10,874.6

Gross realized gains
32.4

 
176.0

 
221.5

 
354.9

Gross realized losses
(6.7
)
 
(80.6
)
 
(88.3
)
 
(188.5
)
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.
5.
Fair Value
Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Level inputs, as defined by Financial Accounting Standards Board, or FASB, guidance for fair value measurements and disclosures, are as follows:
Level Input
 
Input Definition
Level I
 
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level II
 
Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date.
Level III
 
Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
The following methods, assumptions and inputs were used to determine the fair value of each class of the following assets and liabilities recorded at fair value in the consolidated balance sheets:
Cash equivalents: Cash equivalents primarily consist of highly rated money market funds with maturities of three months or less and are purchased daily at par value with specified yield rates. Due to the high ratings and short-term nature of the funds, we designate all cash equivalents as Level I.
Fixed maturity securities, available-for-sale: Fair values of available-for-sale fixed maturity securities are based on quoted market prices, where available. These fair values are obtained primarily from third party pricing services, which generally use Level I or Level II inputs for the determination of fair value to facilitate fair value measurements and disclosures. United States Government securities represent Level I securities, while Level II securities primarily include corporate securities, securities from states, municipalities and political subdivisions and mortgage-backed securities. For securities not actively traded, the third party 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 third party pricing services’ qualifications and procedures used to determine fair values. In addition, we periodically review the third party 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, available-for-sale: Fair values of equity securities are generally designated as Level I and are based on quoted market prices. For certain equity securities, quoted market prices for the identical security are not always available

-12-


and the fair value is estimated by reference to similar securities for which quoted prices are available. These securities are designated Level II. We also have certain equity securities, including private equity securities, for which the fair value is estimated based on each security’s current condition and future cash flow projections. Such securities are designated Level III. The fair values of these private equity securities are generally based on either broker quotes or discounted cash flow projections using assumptions for inputs such as the weighted-average cost of capital, long-term revenue growth rates and earnings before interest, taxes, depreciation and amortization, or EBITDA, and/or revenue multiples that are not observable in the markets.
Other invested assets, current: Other invested assets, current include securities held in rabbi trusts that are classified as trading. Fair values are based on quoted market prices.
Securities lending collateral: Fair values of securities lending collateral are based on quoted market prices, where available. These fair values are obtained primarily from third party pricing services, which generally use Level I or Level II inputs for the determination of fair value, to facilitate fair value measurements and disclosures.
Derivatives: Fair values are based on the quoted market prices by the financial institution that is the counterparty to the derivative transaction. We independently verify prices provided by the counterparties using valuation models that incorporate market observable inputs for similar derivative transactions.
Long-term receivable: Fair value is estimated based on discounted cash flow analysis using assumptions for inputs such as expected cash flow and discount rates that are not observable in the markets.

-13-


A summary of fair value measurements by level for assets and liabilities measured at fair value on a recurring basis at September 30, 2014 and December 31, 2013 is as follows:
 
Level I
 
Level II
 
Level III
 
Total
September 30, 2014:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
591.4

 
$

 
$

 
$
591.4

Investments available-for-sale:
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
United States Government securities
345.8

 

 

 
345.8

Government sponsored securities
4.0

 
123.0

 

 
127.0

States, municipalities and political subdivisions, tax-exempt

 
6,017.7

 

 
6,017.7

Corporate securities
11.9

 
8,599.9

 
145.5

 
8,757.3

Options embedded in convertible debt securities

 
100.4

 

 
100.4

Residential mortgage-backed securities

 
2,217.5

 

 
2,217.5

Commercial mortgage-backed securities

 
506.0

 
3.4

 
509.4

Other debt securities
85.1

 
617.1

 
8.7

 
710.9

Total fixed maturity securities
446.8

 
18,181.6

 
157.6

 
18,786.0

Equity securities
1,630.0

 
206.8

 
43.2

 
1,880.0

Other invested assets, current
19.0

 

 

 
19.0

Securities lending collateral
768.1

 
930.5

 

 
1,698.6

Derivatives excluding embedded options (reported with other assets)

 
0.9

 

 
0.9

Total assets
$
3,455.3

 
$
19,319.8

 
$
200.8

 
$
22,975.9

Liabilities:
 
 
 
 
 
 
 
Derivatives excluding embedded options (reported with other liabilities)
$

 
$
(19.3
)
 
$

 
$
(19.3
)
Total liabilities
$

 
$
(19.3
)
 
$

 
$
(19.3
)
 
 
 
 
 
 
 
 
December 31, 2013:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
632.3

 
$

 
$

 
$
632.3

Investments available-for-sale:
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
United States Government securities
299.9

 

 

 
299.9

Government sponsored securities

 
173.5

 

 
173.5

States, municipalities and political subdivisions, tax-exempt

 
6,002.7

 

 
6,002.7

Corporate securities

 
7,593.4

 
115.2

 
7,708.6

Options embedded in convertible debt securities

 
89.2

 

 
89.2

Residential mortgage-backed securities

 
2,268.9

 

 
2,268.9

Commercial mortgage-backed securities

 
480.1

 
6.5

 
486.6

Other debt securities
35.6

 
408.3

 
14.8

 
458.7

Total fixed maturity securities
335.5

 
17,016.1

 
136.5

 
17,488.1

Equity securities
1,475.7

 
249.7

 
41.4

 
1,766.8

Other invested assets, current
16.3

 

 

 
16.3

Securities lending collateral
408.5

 
561.3

 

 
969.8

Derivatives excluding embedded options (reported with other assets)

 
58.4

 

 
58.4

Total assets
$
2,868.3

 
$
17,885.5

 
$
177.9

 
$
20,931.7

Liabilities:
 
 
 
 
 
 
 
Derivatives excluding embedded options (reported with other liabilities)
$

 
$
(20.7
)
 
$

 
$
(20.7
)
Total liabilities
$

 
$
(20.7
)
 
$

 
$
(20.7
)

-14-


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, 2014 and 2013 is as follows:
 
Corporate
Securities
 
Residential
Mortgage-
backed
Securities
 
Commercial
Mortgage-
backed
Securities
 
Other Debt
Securities
 
Equity
Securities
 
Long-term Receivable
 
Total
Three Months Ended September 30, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance at July 1, 2014
$
150.4

 
$

 
$
3.6

 
$
17.8

 
$
43.1

 
$
32.2

 
$
247.1

Total gains (losses):
 
 
 
 
 
 
 
 
 
 
 
 
 
Recognized in net income
(0.8
)
 

 

 

 

 
(32.2
)
 
(33.0
)
Recognized in accumulated other comprehensive income
(0.5
)
 

 

 
0.1

 
0.1

 

 
(0.3
)
Purchases
19.6

 

 

 
3.5

 
0.1

 

 
23.2

Sales
(20.8
)
 

 

 
(1.6
)
 
(0.1
)
 

 
(22.5
)
Settlements
(3.0
)
 

 
(0.2
)
 

 

 

 
(3.2
)
Transfers into Level III
0.6

 

 

 

 

 

 
0.6

Transfers out of Level III

 

 

 
(11.1
)
 

 

 
(11.1
)
Ending balance at September 30, 2014
$
145.5

 
$

 
$
3.4

 
$
8.7

 
$
43.2

 
$

 
$
200.8

Change in unrealized losses included in net income related to assets still held for the three months ended September 30, 2014
$
(3.5
)
 
$

 
$

 
$

 
$

 
$

 
$
(3.5
)
Three Months Ended September 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance at July 1, 2013
$
139.2

 
$
12.6

 
$

 
$
5.4

 
$
35.8

 
$

 
$
193.0

Total gains (losses):
 
 
 
 
 
 
 
 
 
 
 
 
 
Recognized in net income
(14.9
)
 

 

 
(0.1
)
 

 

 
(15.0
)
Recognized in accumulated other comprehensive income
4.9

 

 

 
0.1

 
(2.4
)
 

 
2.6

Purchases
6.4

 

 

 

 
3.7

 

 
10.1

Sales
(1.6
)
 

 

 

 

 

 
(1.6
)
Settlements
(2.7
)
 

 
(2.3
)
 
(0.2
)
 

 

 
(5.2
)
Transfers into Level III
3.0

 

 
12.6

 
9.8

 

 

 
25.4

Transfers out of Level III

 
(12.6
)
 

 
(0.3
)
 

 

 
(12.9
)
Ending balance at September 30, 2013
$
134.3

 
$

 
$
10.3

 
$
14.7

 
$
37.1

 
$

 
$
196.4

Change in unrealized losses included in net income related to assets still held for the three months ended September 30, 2013
$
(14.9
)
 
$

 
$

 
$
(0.1
)
 
$

 
$

 
$
(15.0
)

-15-


A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level III inputs for the nine months ended September 30, 2014 and 2013 is as follows:
 
Corporate
Securities
 
Residential
Mortgage-
backed
Securities
 
Commercial
Mortgage-
backed
Securities
 
Other Debt
Securities
 
Equity
Securities
 
Long-term Receivable
 
Total
Nine Months Ended September 30, 2014:
 
 
 
 
 
 
 
 

 
 
 
 
Beginning balance at January 1, 2014
$
115.2

 
$

 
$
6.5

 
$
14.8

 
$
41.4

 
$

 
$
177.9

Total gains (losses):
 
 
 
 
 
 
 
 
 
 
 
 
 
Recognized in net income
(7.1
)
 

 

 

 
(0.7
)
 

 
(7.8
)
Recognized in accumulated other comprehensive income
12.2

 

 

 
0.4

 
1.4

 

 
14.0

Purchases
40.5

 

 
3.6

 
6.5

 
10.8

 

 
61.4

Sales
(27.0
)
 

 

 
(1.6
)
 
(9.7
)
 

 
(38.3
)
Settlements
(6.6
)
 

 
(3.6
)
 
(0.3
)
 

 

 
(10.5
)
Transfers into Level III
24.8

 

 

 

 

 

 
24.8

Transfers out of Level III
(6.5
)
 

 
(3.1
)
 
(11.1
)
 

 

 
(20.7
)
Ending balance at September 30, 2014
$
145.5

 
$

 
$
3.4

 
$
8.7

 
$
43.2

 
$

 
$
200.8

Change in unrealized losses included in net income related to assets still held for the nine months ended September 30, 2014
$
(11.1
)
 
$

 
$

 
$

 
$
(0.7
)
 
$

 
$
(11.8
)
Nine Months Ended September 30, 2013:
 
 
 
 
 
 
 
 

 
 
 
 
Beginning balance at January 1, 2013
$
121.1

 
$
4.3

 
$

 
$
3.9

 
$
26.2

 
$

 
$