Company Quick10K Filing
Quick10K
Aetna
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2018-12-04 Other Events
8-K 2018-11-28 Leave Agreement, M&A, Shareholder Rights, Control, Officers, Amend Bylaw, Exhibits
8-K 2018-11-26 Other Events
8-K 2018-10-30 Earnings, Exhibits
8-K 2018-10-11 Other Events
8-K 2018-10-10 Other Events
8-K 2018-09-27 Other Events
8-K 2018-08-02 Earnings, Exhibits
8-K 2018-05-22 Shareholder Vote
8-K 2018-04-17 Regulation FD, Exhibits
8-K 2018-03-15 Shareholder Vote, Other Events, Exhibits
8-K 2018-02-28 Other Events
8-K 2018-02-20 Officers, Exhibits
8-K 2018-02-09 Other Events
8-K 2018-02-01 Other Events
8-K 2018-01-30 Earnings, Exhibits
8-K 2018-01-25 Officers
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AMH American Homes 4 Rent 6,900
PGRE Paramount Group 3,310
TNC Tennant 1,210
BSRR Sierra Bancorp 376
AP Ampco Pittsburgh 40
POTO Potomac Futures Fund 0
COL Rockwell Collins 0
NHEL Natural Health Farm Holdings 0
SAB Grupo Casa Saba 0
AET 2018-09-30
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-12.1 exhibit12_1.htm
EX-15.1 exhibit15_1.htm
EX-31.1 exhibit31_1.htm
EX-31.2 exhibit31_2.htm
EX-32.1 exhibit32_1.htm
EX-32.2 exhibit32_2.htm

Aetna Earnings 2018-09-30

AET 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10-q.htm FORM 10-Q Document


    
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
    
FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934

For the quarterly period ended September 30, 2018
or

o 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: 1-16095

aetnalogoa_02a13.jpg
Aetna Inc.
(Exact name of registrant as specified in its charter)

Pennsylvania
(State or other jurisdiction of incorporation or organization)
23-2229683
(I.R.S. Employer Identification No.)
151 Farmington Avenue, Hartford, CT
(Address of principal executive offices)
06156
(Zip Code)
Registrant’s telephone number, including area code:
(860) 273-0123
 
 
Former name, former address and former fiscal year, if changed since last report: N/A

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. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer o
Non-accelerated filer o  
Smaller reporting company o
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

There were 327.4 million shares of the registrant’s voting common stock with a par value of $.01 per share outstanding at September 30, 2018.




Aetna Inc.
Form 10-Q
For the Quarterly Period Ended September 30, 2018

Unless the context otherwise requires, references to the terms “we”, “our” or “us” used throughout this Quarterly Report on Form 10-Q (except the Report of Independent Registered Public Accounting Firm), refer to Aetna Inc. (a Pennsylvania corporation) (“Aetna”) and its subsidiaries (collectively, the “Company”).






Part I.
Financial Information


Item 1.
Financial Statements
Index to Consolidated Financial Statements

 
 
 
Page
Consolidated Balance Sheets at September 30, 2018 and December 31, 2017
Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017
Consolidated Statements of Shareholders' Equity for the three and nine months ended September 30, 2018 and 2017
Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017
Condensed Notes to the Consolidated Financial Statements
Report of the Independent Registered Public Accounting Firm
 
 


Page 1


Consolidated Balance Sheets
 
 
 
 
(Unaudited)

 
 
(Millions)
 
 
 
September 30,
2018

 
December 31,
2017

Assets:
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
$
6,769

 
$
4,076

Investments
 
 
 
2,796

 
2,280

Premiums receivable, net
 
 
 
2,484

 
2,240

Other receivables, net
 
 
 
3,220

 
2,831

Reinsurance recoverables
 
 
 
1,063

 
1,050

Income taxes receivable
 
 
 

 
365

Other current assets
 
 
 
3,039

 
2,681

Total current assets
 
 
 
19,371

 
15,523

Long-term investments
 
 
 
15,764

 
17,793

Reinsurance recoverables
 
 
 
3,177

 
3,323

Goodwill
 
 
 
10,576

 
10,571

Other acquired intangible assets, net
 
 
 
1,058

 
1,180

Property and equipment, net
 
 
 
568

 
586

Deferred income taxes
 
 
 
127

 
195

Other long-term assets
 
 
 
2,257

 
1,684

Separate Accounts assets
 
 
 
4,205

 
4,296

Total assets
 
 
 
$
57,103

 
$
55,151

 
 
 
 
 
 
 
Liabilities and shareholders’ equity:
 

 
 

 
 

Current liabilities:
 
 
 
 

 
 

Health care costs payable
 
 
 
$
5,831

 
$
5,815

Future policy benefits
 
 
 
565

 
604

Unpaid claims
 
 
 
826

 
850

Unearned premiums
 
 
 
749

 
654

Policyholders’ funds
 
 
 
3,019

 
2,918

Current portion of long-term debt
 
 
 
375

 
999

Income taxes payable
 
 
 
83

 

Accrued expenses and other current liabilities
 
 
 
5,222

 
4,997

Total current liabilities
 
 
 
16,670

 
16,837

Future policy benefits
 
 
 
5,568

 
5,763

Unpaid claims
 
 
 
1,918

 
1,922

Policyholders’ funds
 
 
 
636

 
739

Long-term debt, less current portion
 
 
 
7,782

 
8,160

Other long-term liabilities
 
 
 
1,761

 
1,597

Separate Accounts liabilities
 
 
 
4,205

 
4,296

Total liabilities
 
 
 
38,540

 
39,314

Commitments and contingencies (Note 14)
 
 
 


 


Shareholders’ equity:
 
 
 
 
 
 

Common stock ($.01 par value; 2.5 billion shares authorized and 327.4 million shares issued and outstanding in 2018; 2.5 billion shares authorized and 326.8 million shares issued and outstanding in 2017) and additional paid-in capital
 
 
 
4,779

 
4,706

Retained earnings
 
 
 
15,325

 
12,118

Accumulated other comprehensive loss
 
 
 
(1,813
)
 
(1,244
)
Total Aetna shareholders’ equity
 
 
 
18,291

 
15,580

Non-controlling interests
 
 
 
272

 
257

Total equity
 
 
 
18,563

 
15,837

Total liabilities and equity
 
 
 
$
57,103

 
$
55,151

 
 
 
 
 
 
 
Refer to accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).

Page 2


Consolidated Statements of Income
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(Millions, except per common share data)
 
2018

 
2017

 
2018

 
2017

Revenue:
 
 
 
 
 
 
 
 
Premiums
 
$
13,237

 
$
13,272

 
$
39,663

 
$
40,810

Fees and other revenue (1)
 
2,068

 
1,443

 
6,152

 
4,404

Net investment income
 
202

 
233

 
605

 
730

Net realized capital (losses) gains
 
(23
)
 
46

 
(40
)
 
(262
)
Total revenue
 
15,484

 
14,994

 
46,380

 
45,682

Benefits and expenses:
 
 
 
 
 
 
 
 
Benefit costs (2)
 
10,852

 
10,960

 
32,096

 
33,537

Cost of products sold (1)
 
390

 

 
1,154

 

Operating expenses
 
2,742

 
2,612

 
8,298

 
9,017

Interest expense
 
85

 
90

 
262

 
349

Amortization of other acquired intangible assets
 
48

 
58

 
142

 
176

Loss on early extinguishment of long-term debt
 

 

 

 
246

Reduction of reserve for anticipated future losses on discontinued products
 

 

 
(70
)
 
(109
)
Total benefits and expenses
 
14,117

 
13,720

 
41,882

 
43,216

Income before income taxes
 
1,367

 
1,274

 
4,498

 
2,466

Income taxes:
 
 
 
 
 
 
 
 
Current
 
248

 
470

 
901

 
955

Deferred
 
127

 
(44
)
 
169

 
(140
)
Total income tax expense
 
375

 
426

 
1,070

 
815

Net income including non-controlling interests
 
992

 
848

 
3,428

 
1,651

Less: Net (loss) income attributable to non-controlling interests
(8
)
 
10

 
7

 
(9
)
Net income attributable to Aetna
 
$
1,000

 
$
838

 
$
3,421

 
$
1,660

Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
3.05

 
$
2.54

 
$
10.44

 
$
4.95

Diluted
 
$
3.03

 
$
2.52

 
$
10.37

 
$
4.92

 
 
 
 
 
 
 
 
 
(1) 
Fees and other revenue include administrative services contract member co-payments and plan sponsor reimbursements related to our home delivery and specialty pharmacy operations of $31 million and $100 million (net of pharmaceutical and processing costs of $350 million and $1.0 billion) for the three and nine months ended September 30, 2017, respectively. As a result of the adoption of new accounting guidance related to revenue recognition from contracts with customers for the three and nine months ended September 30, 2018, (a) specialty and home delivery pharmacy revenue reflects the price of the prescription on a gross basis and (b) specialty and home delivery pharmacy costs of products sold reflects the cost of the prescription and certain administrative expenses. Refer to Note 2 for further discussion.
(2) 
Health care costs have been reduced by Insured member co-payments related to our home delivery and specialty pharmacy operations of $26 million and $86 million for the three and nine months ended September 30, 2018, respectively, and $30 million and $96 million for the three and nine months ended September 30, 2017, respectively.

Refer to accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).

Page 3


Consolidated Statements of Comprehensive Income
(Unaudited)


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(Millions)
2018

 
2017

 
2018

 
2017

Net income including non-controlling interests
$
992

 
$
848

 
$
3,428

 
$
1,651

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
    Previously impaired debt securities

 
(1
)
 
(1
)
 
(2
)
    All other securities
(11
)
 
8

 
(328
)
 
132

    Derivatives and foreign currency
2

 
1

 

 
229

Pension and other postretirement employee benefit plans
12

 
11

 
37

 
32

Other comprehensive income (loss)
3

 
19

 
(292
)
 
391

Comprehensive income including non-controlling interests
995

 
867

 
3,136

 
2,042

Less: Comprehensive (loss) income attributable to non-controlling interests
(8
)
 
10

 
7

 
(9
)
Comprehensive income attributable to Aetna
$
1,003

 
$
857

 
$
3,129

 
$
2,051

 
 
 
 
 
 
 
 



Refer to accompanying Condensed Notes to Consolidated Financial Statements (Unaudited), including Note 11 for further information about other comprehensive income (loss).


Page 4


Consolidated Statements of Shareholders’ Equity
(Unaudited)

 
 
 
Attributable to Aetna
 
 
 
 
(Millions)
Number of
Common
Shares
Outstanding

 
Common
Stock and
Additional
Paid-in
Capital

 
Retained
Earnings

 
Accumulated
Other
Comprehensive
Loss

 
Total Aetna
Shareholders’
Equity

 
Non-Controlling Interests

 
Total
Equity

Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
326.8

 
$
4,706

 
$
12,118

 
$
(1,244
)
 
$
15,580

 
$
257

 
$
15,837

Adoption of new accounting standards (Note 2)

 

 
277

 
(277
)
 

 

 

Net income

 

 
1,209

 

 
1,209

 
10

 
1,219

Other comprehensive loss

 

 

 
(208
)
 
(208
)
 

 
(208
)
Common shares issued for benefit plans, including tax benefits, net of employee tax withholdings
0.3

 
(19
)
 

 

 
(19
)
 

 
(19
)
Dividends declared

 

 
(164
)
 

 
(164
)
 

 
(164
)
Balance at March 31, 2018
327.1

 
4,687

 
13,440

 
(1,729
)
 
16,398

 
267

 
16,665

Net income

 

 
1,212

 

 
1,212

 
5

 
1,217

Other decreases in non-controlling interest

 

 

 

 

 
(4
)
 
(4
)
Other comprehensive loss

 

 

 
(87
)
 
(87
)
 

 
(87
)
Common shares issued for benefit plans, including tax benefits, net of employee tax withholdings
0.3

 
43

 

 

 
43

 

 
43

Dividends declared

 

 
(163
)
 

 
(163
)
 

 
(163
)
Balance at June 30, 2018
327.4


4,730


14,489


(1,816
)

17,403


268


17,671

Net income (loss)

 

 
1,000

 

 
1,000

 
(8
)
 
992

Other increases in non-controlling interest

 

 

 

 

 
12

 
12

Other comprehensive income (Note 11)

 

 

 
3

 
3

 

 
3

Common shares issued for benefit plans, including tax benefits, net of employee tax withholdings

 
49

 

 

 
49

 

 
49

Dividends declared

 

 
(164
)
 

 
(164
)
 

 
$
(164
)
Balance at September 30, 2018
327.4

 
$
4,779

 
$
15,325

 
$
(1,813
)
 
$
18,291

 
$
272

 
$
18,563

 
 
 
 
 
 
 
 
 
 
 
 
 
 


Page 5


 
 
 
Attributable to Aetna
 
 
 
 
(Millions)
Number of
Common
Shares
Outstanding

 
Common
Stock and
Additional
Paid-in
Capital

 
Retained
Earnings

 
Accumulated
Other
Comprehensive
Loss

 
Total Aetna
Shareholders’
Equity

 
Non-Controlling Interests

 
Total
Equity

Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
351.7

 
$
4,716

 
$
14,717

 
$
(1,552
)
 
$
17,881

 
$
62

 
$
17,943

Net (loss) income

 

 
(381
)
 

 
(381
)
 
2

 
(379
)
Other increases in non-controlling interest

 

 

 

 

 
13

 
13

Other comprehensive income

 

 

 
276

 
276

 

 
276

Common shares issued for benefit plans, including tax benefits, net of employee tax withholdings
0.9

 
(49
)
 

 

 
(49
)
 

 
(49
)
Repurchases of common shares
(20.9
)
 
(661
)
 
(2,639
)
 

 
(3,300
)
 

 
(3,300
)
Dividends declared

 

 
(166
)
 

 
(166
)
 

 
(166
)
Balance at March 31, 2017
331.7

 
4,006

 
11,531

 
(1,276
)
 
14,261

 
77

 
14,338

Net income (loss)

 

 
1,203

 

 
1,203

 
(21
)
 
1,182

Other increases in non-controlling interest

 

 

 

 

 
115

 
115

Other comprehensive income

 

 

 
96

 
96

 

 
96

Common shares issued for benefit plans, including tax benefits, net of employee tax withholdings
0.4

 
10

 

 

 
10

 

 
10

Dividends declared

 

 
(166
)
 

 
(166
)
 

 
(166
)
Balance at June 30, 2017
332.1


4,016


12,568


(1,180
)

15,404


171


15,575

Net income

 

 
838

 

 
838

 
10

 
848

Other increases in non-controlling interest

 

 

 

 

 
54

 
54

Other comprehensive income (Note 11)

 

 

 
19

 
19

 

 
19

Common shares issued for benefit plans, including tax benefits, net of employee tax withholdings
0.1

 
30

 

 

 
30

 

 
30

Repurchases of common shares
(6.1
)
 
661

 
(1,206
)
 

 
(545
)
 

 
(545
)
Dividends declared

 

 
(163
)
 

 
(163
)
 

 
(163
)
Balance at September 30, 2017
326.1

 
$
4,707

 
$
12,037

 
$
(1,161
)
 
$
15,583

 
$
235

 
$
15,818


Refer to accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).


Page 6


Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
 
Nine Months Ended
September 30,
(Millions)
 
2018

 
2017

Cash flows from operating activities:
 
 
 
 
 
 
Net income including non-controlling interests
 
 
 
$
3,428

 
$
1,651

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Net realized capital losses
 
 
 
40

 
262

Depreciation and amortization
 
 
 
400

 
499

Debt fair value amortization
 
 
 
(10
)
 
(14
)
Equity in earnings of affiliates, net
 
 
 
(30
)
 
(80
)
Stock-based compensation expense
 
 
 
125

 
135

Reduction of reserve for anticipated future losses on discontinued products
 
 
 
(70
)
 
(109
)
Amortization of net investment premium
 
 
 
38

 
54

Loss on early extinguishment of long-term debt
 
 
 

 
246

Gain on sale of businesses
 
 
 
(355
)
 

Changes in assets and liabilities:
 
 
 
 
 
 
Premiums due and other receivables
 
 
 
(486
)
 
(184
)
Income taxes
 
 
 
625

 
(15
)
Other assets and other liabilities
 
 
 
136

 
(1,196
)
Health care and insurance liabilities
 
 
 
(156
)
 
931

Distributions from partnership investments
 
 
 

 
44

Net cash provided by operating activities
 
 
 
3,685

 
2,224

Cash flows from investing activities:
 
 
 
 

 
 

Proceeds from sales and maturities of investments
 
 
 
7,164

 
8,854

Cost of investments
 
 
 
(6,235
)
 
(7,860
)
Additions to property, equipment and software
 
 
 
(336
)
 
(301
)
Cash used for acquisitions, net of cash acquired
 
 
 
(8
)
 
(24
)
Net cash provided by investing activities
 
 
 
585

 
669

Cash flows from financing activities:
 
 
 
 

 
 

Issuance of long-term debt
 
 
 

 
988

Repayment of long-term debt
 
 
 
(1,000
)
 
(11,734
)
Common shares issued under benefit plans, net
 
 
 
(95
)
 
(132
)
Common shares repurchased
 
 
 

 
(3,845
)
Dividends paid to shareholders
 
 
 
(491
)
 
(420
)
Contributions, non-controlling interests
 
 
 
9

 
182

Net cash used for financing activities
 
 
 
(1,577
)
 
(14,961
)
Net increase (decrease) in cash and cash equivalents
 
 
 
2,693

 
(12,068
)
Cash and cash equivalents, beginning of period
 
 
 
4,076

 
17,996

Cash and cash equivalents, end of period
 
 
 
$
6,769

 
$
5,928

Supplemental cash flow information:
 
 
 
 

 
 

Interest paid
 
 
 
$
212

 
$
301

Income taxes paid
 
 
 
446

 
791

 
 
 
 
 
 
 
 
 Refer to accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).

Page 7


Condensed Notes to Consolidated Financial Statements
(Unaudited)

1.    Organization

Effective for the first quarter of 2018, we realigned our business segments to correspond with changes to our management structure and internal management reporting which reflect our evolving business strategy of helping our members live healthier lives. As a result of this realignment, our operations are now conducted in the Health Care reportable segment. Health Care offers a broad range of traditional, voluntary and consumer-directed health insurance products and related services to large and small employers, public sector employers, and Medicaid and Medicare beneficiaries. Our Health Care products are offered on both an Insured basis (where we assume all or a majority of the risk for medical and dental care costs) and an employer-funded basis (where the plan sponsor under an administrative services contract (“ASC”) assumes all or a majority of that risk). Health Care also includes emerging business products and services that complement and enhance our medical products.

We present the remainder of our financial results in the Corporate/Other category, which consists of:
Products for which we no longer solicit or accept new customers such as our large case pensions and long-term care products;
Contracts we have divested through reinsurance or other contracts, such as our domestic group life insurance, group disability insurance and absence management businesses; and
Corporate expenses not supporting our business operations, including transaction and integration-related costs, income taxes, interest expense on our outstanding debt and the financing components of our pension and other postretirement employee benefit plans (“OPEB”) expense.

Prior period segment financial information has been restated to conform to the current year presentation. Refer to Note 15 for segment financial information.

2.    Summary of Significant Accounting Policies

Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. We have omitted certain footnote disclosures that would substantially duplicate the disclosures in our 2017 Annual Report on Form 10-K (our “2017 Annual Report”), unless the information contained in those disclosures materially changed or is required by GAAP. The accompanying unaudited consolidated financial statements and related condensed notes should be read in conjunction with the consolidated financial statements and related notes presented in our 2017 Annual Report.

These interim financial statements necessarily rely on estimates, including assumptions as to annualized tax rates.  In the opinion of management, all adjustments necessary for a fair statement of results for the interim periods have been made.  All such adjustments are of a normal, recurring nature. The Company has evaluated subsequent events that occurred from the financial statement date through the date the financial statements were issued and determined there were no subsequent events to disclose other than as disclosed in Notes 2, 3 and 14.

Reclassifications
Certain reclassifications were made to 2017 financial information to conform with current period presentation.

Revenue Recognition
Our revenue includes premiums, fees and other revenue. Refer to Notes 2 and 18 in our 2017 Annual Report for further discussion of our revenue recognition. Our fees and other revenue relate to contracts that can include various combinations of products, services, or series of services, which are generally capable of being distinct and accounted for as separate performance obligations. Fee revenue of approximately $1.3 billion and approximately $3.8 billion for the three and nine months ended September 30, 2018, respectively, consists primarily of ASC fees which are received in exchange for performing certain claim processing and member services for our medical members and are recognized as revenue over the period the service is provided. Other revenue of $795 million and approximately $2.4 billion for the three and nine months ended September 30, 2018, respectively, primarily relates to our (a) specialty and home delivery pharmacy services to ASC groups, (b) workers’ compensation administrative services and (c) a gain recognized related to the sale of our domestic group life

Page 8



insurance, group disability insurance and absence management businesses (the “Group Insurance sale”) which occurred during fourth-quarter 2017. Specialty and home delivery pharmacy services revenue and cost of products sold are recognized when the prescription is shipped. Effective for the first quarter of 2018, specialty and home delivery pharmacy services revenue reflects the price of the prescription on a gross basis (ASC member co-payments and plan sponsor reimbursements) and specialty and home delivery pharmacy cost of products sold reflects the cost of the prescription and certain administrative costs incurred for dispensing the prescription. Workers’ compensation administrative services revenue is recognized once the service is complete. Refer to Note 3 for further discussion on the timing of recognition of the gain related to the Group Insurance sale.

Accounts receivable related to fees and other revenue was $733 million and $942 million at September 30, 2018 and December 31, 2017, respectively. At September 30, 2018, there were no material contract assets, contract liabilities or deferred costs to obtain or fulfill a contract with a customer related to our fees and other revenue. For the three and nine months ended September 30, 2018, we had no material bad debt expense.

For the three and nine months ended September 30, 2018, revenue recognized from performance obligations related to prior periods (for example, due to changes in transaction price) was not material. The aggregate amount of transaction price allocated to our remaining performance obligations (excluding revenue pertaining to contracts that have an original expected duration of one year or less) was not material. We expect to recognize the majority of our fees and other revenue related to our remaining performance obligations within one calendar year.

Health Insurer Fee
Since January 1, 2014, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (as amended, collectively, the “ACA”) imposes an annual premium-based health insurer fee (“HIF”) for each calendar year that generally is payable in September which is not deductible for tax purposes. In December 2015, the Consolidated Appropriation Act was enacted which included a one-year suspension of the HIF for 2017. Accordingly, there was no expense related to the HIF in 2017. We recorded an operating expense of $234 million and $701 million for the three and nine months ended September 30, 2018, respectively, related to our share of the 2018 HIF. In October 2018, we paid $935 million representing our portion of the non tax-deductible 2018 HIF. In January 2018, the HIF was suspended for 2019.

Income Taxes
The accounting for certain income tax effects of the Tax Cuts and Jobs Act of 2017 (the “TCJA”) was considered provisional at December 31, 2017, including the assessment of the mandatory repatriation of foreign earnings, the minimum tax on global intangible low-taxed income and the assertion of permanent reinvestment of foreign earnings. Accordingly, the items were recorded at a reasonable estimate at December 31, 2017. We are still evaluating the income tax effects of these provisions and accordingly there have been no adjustments recorded for these items at September 30, 2018.

New Accounting Standards
Revenue from Contracts with Customers
Effective January 1, 2018, we adopted, on a modified retrospective basis, new accounting guidance related to revenue recognition from contracts with customers. While industry-specific guidance related to contracts with customers within the scope of Accounting Standards Codification (“ASC”) 944 Financial Services - Insurance remains unchanged, most other industry-specific revenue recognition requirements have been removed. The new guidance requires that an entity recognize revenue for the transfer of goods or services to a customer at an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The new guidance also requires additional disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The new guidance only impacted contracts with customers outside of the scope of ASC Topic 944. As a result of adopting this new guidance, premiums, fees and other revenue, cost of products sold and operating expenses increased by $69 million, $392 million, $390 million and $71 million, respectively, for the three months ended September 30, 2018, and $183 million, approximately $1.2 billion, approximately $1.2 billion and $200 million, respectively, for the nine months ended September 30, 2018, primarily related to modifications to principal versus agent guidance for our home delivery and specialty pharmacy operations. There were no material changes in the timing of our recognition of revenue or net income. We included additional disclosures required by the new accounting guidance under “Revenue Recognition” above.

Recognition and Measurement of Financial Assets and Financial Liabilities
Effective January 1, 2018, we adopted new accounting guidance related to the recognition and measurement of financial assets and financial liabilities. Under the new guidance, all equity investments in unconsolidated entities are measured at fair value with changes in fair value recognized in net income. We adopted this provision on a modified retrospective basis and recorded an immaterial cumulative effect adjustment from accumulated other comprehensive income to retained earnings in our Consolidated Balance Sheet during the nine months ended September 30, 2018. We also elected, on a prospective basis, to report equity investments without a readily determinable fair value at cost less impairment, plus or minus subsequent

Page 9



adjustments for observable price changes. The new guidance also revises certain disclosures regarding financial assets and liabilities. The adoption of this new guidance did not have a material impact on our financial position or operating results.

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
Effective January 1, 2018, we adopted, on a retrospective basis, new accounting guidance related to the presentation of net periodic pension costs and net periodic postretirement benefit costs. Under the new guidance, the service cost component of these net periodic costs is required to be reported in the same income statement line item as other employee compensation costs for services rendered during the period. The other components of these net periodic costs generally are required to be presented in the income statement separately from the service cost component and outside of a subtotal of income from operations. The other components of these net periodic costs are included within operating expenses in our Consolidated Statements of Income because the amounts are not material and thus separate presentation is not required. The net periodic benefit costs for our pension and other postretirement employee benefit plans do not contain a service cost component as these defined benefit plans have been frozen for an extended period of time. The adoption of this new guidance did not have a material impact on our financial position or operating results.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income to Retained Earnings
During the first quarter of 2018, we elected to early adopt new accounting guidance related to the reclassification of certain tax effects from accumulated other comprehensive income to retained earnings. We adopted the new accounting guidance as of the beginning of the first quarter of 2018 using the aggregate portfolio approach for available for sale securities and reclassified the stranded tax effects resulting from the TCJA of $273 million from accumulated other comprehensive loss to retained earnings in our Consolidated Balance Sheet.

Future Application of Accounting Standards
Leases
Effective January 1, 2019, we will adopt new accounting guidance related to the recognition, measurement and disclosure requirements for leases. Under the new guidance, lessees will be required to recognize a right-of-use asset and corresponding lease liability on their balance sheets for all leases other than those that meet the definition of a short-term lease. The new guidance also revises certain disclosure requirements regarding leases. While we are still evaluating the impact of adoption of this new guidance, we will be required to record an asset and corresponding liability related to our operating leases (as described in Note 17 in our 2017 Annual Report) on our Consolidated Balance Sheets. The adoption of this new guidance is not expected to have a material impact on our operating results.

Accounting for the Purchase of Callable Debt Securities
Effective January 1, 2019, we will adopt new accounting guidance related to the amortization of purchased callable debt securities held at a premium. Under the new guidance, premiums on callable debt securities are amortized to the earliest call date rather than to the contractual maturity date. Callable debt securities held at a discount will continue to be amortized to the contractual maturity date. The adoption of this new guidance is not expected to have a material impact on our financial position and operating results.

Measurement of Credit Losses on Financial Instruments
Effective January 1, 2020, we will adopt new accounting guidance related to the measurement of credit losses on financial assets and certain other financial instruments. The new guidance requires the use of a new forward-looking expected loss impairment model for trade and other receivables, held-to-maturity debt securities, loans and other financial instruments. The new guidance also requires impairments and recoveries for available-for-sale debt securities to be recorded through an allowance account and revises certain disclosure requirements. We are still evaluating the impact of adoption of this new guidance on our financial position and operating results.

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract
Effective January 1, 2020, we will adopt new accounting guidance related to implementation costs for cloud computing arrangements. The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. Under the new guidance, the implementation costs are expensed over the term of the hosting arrangement on a straight-line basis. We are still evaluating the impact of the adoption of this new guidance on our financial position and operating results.

Targeted Improvements to the Accounting for Long-Duration Insurance Contracts
Effective January 1, 2021, we will adopt new accounting guidance related to the accounting for and disclosure of long-duration insurance contracts. The new guidance requires us to review cash flow assumptions at least annually and recognize the effect of changes in future cash flow assumptions in net income. We also will be required to update our discount rate assumptions

Page 10



quarterly and recognize the effect of changes in these assumptions in other comprehensive income. The rate used to discount our liability for future policy benefits will be based on an estimate of the yield for an upper-medium-grade fixed-income instrument. In addition, the new guidance changes the amortization method for deferred acquisition costs and requires additional disclosures regarding our long duration insurance contract liabilities in our interim and annual financial statements. We are still evaluating the impact of the adoption of this new guidance on our financial position, operating results and financial statement disclosures.

3.    Proposed Acquisition, Proposed Divestiture, Completed Divestiture, Terminated Acquisition and Terminated Divestiture

Proposed Acquisition by CVS Health
On December 3, 2017, we entered into a definitive agreement (the “CVS Merger Agreement”) under which CVS Health Corporation (“CVS Health”) has agreed to acquire all of our outstanding shares for a combination of cash and stock. Under the terms of the agreement, our shareholders will receive $145 in cash and 0.8378 of a CVS Health common share for each of our common shares. The proposed transaction (the “CVS Health Transaction”) is subject to customary closing conditions, including approvals of certain state departments of insurance and similar regulators. On March 13, 2018, our shareholders approved and adopted the CVS Merger Agreement, and CVS Health’s stockholders approved the issuance of CVS Health shares in the transaction. On October 10, 2018, Aetna and CVS Health entered into a consent decree with the U.S. Department of Justice (the “DOJ”) that allows the CVS Health Transaction to proceed, provided Aetna agrees to sell its individual standalone Medicare Part D prescription drug plans. The consent decree is subject to the normal court approval process. The transactions contemplated by the Divestiture (as defined below) satisfy the consent decree’s divestiture requirement.

Proposed Divestiture to WellCare
On September 26, 2018, we entered into an asset purchase agreement and related agreements with a subsidiary of WellCare Health Plans, Inc. (“WellCare”) pursuant to which WellCare has agreed to acquire all our standalone Medicare Part D prescription drug plans (the “Divestiture”) effective 11:59 p.m. on December 31, 2018. The standalone Medicare Part D prescription drug plans to be divested had an aggregate of approximately 2.2 million members at September 30, 2018. The Divestiture does not affect our individual or group Medicare Advantage, Medicare Advantage Part D or Medicare Supplement products or plans. We will provide administrative services to, and retain the financial results of, the divested plans through 2019. The purchase price is not material to us. Closing of the Divestiture is subject to the closing of the CVS Health Transaction, regulatory approvals and other customary closing conditions.

Divestiture of Domestic Group Life Insurance, Group Disability Insurance and Absence Management Businesses
On November 1, 2017, we completed the Group Insurance sale to Hartford Life and Accident Insurance Company (“HLAIC”) for cash consideration of $1.45 billion. The transaction was accomplished through an indemnity reinsurance arrangement under which HLAIC contractually assumed certain of our policyholder liabilities and obligations, although we remain directly obligated to policyholders. Assets related to and supporting the reinsured life and disability insurance policies were transferred to a trust established by HLAIC for our benefit, and we recorded a reinsurance receivable from HLAIC. As used in this Quarterly Report on Form 10-Q with respect to the Group Insurance sale, the terms “gain”, “deferred gain” and “amortization of deferred gain” include both the deferred gain related to the retroactive provisions of the reinsurance contract and the prepaid reinsurance premium paid by HLAIC to Aetna (representing unearned ceding commission to Aetna) allocated to the prospective provisions of the reinsurance contract.

The sale is expected to result in an after-tax gain of approximately $710 million ($1.1 billion pre-tax), a significant portion of which has been deferred and will be amortized into earnings: (i) over the remaining contract period (estimated to be approximately 3 years at the closing date) in proportion to the amount of insurance protection provided for the prospective reinsurance portion of the gain; and (ii) as we recover amounts due from HLAIC over a period estimated to be approximately 30 years at the closing date for the retrospective reinsurance portion of the gain. Approximately $950 million of the approximately $1.1 billion pre-tax deferred gain was allocated to the prospective provisions of the reinsurance contract. The deferred gain liability was recorded in accrued expenses and other current liabilities and in other long-term liabilities in our Consolidated Balance Sheets, and the gain recognition is being recorded in fees and other revenue in our Consolidated Statements of Income. During the three and nine months ended September 30, 2018, we recognized $121 million and $355 million, respectively, pre-tax of the deferred gain into earnings. The remaining pre-tax deferred gain liability was approximately $650 million at September 30, 2018, of which approximately $530 million relates to the prospective provisions of the reinsurance contract.

Revenue and income before income taxes for the businesses sold were $585 million and $30 million, respectively, for the three months ended September 30, 2017 and $1.7 billion and $93 million, respectively, for the nine months ended September 30, 2017.

Page 11




Terminated Acquisition of Humana
On July 2, 2015, we entered into a definitive agreement (the “Humana Merger Agreement”) to acquire Humana Inc. (“Humana”). On July 21, 2016, the DOJ and certain state attorneys general filed a civil complaint in the U.S. District Court for the District of Columbia (the “District Court”) against us and Humana charging that our acquisition of Humana (the “Humana Transaction”) would violate Section 7 of the Clayton Antitrust Act, and seeking a permanent injunction to prevent Aetna from acquiring Humana. On January 23, 2017, the District Court granted the DOJ’s request to enjoin the Humana Transaction.

On February 14, 2017, Aetna and Humana entered into a mutual termination agreement (the “Termination Agreement”) pursuant to which the parties thereto (collectively the “Parties”) agreed to terminate the Humana Merger Agreement, including all schedules and exhibits thereto, and all ancillary agreements contemplated thereby, entered pursuant thereto or entered in connection therewith (other than certain confidentiality agreements) (collectively with the Humana Merger Agreement, the “Transaction Documents”), effective immediately as of February 14, 2017. Under the Termination Agreement, Aetna agreed to pay Humana the Regulatory Termination Fee (as defined in the Humana Merger Agreement) of $1.0 billion in cash in full satisfaction of any amounts required to be paid by Aetna under the Humana Merger Agreement. The Parties also agreed to release each other from any and all liability, claims, rights, actions, causes of action, suits, liens, obligations, accounts, debts, demands, agreements, promises, liabilities, controversies, costs, charges, damages, expenses and fees, however arising, in connection with, arising out of or related to the Transaction Documents, the transactions contemplated therein or thereby or certain related matters. We paid Humana the Regulatory Termination Fee on February 16, 2017 and recorded the expense in operating expenses. We funded that payment with the proceeds of the 2016 senior notes (as defined below).

In June 2016, we issued $13.0 billion of senior notes to partially fund the Humana Transaction (collectively, the “2016 senior notes”). In accordance with the terms of the 2016 senior notes, on February 14, 2017, we issued a notice of redemption for $10.2 billion aggregate principal amount of certain of the 2016 senior notes (collectively, the “Special Mandatory Redemption Notes”) at a redemption price equal to 101% of the aggregate principal amount of those notes plus accrued and unpaid interest. We redeemed the Special Mandatory Redemption Notes on March 16, 2017, and we funded the redemption with the proceeds of the 2016 senior notes. As a result of the redemption of the Special Mandatory Redemption Notes, we recognized certain costs in our net income during the nine months ended September 30, 2017. Refer to Note 8 for additional information.

Terminated Divestiture to Molina
In order to address the DOJ’s perceived competitive concerns regarding Medicare Advantage relating to the Humana Transaction, on August 2, 2016, we entered into a definitive agreement (the “Aetna APA”) to sell for cash to Molina Healthcare, Inc. (“Molina”) certain of our Medicare Advantage assets. On February 14, 2017, Aetna and Molina entered into a Termination Agreement (the “APA Termination Agreement”) pursuant to which Aetna terminated the Aetna APA, including all schedules and exhibits thereto, and all ancillary agreements contemplated thereby or entered pursuant thereto. Under the APA Termination Agreement, Aetna agreed to pay Molina in cash (a) a termination fee of $53 million and (b) approximately 70% of Molina’s transaction costs. We paid Molina the termination fee on February 16, 2017 and the applicable transaction costs of $7 million on February 27, 2017 and recorded the expense in operating expenses. The payments were funded with the proceeds of the 2016 senior notes.

4.    Investments

Total investments at September 30, 2018 and December 31, 2017 were as follows:
 
September 30, 2018
 
December 31, 2017
(Millions)
Current

 
Long-term

 
Total

 
Current

 
Long-term

 
Total

Debt securities available for sale
$
2,646

 
$
13,073

 
$
15,719

 
$
2,101

 
$
14,849

 
$
16,950

Mortgage loans
150

 
1,228

 
1,378

 
166

 
1,330

 
1,496

Other investments

 
1,463

 
1,463

 
13

 
1,614

 
1,627

Total investments
$
2,796

 
$
15,764

 
$
18,560

 
$
2,280

 
$
17,793

 
$
20,073



Page 12



Debt Securities
Debt securities available for sale at September 30, 2018 and December 31, 2017 were as follows:
(Millions)
Amortized
Cost

 
Gross
Unrealized
Gains

 
Gross
Unrealized
Losses

 
Fair
Value

September 30, 2018
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
U.S. government securities
$
1,686

 
$
19

 
$
(3
)
 
$
1,702

States, municipalities and political subdivisions
2,484

 
54

 
(28
)
 
2,510

U.S. corporate securities
6,653

 
176

 
(110
)
 
6,719

Foreign securities
2,395

 
88

 
(46
)
 
2,437

Residential mortgage-backed securities
611

 
1

 
(14
)
 
598

Commercial mortgage-backed securities
610

 

 
(25
)
 
585

Other asset-backed securities
1,143

 
2

 
(8
)
 
1,137

Redeemable preferred securities
29

 
2

 

 
31

Total debt securities (1)(2)
$
15,611

 
$
342

 
$
(234
)
 
$
15,719

December 31, 2017
 

 
 

 
 

 
 

Debt securities:
 

 
 

 
 

 
 

U.S. government securities
$
1,319

 
$
44

 
$
(1
)
 
$
1,362

States, municipalities and political subdivisions
3,287

 
116

 
(12
)
 
3,391

U.S. corporate securities
6,886

 
388

 
(22
)
 
7,252

Foreign securities
2,498

 
187

 
(7
)
 
2,678

Residential mortgage-backed securities
570

 
5

 
(4
)
 
571

Commercial mortgage-backed securities
641

 
3

 
(9
)
 
635

Other asset-backed securities
1,031

 
8

 
(4
)
 
1,035

Redeemable preferred securities
22

 
4

 

 
26

Total debt securities(1)(2)
$
16,254

 
$
755

 
$
(59
)
 
$
16,950

 
 
 
 
 
 
 
 
(1) 
At both September 30, 2018 and December 31, 2017, we held securities for which we previously recognized an immaterial amount of non-credit related impairments in accumulated other comprehensive loss. These securities had an immaterial amount of net unrealized capital gains at both September 30, 2018 and December 31, 2017.
(2) 
Investment risks associated with our experience-rated and discontinued products generally do not impact our operating results (refer to Note 16 for additional information on our accounting for discontinued products). At September 30, 2018, debt securities with a fair value of approximately $2.3 billion, gross unrealized capital gains of $80 million and gross unrealized capital losses of $55 million and, at December 31, 2017, debt securities with a fair value of approximately $2.6 billion, gross unrealized capital gains of $199 million and gross unrealized capital losses of $8 million were included in total debt securities, but support our experience-rated and discontinued products. Changes in net unrealized capital gains (losses) on these securities are not reflected in accumulated other comprehensive income.


Page 13



The fair value of debt securities at September 30, 2018 is shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called or prepaid, or we intend to sell a security prior to maturity.
(Millions)
Amortized
Cost

 
Fair
Value

Due to mature:
 
 
 
Less than one year
$
817

 
$
824

One year through five years
5,694

 
5,700

After five years through ten years
3,078

 
3,055

Greater than ten years
3,658

 
3,820

Residential mortgage-backed securities
611

 
598

Commercial mortgage-backed securities
610

 
585

Other asset-backed securities
1,143

 
1,137

Total
$
15,611

 
$
15,719

 
Mortgage-Backed and Other Asset-Backed Securities
All of our residential mortgage-backed securities at September 30, 2018 were issued by the Government National Mortgage Association, the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation and carry agency guarantees and explicit or implicit guarantees by the U.S. Government. At September 30, 2018, our residential mortgage-backed securities had an average credit quality rating of AAA and a weighted average duration of 5.4 years.

Our commercial mortgage-backed securities have underlying loans that are dispersed throughout the United States.  Significant market observable inputs used to value these securities include loss severity and probability of default. At September 30, 2018, these securities had an average credit quality rating of AAA and a weighted average duration of 6.4 years.

Our other asset-backed securities have a variety of underlying collateral (e.g., automobile loans, credit card receivables, home equity loans and commercial loans). Significant market observable inputs used to value these securities include the unemployment rate, loss severity and probability of default. At September 30, 2018, these securities had an average credit quality rating of AA- and a weighted average duration of 1.2 years.



























Page 14



Summarized below are the debt securities we held at September 30, 2018 and December 31, 2017 that were in an unrealized capital loss position, aggregated by the length of time the investments have been in that position:
 
Less than 12 months
 
Greater than 12 months
 
Total (1)
(Millions, except number of securities)
Number of Securities

 
Fair
Value

 
Unrealized
Losses

 
Number of Securities

 
Fair
Value

 
Unrealized
Losses

 
Number of Securities

 
Fair
Value

 
Unrealized
Losses

September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government securities
137

 
$
500

 
$
2

 
26

 
$
75

 
$
1

 
163

 
$
575

 
$
3

States, municipalities and political subdivisions
497

 
1,132

 
18

 
89

 
233

 
10

 
586

 
1,365

 
28

U.S. corporate securities
2,391

 
3,589

 
73

 
450

 
662

 
37

 
2,841

 
4,251

 
110

Foreign securities
777

 
1,187

 
35

 
126

 
205

 
11

 
903

 
1,392

 
46

Residential mortgage-backed securities
119

 
396

 
7

 
125

 
156

 
7

 
244

 
552

 
14

Commercial mortgage-backed securities
99

 
293

 
9

 
84

 
252

 
16

 
183

 
545

 
25

Other asset-backed securities
442

 
669

 
5

 
65

 
136

 
3

 
507

 
805

 
8

Redeemable preferred securities
4

 
5

 

 

 

 

 
4

 
5

 

Total debt securities(1)
4,466

 
$
7,771

 
$
149

 
965

 
$
1,719

 
$
85

 
5,431

 
$
9,490

 
$
234

December 31, 2017
 
 
 

 
 

 
 
 
 

 
 

 
 
 
 

 
 

Debt securities:
 
 
 

 
 

 
 
 
 

 
 

 
 
 
 

 
 

U.S. government securities
77

 
$
200

 
$
1

 
14

 
$
22

 
$

 
91

 
$
222

 
$
1

States, municipalities and political subdivisions
318

 
616

 
4

 
111

 
308

 
8

 
429

 
924

 
12

U.S. corporate securities
989

 
1,469

 
6

 
284

 
494

 
16

 
1,273

 
1,963

 
22

Foreign securities
262

 
419

 
3

 
91

 
194

 
4

 
353

 
613

 
7

Residential mortgage-backed securities
111

 
179

 
1

 
98

 
134

 
3

 
209

 
313

 
4

Commercial mortgage-backed securities
38

 
135

 
1

 
79

 
241

 
8

 
117

 
376

 
9

Other asset-backed securities
150

 
304

 
2

 
79

 
151

 
2

 
229

 
455

 
4

Total debt securities(1)
1,945

 
$
3,322

 
$
18

 
756

 
$
1,544

 
$
41

 
2,701

 
$
4,866

 
$
59

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) 
At September 30, 2018 and December 31, 2017, debt securities in an unrealized capital loss position of $55 million and $8 million, respectively, and with related fair value of $1.4 billion and $515 million, respectively, related to experience-rated and discontinued products.

We reviewed the securities in the tables above and concluded that these are performing assets generating investment income to support the needs of our business. In performing this review, we considered factors such as the quality of the investment security based on research performed by our internal credit analysts and external rating agencies and the prospects of realizing the carrying value of the security based on the investment’s current prospects for recovery. At September 30, 2018, we did not intend to sell these securities, and we did not believe it was more likely than not that we would be required to sell these securities prior to anticipated recovery of their amortized cost basis.













Page 15



The maturity dates for debt securities in an unrealized capital loss position at September 30, 2018 were as follows:
 
Supporting discontinued and
experience-rated products
 
Supporting remaining
products
 
Total
(Millions)
Fair
Value

 
Unrealized
Losses

 
Fair
Value

 
Unrealized
Losses

 
Fair
Value

 
Unrealized
Losses

Due to mature:
 
 
 
 
 
 
 
 
 
 
 
Less than one year
$
8

 
$

 
$
423

 
$
2

 
$
431

 
$
2

One year through five years
238

 
5

 
3,118

 
47

 
3,356

 
52

After five years through ten years
498

 
18

 
1,523

 
43

 
2,021

 
61

Greater than ten years
456

 
24

 
1,324

 
48

 
1,780

 
72

Residential mortgage-backed securities
33

 
1

 
519

 
13

 
552

 
14

Commercial mortgage-backed securities
139

 
7

 
406

 
18

 
545

 
25

Other asset-backed securities
15

 

 
790

 
8

 
805

 
8

Total
$
1,387

 
$
55

 
$
8,103

 
$
179

 
$
9,490

 
$
234

 
 
 
 
 
 
 
 
 
 
 
 

Mortgage Loans
Our mortgage loans are collateralized by commercial real estate. During the three and nine months ended September 30, 2018 and 2017 we had the following activity in our mortgage loan portfolio:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(Millions)
2018

 
2017

 
2018

 
2017

New mortgage loans
$
42

 
$
27

 
$
90

 
$
209

Mortgage loans fully repaid
53

 
90

 
175

 
190

 
 
 
 
 
 
 
 
 
We assess our mortgage loans on a regular basis for credit impairments, and annually assign a credit quality indicator to each loan. Our credit quality indicator is internally developed and categorizes our portfolio on a scale from 1 to 7. These indicators are based upon several factors, including current loan to value ratios, property condition, market trends, creditworthiness of the borrower and deal structure. The vast majority of our mortgage loans fall into categories 2 to 4.
Category 1 - Represents loans of superior quality.
Categories 2 to 4 - Represent loans where credit risk is minimal to acceptable; however, these loans may display some susceptibility to economic changes.
Categories 5 and 6 - Represent loans where credit risk is not substantial, but these loans warrant management’s close attention.
Category 7 - Represents loans where collections are potentially at risk; if necessary, an impairment is recorded.
Based upon our most recent assessments at September 30, 2018 and December 31, 2017, our mortgage loans were given the following credit quality indicators:
(In Millions, except credit ratings indicator)
September 30,
2018

 
December 31,
2017

1
$
41

 
$
40

2 to 4
1,322

 
1,447

5 and 6
15

 
9

7

 

Total
$
1,378

 
$
1,496

 
 
 
 
 


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Net Investment Income
Sources of net investment income for the three and nine months ended September 30, 2018 and 2017 were as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(Millions)
2018

 
2017

 
2018

 
2017

Debt securities
$
148

 
$
184

 
$
435

 
$
564

Mortgage loans
18

 
22

 
57

 
65

Other investments
47

 
43

 
143

 
138

Gross investment income
213

 
249

 
635

 
767

Investment expenses
(11
)
 
(16