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EX-31.2 - EXHIBIT 31.2 - Anthem, Inc.exhibit312-20160930forq3.htm
EX-32.2 - EXHIBIT 32.2 - Anthem, Inc.exhibit322-20160930forq3.htm
EX-32.1 - EXHIBIT 32.1 - Anthem, Inc.exhibit321-20160930forq3.htm
EX-31.1 - EXHIBIT 31.1 - Anthem, Inc.exhibit311-20160930forq3.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, 2016
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)
 
 
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 20, 2016
Common Stock, $0.01 par value
 
263,435,396 shares
 
 
 




Anthem, Inc.
Quarterly Report on Form 10-Q
For the Period Ended September 30, 2016
Table of Contents
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
PART II. OTHER INFORMATION
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.

-1-



PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Anthem, Inc.
Consolidated Balance Sheets
 
September 30,
2016
 
December 31,
2015
(In millions, except share data)
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,546.0

 
$
2,113.5

Investments available-for-sale, at fair value:
 
 
 
Fixed maturity securities (amortized cost of $17,593.7 and $16,950.0)
18,218.6

 
16,920.0

Equity securities (cost of $1,143.4 and $1,055.8)
1,480.8

 
1,441.8

Other invested assets, current
13.6

 
19.1

Accrued investment income
169.4

 
170.8

Premium and self-funded receivables
5,212.8

 
4,602.8

Other receivables
2,016.2

 
2,421.4

Income taxes receivable

 
316.6

Securities lending collateral
1,360.1

 
1,300.4

Other current assets
1,906.8

 
1,555.7

Total current assets
32,924.3

 
30,862.1

Long-term investments available-for-sale, at fair value:
 
 
 
Fixed maturity securities (amortized cost of $522.8 and $550.4)
538.9

 
558.2

Equity securities (cost of $27.0 and $27.3)
31.2

 
31.0

Other invested assets, long-term
2,155.9

 
2,041.1

Property and equipment, net
2,006.6

 
2,019.8

Goodwill
17,562.2

 
17,562.2

Other intangible assets
8,012.3

 
8,158.0

Other noncurrent assets
1,168.5

 
485.4

Total assets
$
64,399.9

 
$
61,717.8

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Liabilities
 
 
 
Current liabilities:
 
 
 
Policy liabilities:
 
 
 
Medical claims payable
$
7,472.9

 
$
7,569.8

Reserves for future policy benefits
68.6

 
71.9

Other policyholder liabilities
2,092.0

 
2,256.5

Total policy liabilities
9,633.5

 
9,898.2

Unearned income
1,613.4

 
1,145.5

Accounts payable and accrued expenses
3,717.2

 
3,318.8

Income taxes payable
60.4

 

Security trades pending payable
155.3

 
73.1

Securities lending payable
1,359.3

 
1,300.9

Short-term borrowings
440.0

 
540.0

Current portion of long-term debt
927.9

 

Other current liabilities
3,129.9

 
2,816.1

Total current liabilities
21,036.9

 
19,092.6

Long-term debt, less current portion
14,242.3

 
15,324.5

Reserves for future policy benefits, noncurrent
646.9

 
631.7

Deferred tax liabilities, net
2,688.9

 
2,630.6

Other noncurrent liabilities
1,040.7

 
994.3

Total liabilities
39,655.7

 
38,673.7

 
 
 
 
Commitment and contingencies – Note 10


 


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 –
263,396,236 and 261,238,188
2.6

 
2.6

Additional paid-in capital
8,741.4

 
8,555.6

Retained earnings
16,364.1

 
14,778.5

Accumulated other comprehensive loss
(363.9
)
 
(292.6
)
Total shareholders’ equity
24,744.2

 
23,044.1

Total liabilities and shareholders’ equity
$
64,399.9

 
$
61,717.8


See accompanying notes.

-2-



Anthem, Inc.
Consolidated Statements of Income
(Unaudited) 
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
(In millions, except per share data)
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Premiums
$
19,786.1

 
$
18,513.0

 
$
58,723.0

 
$
54,639.8

Administrative fees
1,330.0

 
1,249.6

 
3,956.8

 
3,706.2

Other revenue
9.1

 
8.8

 
29.3

 
35.1

Total operating revenue
21,125.2

 
19,771.4

 
62,709.1

 
58,381.1

Net investment income
200.9

 
161.2

 
566.9

 
515.5

Net realized gains (losses) on financial instruments
88.8

 
(11.9
)
 
(23.8
)
 
126.9

Other-than-temporary impairment losses on investments:
 
 
 
 
 
 
 
Total other-than-temporary impairment losses on investments
(15.1
)
 
(26.6
)
 
(134.1
)
 
(68.2
)
Portion of other-than-temporary impairment losses recognized in other comprehensive income
4.1

 
7.5

 
30.5

 
13.3

Other-than-temporary impairment losses recognized in income
(11.0
)
 
(19.1
)
 
(103.6
)
 
(54.9
)
Total revenues
21,403.9

 
19,901.6

 
63,148.6

 
58,968.6

Expenses
 
 
 
 
 
 
 
Benefit expense
16,922.5

 
15,469.1

 
49,266.5

 
44,801.4

Selling, general and administrative expense:
 
 
 
 
 
 
 
Selling expense
338.5

 
359.1

 
1,039.9

 
1,091.1

General and administrative expense
2,786.1

 
2,721.3

 
8,254.0

 
8,175.3

Total selling, general and administrative expense
3,124.6

 
3,080.4

 
9,293.9

 
9,266.4

Interest expense
172.9

 
164.8

 
545.7

 
473.3

Amortization of other intangible assets
47.4

 
60.0

 
145.7

 
172.6

Gain on extinguishment of debt

 
(2.3
)
 

 
(1.8
)
Total expenses
20,267.4

 
18,772.0

 
59,251.8

 
54,711.9

Income before income tax expense
1,136.5

 
1,129.6

 
3,896.8

 
4,256.7

Income tax expense
518.7

 
474.8

 
1,795.4

 
1,877.6

Net income
$
617.8

 
$
654.8

 
$
2,101.4

 
$
2,379.1

Net income per share
 
 
 
 
 
 
 
Basic
$
2.35

 
$
2.51

 
$
8.00

 
$
9.03

Diluted
$
2.30

 
$
2.43

 
$
7.84

 
$
8.66

Dividends per share
$
0.650

 
$
0.625

 
$
1.950

 
$
1.875










See accompanying notes.

-3-



Anthem, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited) 
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
(In millions)
2016
 
2015
 
2016
 
2015
Net income
$
617.8

 
$
654.8

 
$
2,101.4

 
$
2,379.1

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in net unrealized gains/losses on investments
5.3

 
(141.2
)
 
387.4

 
(322.0
)
Change in non-credit component of other-than-temporary impairment losses on investments
9.3

 
(4.9
)
 
2.2

 
(4.2
)
Change in net unrealized losses on cash flow hedges
(17.2
)
 
(76.5
)
 
(472.7
)
 
(74.7
)
Change in net periodic pension and postretirement costs
3.2

 
5.6

 
10.8

 
15.2

Foreign currency translation adjustments
0.4

 
0.4

 
1.0

 
(2.4
)
Other comprehensive income (loss)
1.0

 
(216.6
)
 
(71.3
)
 
(388.1
)
Total comprehensive income
$
618.8

 
$
438.2

 
$
2,030.1

 
$
1,991.0



































See accompanying notes.

-4-


Anthem, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended 
 September 30
(In millions)
2016
 
2015
Operating activities
 
 
 
Net income
$
2,101.4

 
$
2,379.1

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net realized losses (gains) on financial instruments
23.8

 
(126.9
)
Other-than-temporary impairment losses recognized in income
103.6

 
54.9

Gain on extinguishment of debt

 
(1.8
)
Loss on disposal of assets
3.5

 
13.8

Deferred income taxes
81.6

 
(12.8
)
Amortization, net of accretion
601.7

 
598.6

Depreciation expense
77.7

 
78.0

Share-based compensation
124.3

 
111.0

Excess tax benefits from share-based compensation
(48.7
)
 
(92.5
)
Changes in operating assets and liabilities:
 
 
 
Receivables, net
(176.2
)
 
454.0

Other invested assets
(17.7
)
 
11.7

Other assets
(925.2
)
 
(616.8
)
Policy liabilities
(249.5
)
 
(27.4
)
Unearned income
467.9

 
(166.5
)
Accounts payable and accrued expenses
23.3

 
(303.6
)
Other liabilities
381.6

 
469.3

Income taxes
410.6

 
363.1

Other, net
(53.9
)
 
(18.3
)
Net cash provided by operating activities
2,929.8

 
3,166.9

Investing activities
 
 
 
Purchases of fixed maturity securities
(7,624.0
)
 
(7,937.8
)
Proceeds from fixed maturity securities:
 
 
 
Sales
6,001.0

 
6,534.5

Maturities, calls and redemptions
979.3

 
1,017.5

Purchases of equity securities
(1,178.3
)
 
(1,466.9
)
Proceeds from sales of equity securities
1,210.4

 
1,252.4

Purchases of other invested assets
(348.3
)
 
(250.6
)
Proceeds from sales of other invested assets
273.1

 
59.6

Change in collateral and settlements of non-hedging derivatives
(21.0
)
 
27.6

Changes in securities lending collateral
(58.4
)
 
(3.3
)
Purchase of subsidiary, net of cash acquired

 
(636.2
)
Purchases of property and equipment
(415.6
)
 
(408.3
)
Proceeds from sales of property and equipment

 
35.3

Other, net
(3.0
)
 
(6.0
)
Net cash used in investing activities
(1,184.8
)
 
(1,782.2
)
Financing activities
 
 
 
Net (repayments of) proceeds from commercial paper borrowings
(177.5
)
 
965.8

Proceeds from long-term borrowings

 
1,226.5

Repayments of long-term borrowings

 
(2,386.5
)
Proceeds from short-term borrowings
1,860.0

 
2,660.0

Repayments of short-term borrowings
(1,960.0
)
 
(2,520.0
)
Changes in securities lending payable
58.4

 
3.3

Changes in bank overdrafts
311.5

 
(187.1
)
Premiums paid on equity call options

 
(16.7
)
Proceeds from sale of put options

 
16.6

Repurchase and retirement of common stock

 
(1,515.8
)
Change in collateral and settlements of debt-related derivatives
(1,034.0
)
 

Cash dividends
(512.7
)
 
(493.5
)
Proceeds from issuance of common stock under employee stock plans
91.2

 
169.9

Excess tax benefits from share-based compensation
48.7

 
92.5

Net cash used in financing activities
(1,314.4
)
 
(1,985.0
)
Effect of foreign exchange rates on cash and cash equivalents
1.9

 
(3.6
)
Change in cash and cash equivalents
432.5

 
(603.9
)
Cash and cash equivalents at beginning of period
2,113.5

 
2,151.7

Cash and cash equivalents at end of period
$
2,546.0

 
$
1,547.8


See accompanying notes.

-5-


Anthem, Inc.
Consolidated Statements of Shareholders’ Equity
(Unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Total
Shareholders’
Equity
(In millions)
Number of
Shares
 
Par
Value
 
January 1, 2016
261.2

 
$
2.6

 
$
8,555.6

 
$
14,778.5

 
$
(292.6
)
 
$
23,044.1

Net income

 

 

 
2,101.4

 

 
2,101.4

Other comprehensive loss

 

 

 

 
(71.3
)
 
(71.3
)
Dividends and dividend equivalents

 

 

 
(515.8
)
 

 
(515.8
)
Issuance of common stock under employee stock plans, net of related tax benefits
2.2

 

 
185.5

 

 

 
185.5

Equity Units issuance costs adjustment

 

 
0.3

 

 

 
0.3

September 30, 2016
263.4

 
$
2.6

 
$
8,741.4

 
$
16,364.1

 
$
(363.9
)
 
$
24,744.2

 
 
 
 
 
 
 
 
 
 
 
 
January 1, 2015
268.1

 
$
2.7

 
$
10,062.3

 
$
14,014.4

 
$
171.9

 
$
24,251.3

Net income

 

 

 
2,379.1

 

 
2,379.1

Other comprehensive loss

 

 

 

 
(388.1
)
 
(388.1
)
Premiums for and settlement of equity options

 

 
(14.0
)
 

 

 
(14.0
)
Repurchase and retirement of common stock
(10.4
)
 
(0.1
)
 
(382.2
)
 
(1,133.5
)
 

 
(1,515.8
)
Dividends and dividend equivalents

 

 

 
(498.2
)
 

 
(498.2
)
Issuance of common stock under employee stock plans, net of related tax benefits
3.3

 

 
247.8

 

 

 
247.8

Convertible debenture repurchases and conversions

 

 
(1,095.1
)
 

 

 
(1,095.1
)
Equity Units contract payments and issuance costs

 

 
(130.9
)
 

 

 
(130.9
)
September 30, 2015
261.0

 
$
2.6

 
$
8,687.9

 
$
14,761.8

 
$
(216.2
)
 
$
23,236.1


















See accompanying notes.

-6-


Anthem, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2016
(In Millions, Except Per Share Data or As Otherwise Stated Herein)
 
1.
Organization
References to the terms “we”, “our”, “us”, “Anthem” or the “Company” used throughout these Notes to Consolidated Financial Statements refer to Anthem, Inc., an Indiana corporation, and unless the context otherwise requires, its direct and indirect subsidiaries.
We are one of the largest health benefits companies in the United States in terms of medical membership, serving 39.9 medical members through our affiliated health plans as of September 30, 2016. We offer a broad spectrum of network-based managed care plans to large and small employer, individual, Medicaid and Medicare markets. Our managed care plans include: preferred provider organizations, or PPOs; health maintenance organizations, or HMOs; point-of-service, or POS, plans; traditional indemnity plans and other hybrid plans, including consumer-driven health plans, or CDHPs; and hospital only and limited benefit products. In addition, we provide a broad array of managed care services to self-funded customers, including claims processing, underwriting, stop loss insurance, actuarial services, provider network access, medical cost management, disease management, wellness programs and other administrative services. We provide an array of specialty and other insurance products and services such as dental, vision, life and disability insurance benefits, radiology benefit management and analytics-driven personal health care. We also provide services to the federal government in connection with the Federal Employee Program, or FEP.
We 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), 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 an arrangement with another BCBS licensee in South Carolina. We conduct business through our AMERIGROUP Corporation, or Amerigroup, subsidiary, in Florida, Georgia, Iowa, Kansas, Louisiana, Maryland, Nevada, New Jersey, New Mexico, New York, Tennessee, Texas and Washington. In addition, we conduct business through our Simply Healthcare Holdings, Inc., or Simply Healthcare, subsidiary in Florida. We also serve customers throughout the country as HealthLink, UniCare (including a non-risk arrangement with Massachusetts), and in certain Arizona, California, Nevada 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.

-7-


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 2015 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. 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, 2016 and 2015 have been recorded. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2016. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2015 included in our 2015 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. Additionally, we control a number of bank accounts that are used exclusively to hold customer funds for the administration of customer benefits. At September 30, 2016 and December 31, 2015, we held $83.9 and $122.6, respectively, of customer funds with an offsetting liability in other current liabilities.
Recently Adopted Accounting Guidance: In April 2015, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, or ASU 2015-05. This update provides guidance to help entities determine whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software or as a service contract. ASU 2015-05 became effective January 1, 2016 and we elected to adopt the provisions of the new guidance prospectively to all arrangements entered into or materially modified on or after January 1, 2016. The adoption of ASU 2015-05 did not have an impact on our consolidated financial position, results of operations or cash flows.
In February 2015, the FASB issued Accounting Standards Update No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, or ASU 2015-02. This update amended the consolidation guidance by modifying the evaluation criteria for whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, eliminating the presumption that a general partner should consolidate a limited partnership, and affecting the consolidation analysis of reporting entities that are involved with variable interest entities. We adopted the provisions of ASU 2015-02 effective January 1, 2016 and re-evaluated all legal entity investments under the revised consolidation model. The adoption of ASU 2015-02 did not have a material impact on our consolidated financial position, results of operations or cash flows.
Recent Accounting Guidance Not Yet Adopted: In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, or ASU 2016-15. This update addresses the presentation and classification on the statement of cash flows for eight specific items, with the objective of reducing existing diversity in practice in how certain cash receipts and cash payments are presented and classified. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the effects the adoption of ASU 2016-15 will have on our consolidated statements of cash flows, if any. ASU 2016-15 will not impact our results of operations.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. This update 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 is effective for interim and annual reporting periods beginning

-8-


after December 15, 2019, with early adoption permitted for interim and annual reporting periods beginning after December 15, 2018. We are currently evaluating the effects the adoption of ASU 2016-13 will have on our consolidated financial statements, results of operations and cash flows.
In May 2016, the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts With Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, or ASU 2016-12. In April 2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, or ASU 2016-10. In March 2016, the FASB issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross verses Net), or ASU 2016-08. These updates provide additional clarification and implementation guidance on the previously issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09. The amendments in ASU 2016-12 provide clarifying guidance on assessing collectability; noncash consideration; presentation of sales taxes; and transition. The amendments in ASU 2016-10 provide clarifying guidance on materiality of performance obligations; evaluating distinct performance obligations; treatment of shipping and handling costs; and determining whether an entity's promise to grant a license provides a customer with either a right to use or a right to access an entity's intellectual property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The adoption of ASU 2016-12, ASU 2016-10 and ASU 2016-08 is to coincide with an entity's adoption of ASU 2014-09, which we intend to adopt for interim and annual reporting periods beginning after December 15, 2017. Upon the effective date, these updates will supersede almost all existing revenue recognition guidance under GAAP, with certain exceptions, including an exception for our premium revenues accounted for in accordance with the provisions of Accounting Standards Codification Topic 944, Financial Services - Insurance. These updates will require a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance permits adoption through either a full retrospective approach or a modified retrospective approach with a cumulative effect adjustment to retained earnings. We are currently evaluating the impact that these updates will have on our results of operations, cash flows, consolidated financial position and related disclosures and the method of adoption we will ultimately choose.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, or ASU 2016-09. The amendments in this update simplify several aspects of accounting for and reporting on share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in ASU 2016-09 are effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The various amendments are to be applied differently upon adoption with certain amendments being applied prospectively, retrospectively and under a modified retrospective transition method. We are currently evaluating the effects the adoption of ASU 2016-09 will have on our consolidated financial statements, results of operations and cash flows.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842), or ASU 2016-02. Upon the effective date, ASU 2016-02 will supersede the current lease guidance in Topic 840, Leases. Under the new guidance, lessees will be required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis. Concurrently, lessees will be required to recognize a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The guidance is required to be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements. We are currently evaluating the effects the adoption of ASU 2016-02 will have on our consolidated financial statements, results of operations and cash flows.
There were no other new accounting pronouncements that were issued or became effective since the issuance of our 2015 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.

-9-


3.
Business Acquisitions
Pending Acquisition of Cigna Corporation
On July 24, 2015, we and Cigna Corporation, or Cigna, announced that we entered into an Agreement and Plan of Merger, or Merger Agreement, dated as of July 23, 2015, by and among Anthem, Cigna and Anthem Merger Sub Corp., a Delaware corporation and our direct wholly-owned subsidiary, pursuant to which we will acquire all outstanding shares of Cigna, or the Acquisition. The Acquisition will further our goal of creating a premier health benefits company with critical diversification and scale to lead the transformation of health care delivery for consumers. Cigna is a global health services organization that delivers affordable and personalized products and services to customers through employer-based, government-sponsored and individual coverage arrangements. All of Cigna's products and services are provided exclusively by or through its operating subsidiaries, including Connecticut General Life Insurance Company, Cigna Health and Life Insurance Company, Life Insurance Company of North America and Cigna Life Insurance Company of New York. Such products and services include an integrated suite of health services, such as medical, dental, behavioral health, pharmacy, vision, supplemental benefits, and other related products including group life, accident and disability insurance. Cigna maintains sales capability in 30 countries and jurisdictions.
Under the terms of the Merger Agreement, Cigna’s shareholders will receive $103.40 in cash and 0.5152 shares of our common stock for each Cigna common share outstanding. The value of the transaction is estimated to be approximately $53,000.0 based on the closing price of our common stock on the New York Stock Exchange on July 23, 2015. The final purchase price will be determined based on our closing stock price on the date of closing of the Acquisition. The combined company will reflect a pro forma equity ownership comprised of approximately 67% Anthem shareholders and approximately 33% Cigna shareholders. We expect to finance the cash portion of the Acquisition through available cash on hand and the issuance of new debt. We entered into a bridge facility commitment letter and a joinder agreement with a group of lenders which will provide up to $22,500.0 under a 364-day senior unsecured bridge term loan credit facility to finance the Acquisition in the event that we have not received proceeds from any combination of (i) senior unsecured term loans, (ii) common or preferred equity or equity-linked securities and/or (iii) senior unsecured notes in a public offering or private placement in an aggregate principal amount of at least $22,500.0 prior to the consummation of the Acquisition. In addition, in August 2015, we entered into a term loan facility which will provide up to $4,000.0 to finance a portion of the Acquisition. The commitment of the lenders to provide the bridge facility and the term loan facility is subject to several conditions, including the completion of the Acquisition.
On July 21, 2016, the U.S. Department of Justice, or DOJ, along with certain state attorneys general, filed a civil antitrust lawsuit in the U.S. District Court for the District of Columbia seeking to block the Acquisition. Trial is expected to commence on November 21, 2016. At trial, the Court will first hear evidence regarding the alleged anti-competitive effects of the Acquisition with respect to the combination of Anthem's and Cigna's National Accounts businesses. Upon conclusion of this first phase, the Court will hear evidence on the DOJ's claims pertaining to local commercial markets and healthcare services rates. Further, in its challenge to the Acquisition, the DOJ has agreed that it will not pursue allegations relating to the sale of Individual insurance policies on the public exchanges. We intend to vigorously defend the Acquisition in this litigation and remain committed to completing the Acquisition as soon as practicable. Though the Merger Agreement provides that the closing of the Acquisition occur by January 31, 2017, this date can be extended to April 30, 2017 by either us or Cigna through written notice to the other party if all conditions to the merger have been satisfied except for the receipt of regulatory approvals and other governmental consents. If the Merger Agreement is terminated because the required regulatory approvals cannot be obtained, under certain conditions, we would be obligated to pay a $1,850.0 termination fee to Cigna.
Acquisition of Simply Healthcare
On February 17, 2015, we completed our acquisition of Simply Healthcare, a leading managed care company for people enrolled in Medicaid and Medicare programs in Florida. The excess of the consideration transferred over the fair value of net assets acquired resulted in non-tax-deductible goodwill of $474.7 at December 31, 2015. There were no additional measurement period adjustments to the provisional amounts recorded at December 31, 2015. The results of operations of Simply Healthcare are included in our consolidated financial statements within our Government Business segment for the periods following February 17, 2015.

-10-


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 $11.0 and $19.1 for the three months ended September 30, 2016 and 2015, respectively. Other-than-temporary impairment losses recognized in income totaled $103.6 and $54.9 for the nine months ended September 30, 2016 and 2015, respectively. There were no individually significant other-than-temporary impairment losses on investments during the three and nine months ended September 30, 2016 and 2015. 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 further declines in fair value may occur and additional material other-than-temporary impairment losses on investments may be recorded in future periods.
A summary of current and long-term investments, available-for-sale, at September 30, 2016 and December 31, 2015 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, 2016
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
$
461.1

 
$
10.6

 
$
(0.8
)
 
$

 
$
470.9

 
$

Government sponsored securities
49.8

 
0.9

 

 

 
50.7

 

States, municipalities and political subdivisions, tax-exempt
5,983.7

 
345.0

 
(3.2
)
 
(3.0
)
 
6,322.5

 
(1.4
)
Corporate securities
8,613.4

 
287.3

 
(14.7
)
 
(37.0
)
 
8,849.0

 
(10.1
)
Residential mortgage-backed securities
1,953.6

 
56.3

 
(1.1
)
 
(3.0
)
 
2,005.8

 

Commercial mortgage-backed securities
284.5

 
3.3

 
(0.1
)
 
(2.6
)
 
285.1

 

Other debt securities
770.4

 
7.6

 
(1.1
)
 
(3.4
)
 
773.5

 
(0.6
)
Total fixed maturity securities
18,116.5

 
711.0

 
(21.0
)
 
(49.0
)
 
18,757.5

 
$
(12.1
)
Equity securities
1,170.4

 
357.9

 
(16.3
)
 

 
1,512.0

 
 
Total investments, available-for-sale
$
19,286.9

 
$
1,068.9

 
$
(37.3
)
 
$
(49.0
)
 
$
20,269.5

 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
$
349.5

 
$
2.0

 
$
(1.6
)
 
$

 
$
349.9

 
$

Government sponsored securities
75.6

 
0.5

 
(0.1
)
 
(0.1
)
 
75.9

 

States, municipalities and political subdivisions, tax-exempt
5,976.7

 
284.1

 
(4.0
)
 
(5.2
)
 
6,251.6

 

Corporate securities
8,209.7

 
61.1

 
(267.2
)
 
(110.5
)
 
7,893.1

 
(15.4
)
Residential mortgage-backed securities
1,724.5

 
41.2

 
(7.6
)
 
(7.2
)
 
1,750.9

 

Commercial mortgage-backed securities
407.6

 
1.4

 
(4.3
)
 
(0.4
)
 
404.3

 

Other debt securities
756.8

 
4.1

 
(5.8
)
 
(2.6
)
 
752.5

 

Total fixed maturity securities
17,500.4

 
394.4

 
(290.6
)
 
(126.0
)
 
17,478.2

 
$
(15.4
)
Equity securities
1,083.1

 
420.6

 
(30.9
)
 

 
1,472.8

 
 
Total investments, available-for-sale
$
18,583.5

 
$
815.0

 
$
(321.5
)
 
$
(126.0
)
 
$
18,951.0

 
 

-11-


At September 30, 2016 and December 31, 2015, we held $793.6 and $777.2, respectively, of energy sector fixed maturity securities within our available-for-sale investment portfolio. These energy sector securities had accumulated net unrealized gains of $24.4 at September 30, 2016 and accumulated net unrealized losses of $172.0 at December 31, 2015.
For available-for-sale securities in an unrealized loss position at September 30, 2016 and December 31, 2015, 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
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
18

 
$
110.8

 
$
(0.8
)
 

 
$

 
$

Government sponsored securities
2

 
1.6

 

 
1

 
1.1

 

States, municipalities and political subdivisions, tax-exempt
242

 
385.7

 
(3.2
)
 
29

 
60.0

 
(3.0
)
Corporate securities
491

 
822.2

 
(14.7
)
 
302

 
569.0

 
(37.0
)
Residential mortgage-backed securities
77

 
127.6

 
(1.1
)
 
114

 
159.9

 
(3.0
)
Commercial mortgage-backed securities
14

 
42.5

 
(0.1
)
 
29

 
71.2

 
(2.6
)
Other debt securities
36

 
101.1

 
(1.1
)
 
60

 
186.5

 
(3.4
)
Total fixed maturity securities
880

 
1,591.5

 
(21.0
)
 
535

 
1,047.7

 
(49.0
)
Equity securities
577

 
176.0

 
(16.3
)
 

 

 

Total fixed maturity and equity securities
1,457

 
$
1,767.5

 
$
(37.3
)
 
535

 
$
1,047.7

 
$
(49.0
)
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government securities
48

 
$
248.4

 
$
(1.6
)
 
2

 
$
0.9

 
$

Government sponsored securities
13

 
18.3

 
(0.1
)
 
6

 
8.2

 
(0.1
)
States, municipalities and political subdivisions, tax-exempt
198

 
467.8

 
(4.0
)
 
43

 
83.0

 
(5.2
)
Corporate securities
2,492

 
4,912.3

 
(267.2
)
 
372

 
447.0

 
(110.5
)
Residential mortgage-backed securities
298

 
668.3

 
(7.6
)
 
119

 
186.3

 
(7.2
)
Commercial mortgage-backed securities
66

 
263.0

 
(4.3
)
 
17

 
38.5

 
(0.4
)
Other debt securities
153

 
488.2

 
(5.8
)
 
28

 
77.0

 
(2.6
)
Total fixed maturity securities
3,268

 
7,066.3

 
(290.6
)
 
587

 
840.9

 
(126.0
)
Equity securities
792

 
261.1

 
(30.9
)
 

 

 

Total fixed maturity and equity securities
4,060

 
$
7,327.4

 
$
(321.5
)
 
587

 
$
840.9

 
$
(126.0
)

-12-


The amortized cost and fair value of available-for-sale fixed maturity securities at September 30, 2016, 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
$
403.2

 
$
404.3

Due after one year through five years
4,852.5

 
4,959.1

Due after five years through ten years
5,569.9

 
5,823.3

Due after ten years
5,052.8

 
5,279.9

Mortgage-backed securities
2,238.1

 
2,290.9

Total available-for-sale fixed maturity securities
$
18,116.5

 
$
18,757.5

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, 2016 and 2015 are as follows:
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
 
2016
 
2015
 
2016
 
2015
Proceeds
$
2,921.2

 
$
2,703.3

 
$
8,463.8

 
$
8,864.0

Gross realized gains
113.4

 
49.5

 
343.2

 
331.6

Gross realized losses
(13.0
)
 
(61.4
)
 
(136.7
)
 
(204.7
)
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.
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 $1,359.3 and $1,300.9 at September 30, 2016 and December 31, 2015, respectively. The value of the collateral represented 103% of the market value of the securities on loan at September 30, 2016 and December 31, 2015. We recognize the collateral as an asset under the caption “Securities lending collateral” on our consolidated balance sheets and we recognize a corresponding liability for the obligation to return the collateral to the borrower under the caption “Securities lending payable.” 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 income as a separate component of shareholders’ equity.

-13-


The remaining contractual maturity of our securities lending agreements at September 30, 2016 is as follows:
 
Overnight and Continuous
 
Less than 30 days
 
30-90 days
 
Greater Than 90 days
 
Total
Securities lending transactions
 
 
 
 
 
 
 
 
 
United States Government securities
$
60.5

 
$
7.0

 
$
7.2

 
$
73.3

 
$
148.0

Corporate securities
758.9

 

 

 

 
758.9

Equity securities
272.1

 
5.2

 

 
0.9

 
278.2

Other debt securities
174.2

 

 

 

 
174.2

Total
$
1,265.7

 
$
12.2

 
$
7.2

 
$
74.2

 
$
1,359.3

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.
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. At September 30, 2016, we had posted collateral of $67.0 and received collateral of $46.6 related to our derivative financial instruments. In addition to collateral posted for derivative transactions, from time to time, we may have cash on deposit to meet certain regulatory requirements, which are included in Cash and cash equivalents on the balance sheet. At September 30, 2016 and December 31, 2015, we had cash on deposit of $663.6 and $79.9, respectively.

-14-


A summary of the aggregate contractual or notional amounts and estimated fair values related to derivative financial instruments at September 30, 2016 and December 31, 2015 is as follows:
 
Contractual/
Notional
Amount
 
Balance Sheet Location
 
Estimated Fair Value
 
Asset
 
(Liability)
September 30, 2016
 
 
 
 
 
 
 
Hedging instruments
 
 
 
 
 
 
 
Interest rate swaps - fixed to floating
$
1,385.0

 
Other assets/other liabilities
 
$
16.4

 
$
(0.9
)
Interest rate swaps - forward starting pay fixed
4,775.0

 
Other assets/other liabilities
 
20.3

 
(3.1
)
Subtotal hedging
6,160.0

 
Subtotal hedging
 
36.7

 
(4.0
)
 
 
 
 
 
 
 
 
Non-hedging instruments
 
 
 
 
 
 
 
Interest rate swaps
269.6

 
Equity securities 
 

 
(21.2
)
Options
13,776.8

 
Other assets/other liabilities
 
243.1

 
(244.5
)
Futures
101.8

 
Equity securities 
 
0.4

 
(0.2
)
Subtotal non-hedging
14,148.2

 
Subtotal non-hedging
 
243.5

 
(265.9
)
Total derivatives
$
20,308.2

 
Total derivatives
 
280.2

 
(269.9
)
 
 
 
Amounts netted
 
(119.2
)
 
119.2

 
 
 
Net derivatives
 
$
161.0

 
$
(150.7
)
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
Hedging instruments
 
 
 
 
 
 
 
Interest rate swaps - fixed to floating
$
1,385.0

 
Other assets/other liabilities
 
$
7.0

 
$
(0.8
)
Interest rate swaps - forward starting pay fixed
4,650.0

 
Other assets/other liabilities
 
15.7

 
(90.9
)
Subtotal hedging
6,035.0

 
Subtotal hedging
 
22.7

 
(91.7
)
 
 
 
 
 
 
 
 
Non-hedging instruments
 
 
 
 
 
 
 
Interest rate swaps
271.7

 
Equity securities 
 
1.2

 
(6.0
)
Options
16,917.4

 
Other assets/other liabilities
 
305.7

 
(332.1
)
Futures
152.0

 
Equity securities 
 
0.1

 
(0.2
)
Subtotal non-hedging
17,341.1

 
Subtotal non-hedging
 
307.0

 
(338.3
)
Total derivatives
$
23,376.1

 
Total derivatives
 
329.7

 
(430.0
)
 
 
 
Amounts netted
 
(170.6
)
 
170.6

 
 
 
Net derivatives
 
$
159.1

 
$
(259.4
)

-15-


Fair Value Hedges
We have entered into various interest rate swap contracts to convert a portion of our interest rate exposure on our long-term debt from fixed rates to floating rates. The floating rates payable on all of our fair value hedges are benchmarked to LIBOR. A summary of our outstanding fair value hedges at September 30, 2016 and December 31, 2015 is as follows:
Type of Fair Value Hedges
 
Year
Entered
Into
 
Outstanding Notional Amount
 
Interest Rate
Received
 
Expiration Date
 
September 30, 
 2016
 
December 31, 2015
 
Interest rate swap
 
2015
 
$
200.0

 
$
200.0

 
4.350
%
 
August 15, 2020
Interest rate swap
 
2014
 
150.0

 
150.0

 
4.350
 
 
August 15, 2020
Interest rate swap
 
2013
 
10.0

 
10.0

 
4.350
 
 
August 15, 2020
Interest rate swap
 
2012
 
200.0

 
200.0

 
4.350
 
 
August 15, 2020
Interest rate swap
 
2012
 
625.0

 
625.0

 
1.875
 
 
January 15, 2018
Interest rate swap
 
2012
 
200.0

 
200.0

 
2.375
 
 
February 15, 2017
Total notional amount outstanding
 
 
 
$
1,385.0

 
$
1,385.0

 
 
 
 
 
A summary of the effect of fair value hedges on our income statement for the three and nine months ended September 30, 2016 and 2015 is as follows:
Type of Fair Value Hedges
 
Income Statement
Location of Hedge
Gain
 
Hedge
Gain
Recognized
 
Hedged Item
 
Income Statement
Location of
Hedged Item
Loss
 
Hedged 
Item
Loss
Recognized
Three months ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense
 
$
2.0

 
Fixed rate debt
 
Interest expense
 
$
(2.0
)
Three months ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense
 
$
3.2

 
Fixed rate debt
 
Interest expense
 
$
(3.2
)
Nine months ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense
 
$
6.6

 
Fixed rate debt
 
Interest expense
 
$
(6.6
)
Nine months ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense
 
$
9.0

 
Fixed rate debt
 
Interest expense
 
$
(9.0
)
Cash Flow Hedges
We have entered into a series of forward starting pay fixed interest rate swaps with the objective of eliminating the variability of cash flows in the interest payments on anticipated future financings beginning in 2017. During the three months ended September 30, 2016, swaps in the notional amount of $5,400.0 expired. We paid an aggregate of $831.6 to the swap counter parties upon expiration. We performed a final effectiveness test upon the expiration of each swap. The ineffective portion of the hedge loss of $7.7 was recorded as a net realized loss on financial instruments. The effective portion of the hedge loss of $823.9 was recorded in accumulated other comprehensive loss. Following the expiration of these swaps, we entered into a new series of forward starting pay fixed interest rate swaps to replace the expired swaps. As of September 30, 2016, we recognized a hedge gain of $17.1 on the new swaps, which was recorded in accumulated other comprehensive loss. We had $4,775.0 and $4,650.0 in notional amount outstanding under these swaps at September 30, 2016 and December 31, 2015, respectively. The unrecognized loss for all outstanding, expired and terminated cash flow hedges included in accumulated other comprehensive loss, net of tax, was $553.8 and $81.1 at September 30, 2016 and December 31, 2015, respectively. As of September 30, 2016, the total amount of amortization over the next twelve months for all cash flow hedges is estimated to increase interest expense by approximately $19.2.

-16-


A summary of the effect of cash flow hedges on our financial statements for the three and nine months ended September 30, 2016 and 2015 is as follows:
 
 
Effective Portion
 
 
 
 
Pretax
Hedge Loss
Recognized
in Other
Comprehensive
Income (Loss)
 
Income Statement
Location of
Loss
Reclassification
from Accumulated
Other
Comprehensive
Loss
 
Hedge Loss
Reclassified from
Accumulated
Other
Comprehensive
Loss
 
Ineffective Portion
Type of Cash Flow Hedge
 
 
 
 
Income Statement Location of
Loss Recognized
 
Hedge Loss
Recognized
Three months ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
Forward starting pay fixed swaps
 
$
(27.9
)
 
Interest expense
 
$
(1.4
)
 
Net realized gains (losses) on financial instruments
 
$
(7.7
)
Three months ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
Forward starting pay fixed swaps
 
$
(119.1
)
 
Interest expense
 
$
(1.4
)
 
None
 
$

Nine months ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
Forward starting pay fixed swaps
 
$
(731.6
)
 
Interest expense
 
$
(4.3
)
 
Net realized gains (losses) on financial instruments
 
$
(7.7
)
Nine months ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
Forward starting pay fixed swaps
 
$
(119.1
)
 
Interest expense
 
$
(4.1
)
 
None
 
$

We test for cash flow hedge effectiveness at hedge inception and re-assess at the end of each reporting period. No amounts were excluded from the assessment of hedge effectiveness, except for the amounts described above related to the expired interest rate swaps.

-17-


Non-Hedging Derivatives
A summary of the effect of non-hedging derivatives on our income statement for the three and nine months ended September 30, 2016 and 2015 is as follows:
Type of Non-hedging Derivatives
 
Income Statement Location of
Gain (Loss) Recognized
 
Derivative
Gain (Loss)
Recognized
Three months ended September 30, 2016
 
 
 
 
Interest rate swaps
 
Net realized gains (losses) on financial instruments
 
$
2.8

Options
 
Net realized gains (losses) on financial instruments
 
(7.7
)
Futures
 
Net realized gains (losses) on financial instruments
 
1.0

Total
 
 
 
$
(3.9
)
Three months ended September 30, 2015
 
 
 
 
Derivatives embedded in convertible fixed maturity securities
 
Net realized gains (losses) on financial instruments
 
$
0.8

Interest rate swaps
 
Net realized gains (losses) on financial instruments
 
(8.8
)
Options
 
Net realized gains (losses) on financial instruments
 
18.0

Futures
 
Net realized gains (losses) on financial instruments
 
(3.0
)
Total
 
 
 
$
7.0

Nine months ended September 30, 2016
 
 
 
 
Interest rate swaps
 
Net realized gains (losses) on financial instruments
 
$
(23.5
)
Options
 
Net realized gains (losses) on financial instruments
 
(197.8
)
Futures
 
Net realized gains (losses) on financial instruments
 
(1.3
)
Total
 
 
 
$
(222.6
)
Nine months ended September 30, 2015
 
 
 
 
Derivatives embedded in convertible fixed maturity securities
 
Net realized gains (losses) on financial instruments
 
$
(21.5
)
Interest rate swaps
 
Net realized gains (losses) on financial instruments
 
(5.7
)
Options
 
Net realized gains (losses) on financial instruments
 
34.4

Futures
 
Net realized gains (losses) on financial instruments
 
(0.1
)
Total
 
 
 
$
7.1

During the three months ended September 30, 2016, certain options classified as non-hedging derivatives expired and we paid the counter parties $164.4.
6.
Fair Value
Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Level inputs, as defined by FASB guidance for fair value measurements and disclosures, are as follows:
Level Input
 
Input Definition
Level I
 
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level II
 
Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date.
Level III
 
Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

-18-


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. Level I securities include United States Government securities, certain corporate securities and certain other asset-backed securities. Level II securities include corporate securities, securities from states, municipalities and political subdivisions, mortgage-backed securities, government sponsored 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, that are designated Level III securities. For these securities, the valuation methodologies may incorporate broker quotes or discounted cash flow analyses using assumptions for inputs such as expected cash flows, benchmark yields, credit spreads, default rates and prepayment speeds that are not observable in the markets.
Equity securities, available-for-sale: Fair values of equity securities are generally designated as Level I and are based on quoted market prices. For certain equity securities, quoted market prices for the identical security are not always available and the fair value is estimated by reference to similar securities for which quoted prices are available. These securities are designated Level II. We also have certain equity securities, including private equity securities, for which the fair value is estimated based on each security’s current condition and future cash flow projections. Such securities are designated Level III. The fair values of these private equity securities are generally based on either broker quotes or discounted cash flow projections using assumptions for inputs such as the weighted-average cost of capital, long-term revenue growth rates and earnings before interest, taxes, depreciation and amortization, and/or revenue multiples that are not observable in the markets.
Other invested assets, current: Other invested assets, current include securities held in rabbi trusts that are classified as trading. These securities are designated Level I securities as fair values are based on quoted market prices.
Securities lending collateral: Fair values of securities lending collateral are based on quoted market prices, where available. These fair values are obtained primarily from third 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. 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.

-19-


A summary of fair value measurements by level for assets and liabilities measured at fair value on a recurring basis at September 30, 2016 and December 31, 2015 is as follows:
 
Level I
 
Level II
 
Level III
 
Total
September 30, 2016
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
672.5

 
$

 
$

 
$
672.5

Investments available-for-sale:
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
United States Government securities
470.9

 

 

 
470.9

Government sponsored securities

 
50.7

 

 
50.7

States, municipalities and political subdivisions, tax-exempt

 
6,322.5

 

 
6,322.5

Corporate securities
226.3

 
8,374.8

 
247.9

 
8,849.0

Residential mortgage-backed securities

 
2,000.6

 
5.2

 
2,005.8

Commercial mortgage-backed securities

 
285.1

 

 
285.1

Other debt securities
53.1

 
677.1

 
43.3

 
773.5

Total fixed maturity securities
750.3

 
17,710.8

 
296.4

 
18,757.5

Equity securities
1,264.1

 
72.2

 
175.7

 
1,512.0

Other invested assets, current
13.6

 

 

 
13.6

Securities lending collateral
818.9

 
541.2

 

 
1,360.1

Derivatives

 
280.2

 

 
280.2

Total assets
$
3,519.4

 
$
18,604.4

 
$
472.1

 
$
22,595.9

Liabilities:
 
 
 
 
 
 
 
Derivatives
$

 
$
(269.9
)
 
$

 
$
(269.9
)
Total liabilities
$

 
$
(269.9
)
 
$

 
$
(269.9
)
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
701.0

 
$

 
$

 
$
701.0

Investments available-for-sale:
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
United States Government securities
349.9

 

 

 
349.9

Government sponsored securities

 
75.9

 

 
75.9

States, municipalities and political subdivisions, tax-exempt

 
6,251.6

 

 
6,251.6

Corporate securities
77.6

 
7,629.3

 
186.2

 
7,893.1

Residential mortgage-backed securities