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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
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: 001-32209
WELLCARE HEALTH PLANS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
47-0937650
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)

8735 Henderson Road, Renaissance One
Tampa, Florida
 
33634
(Address of Principal Executive Offices)
 
(Zip Code)
(813) 290-6200
(Registrant's telephone number, including area code)

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 ý No o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 x Accelerated filer o Non-accelerated filer o (do not check if a smaller reporting company) 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). Yes o No x

As of October 30, 2017, there were 44,521,556 shares of the registrant's common stock, par value $.01 per share, outstanding.



WELLCARE HEALTH PLANS, INC.

TABLE OF CONTENTS

 
Page
Part I — FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 (unaudited)
 
Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 (unaudited)
 
Condensed Consolidated Statements of Changes in Stockholders' Equity for the nine months ended
September 30, 2017 and 2016 (unaudited)
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and
2016 (unaudited)
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
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
 
 
 
 
Signatures
 
 
 
 
Exhibit Index




Part I — FINANCIAL INFORMATION

Item 1. Financial Statements.

WELLCARE HEALTH PLANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In millions, except per share and share data) 

 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Premium
$
4,390.9

 
$
3,578.8

 
$
12,631.5

 
$
10,705.4

Investment and other income
12.0

 
5.2

 
30.6

 
13.5

Total revenues
4,402.9

 
3,584.0

 
12,662.1

 
10,718.9

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Medical benefits
3,740.7

 
3,040.2

 
10,938.3

 
9,091.0

Selling, general and administrative
372.3

 
268.5

 
1,040.2

 
815.4

ACA industry fee

 
57.1

 

 
171.0

Medicaid premium taxes
29.5

 
28.3

 
90.6

 
83.1

Depreciation and amortization
31.4

 
22.4

 
84.6

 
64.9

Interest
17.1

 
14.6

 
51.4

 
45.0

Total expenses
4,191.0

 
3,431.1

 
12,205.1

 
10,270.4

Income from operations
211.9

 
152.9

 
457.0

 
448.5

Loss on extinguishment of debt

 

 
26.1

 

Income before income taxes and equity in earnings of unconsolidated subsidiaries
211.9

 
152.9

 
430.9

 
448.5

Equity in earnings of unconsolidated subsidiaries
23.2

 

 
22.1

 

Income before income taxes
235.1

 
152.9

 
453.0

 
448.5

Income tax expense
63.5

 
84.3

 
140.0

 
251.3

Net income
$
171.6

 
$
68.6

 
$
313.0

 
$
197.2

 
 
 
 
 
 
 
 
Other comprehensive income, before tax:
 
 
 
 
 
 
 
Change in net unrealized gains and losses on
available-for-sale securities
0.4

 

 
1.7

 
0.1

Income tax expense related to other
comprehensive income
0.2

 

 
0.6

 

Other comprehensive income, net of tax
0.2

 

 
1.1

 
0.1

Comprehensive income
$
171.8

 
$
68.6

 
$
314.1

 
$
197.3

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
3.86

 
$
1.55

 
$
7.04

 
$
4.46

Diluted
$
3.82

 
$
1.54

 
$
6.97

 
$
4.43

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
       Basic
44,509,692

 
44,276,035

 
44,458,096

 
44,234,001

       Diluted
44,969,033

 
44,639,442

 
44,909,916

 
44,561,051


See notes to unaudited condensed consolidated financial statements.

2



WELLCARE HEALTH PLANS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In millions, except share data)

 
September 30,
2017
 
December 31,
2016
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
4,878.9

 
$
3,961.4

Short-term investments
504.6

 
124.2

Premiums receivable, net
534.0

 
498.6

Pharmacy rebates receivable, net
343.6

 
278.0

Receivables from government partners
64.8

 

Funds receivable for the benefit of members
116.8

 
32.6

Prepaid expenses and other current assets, net
318.7

 
224.8

Total current assets
6,761.4

 
5,119.6

 
 
 
 
Property, equipment and capitalized software, net
316.4

 
274.5

Goodwill
648.2

 
392.5

Other intangible assets, net
378.4

 
74.1

Long-term investments
590.3

 
57.3

Restricted investments
213.6

 
234.3

Other assets
3.6

 
0.5

Assets of discontinued operations
216.6

 

Total Assets
$
9,128.5

 
$
6,152.8

 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

Current Liabilities:
 

 
 

Medical benefits payable
$
2,076.8

 
$
1,690.5

Unearned premiums
576.4

 
3.3

Accounts payable and accrued expenses
577.9

 
665.6

Funds payable for the benefit of members
1,578.7

 
390.3

Other payables to government partners
416.2

 
303.2

Income taxes payable
63.0

 
2.9

Total current liabilities
5,289.0

 
3,055.8

 
 
 
 
Deferred income tax liability, net
94.1

 
63.4

Long-term debt, net
1,181.6

 
997.6

Other liabilities
13.8

 
35.9

Liabilities of discontinued operations
216.6

 

Total Liabilities
6,795.1

 
4,152.7

Commitments and contingencies (see Note 14)

 

Stockholders' Equity:
 
 
 
Preferred stock, $0.01 par value (20,000,000 authorized, no shares
issued or outstanding)

 

Common stock, $0.01 par value (100,000,000 authorized, 44,512,477 and 44,293,881 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively)
0.4

 
0.4

Paid-in capital
566.1

 
546.9

Retained earnings
1,766.8

 
1,453.8

Accumulated other comprehensive income (loss)
0.1

 
(1.0
)
Total Stockholders' Equity
2,333.4

 
2,000.1

Total Liabilities and Stockholders' Equity
$
9,128.5

 
$
6,152.8

See notes to unaudited condensed consolidated financial statements.


3



WELLCARE HEALTH PLANS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited) (In millions, except share data)

 
Common Stock
 
Paid in Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Income (Loss)
 
Total
Stockholders' Equity
Shares
 
Amount
Balance at January 1, 2017
44,293,881

 
0.4

 
546.9

 
1,453.8


(1.0
)
 
2,000.1

Common stock issued for vested
stock-based compensation awards
315,391

 

 

 

 

 

Repurchase and retirement of shares to
satisfy tax withholding requirements
(96,795
)
 

 
(13.6
)
 

 

 
(13.6
)
Stock-based compensation expense, net
of forfeitures

 

 
32.8

 

 

 
32.8

Comprehensive income

 

 

 
313.0

 
1.1

 
314.1

Balance at September 30, 2017
44,512,477

 
$
0.4

 
$
566.1

 
$
1,766.8


$
0.1

 
$
2,333.4

 

 

 

 

 

 

Balance at January 1, 2016
44,113,328

 
$
0.4

 
$
518.4

 
$
1,211.7

 
$
(2.2
)
 
$
1,728.3

Common stock issued for vested
stock-based compensation awards
253,271

 

 

 

 

 

Repurchase and retirement of shares to
satisfy tax withholding requirements
(73,981
)
 

 
(6.9
)
 

 

 
(6.9
)
Stock-based compensation expense, net
of forfeitures

 

 
24.2

 

 

 
24.2

Comprehensive income

 

 

 
197.2

 
0.1

 
197.3

Balance at September 30, 2016
44,292,618

 
$
0.4

 
$
535.7

 
$
1,408.9

 
$
(2.1
)
 
$
1,942.9


See notes to unaudited condensed consolidated financial statements.


4



WELLCARE HEALTH PLANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)

 
For the Nine Months Ended
September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
313.0

 
$
197.2

Adjustments to reconcile net income to cash flows from operating activities:
 

 
 

Depreciation and amortization
84.6

 
64.9

Loss on extinguishment of debt
26.1

 

Stock-based compensation expense
32.8

 
24.2

Deferred taxes, net
(39.0
)
 
(25.3
)
Other, net
13.4

 
12.5

Changes in operating accounts, net of effects from acquisitions:
 

 
 

Premiums receivable, net
58.4

 
167.0

Pharmacy rebates receivable, net
(52.7
)
 
(39.7
)
Medical benefits payable
258.8

 
89.5

Unearned premiums
574.4

 
372.5

Other payables to government partners
36.6

 
131.4

Accrued liabilities and other, net
(60.9
)
 
86.1

Net cash provided by operating activities
1,245.5

 
1,080.3

 
 
 
 
Cash flows from investing activities:
 

 
 

Acquisitions and acquisition-related settlements, net of cash acquired
(728.5
)
 
(23.8
)
Purchases of investments
(1,124.8
)
 
(338.6
)
Proceeds from sales and maturities of investments
484.0

 
370.1

Additions to property, equipment and capitalized software, net
(92.6
)
 
(61.5
)
Net cash used in investing activities
(1,461.9
)
 
(53.8
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from issuance of debt, net of financing costs paid
1,182.2

 
196.9

Payments on debt
(1,026.1
)
 
(400.0
)
Repurchase and retirement of shares to satisfy employee tax withholding requirements
(13.6
)
 
(6.9
)
Funds received for the benefit of members, net
978.0

 
661.7

Other, net
13.4

 
(6.8
)
Net cash provided by financing activities
1,133.9

 
444.9

 
 
 
 
Increase in cash and cash equivalents
917.5

 
1,471.4

Balance at beginning of period
3,961.4

 
2,407.0

Balance at end of period
$
4,878.9

 
$
3,878.4

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

  Cash paid for taxes, net of refunds
$
149.5

 
$
153.1

  Cash paid for interest
$
56.3

 
$
30.6

SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
 

 
 

Non-cash additions to property, equipment, and capitalized software
$
11.3

 
$
5.9

See notes to unaudited condensed consolidated financial statements.

5



WELLCARE HEALTH PLANS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (In millions, except member, per share and share data)

1. ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
WellCare Health Plans, Inc. (the "Company," "we," "us," or "our"), focuses exclusively on government-sponsored managed care services, primarily through Medicaid, Medicare Advantage ("MA") and Medicare Prescription Drug Plans ("PDPs") to families, children, seniors and individuals with complex medical needs. As of September 30, 2017, we served approximately 4.3 million members. During the nine months ended September 30, 2017, we operated Medicaid health plans in Arizona, Florida, Georgia, Hawaii, Illinois, Kentucky, Missouri, Nebraska, New Jersey, New York and South Carolina. We began serving Medicaid and Medicare members in Arizona, effective December 31, 2016, in connection with the acquisition of Care1st Health Plan Arizona, Inc. and One Care by Care1st Health Plan of Arizona, Inc. (together, "Care1st Arizona"). Effective January 1, 2017, we began serving Medicaid members statewide in Nebraska.

As of September 30, 2017, we also operated MA coordinated care plans ("CCPs") in Arizona, Arkansas, California, Connecticut, Florida, Georgia, Hawaii, Illinois, Kentucky, Louisiana, Maine, Mississippi, New Jersey, New York, South Carolina, Tennessee and Texas, as well as stand-alone Medicare PDPs nationwide.

Basis of Presentation

The accompanying unaudited Condensed Consolidated Balance Sheets and statements of comprehensive income, changes in stockholders' equity, and cash flows include our accounts and the accounts of our subsidiaries over which we have control or are the primary beneficiary. We eliminated all intercompany accounts and transactions.

The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"). Accordingly, certain financial information and footnote disclosures normally included in financial statements prepared in accordance with GAAP, but that are not required for interim reporting purposes, have been condensed or omitted. The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto, for the fiscal year ended December 31, 2016, included in our Annual Report on Form 10-K ("2016 Form 10-K"), which was filed with the U.S. Securities and Exchange Commission ("SEC") in February 2017. Results for the interim periods presented are not necessarily indicative of results that may be expected for the entire year or any other interim period.

In the opinion of management, the interim financial statements reflect all normal recurring adjustments that we consider necessary for the fair presentation of our financial position, results of operations and cash flows for the interim periods presented. In accordance with GAAP, we make certain estimates and assumptions that affect the amounts reported in the condensed consolidated interim financial statements and accompanying notes. We base these estimates, including assumptions as to the annualized tax rate, on our knowledge of current events and anticipated future events and evaluate and update our assumptions and estimates on an ongoing basis; however, actual results may differ from our estimates. We evaluated all material events subsequent to the date of these condensed consolidated interim financial statements. Certain reclassifications were made to 2016 financial information to conform to the 2017 presentation.

Unconsolidated Subsidiaries

As discussed in Note 2- Acquisitions, in connection with the acquisition of Universal American Corp. (“Universal American”) we acquired a wholly-owned subsidiary which works with physicians and other health care professionals to operate Accountable Care Organizations (“ACOs”) under the Medicare Shared Saving Program ("MSSP") and Next Generation ACO Models. ACOs were established by the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the "ACA") to reward integrated, efficient care and allow providers to share in any savings they achieve as a result of improved quality and operational efficiency.

These ACOs were generally formed as limited liability companies. The ACOs are considered variable interest entities ("VIEs"), under GAAP; as these entities do not have sufficient equity to finance their own operations without additional financial support. We own a majority interest in our ACOs; however, we share the power to direct the activities that most significantly affect the ACOs with health care providers as minority owners in the ACOs. This power is shared pursuant to the structure of the management committee of each of the ACOs. Accordingly, we have determined that we are not the primary beneficiary of the ACOs, and therefore we cannot consolidate their results. We perform an ongoing qualitative assessment of

6


our variable interests in VIEs to determine whether we have a controlling financial interest and would therefore be considered the primary beneficiary of the VIE.

We account for our participation in the ACOs using the equity method. Gains and losses are reported as equity in earnings of unconsolidated subsidiaries in our Condensed Consolidated Statements of Comprehensive Income. We recognized equity in earnings of our unconsolidated ACOs of $23.2 million and $22.1 million for the three and nine months ended September 30, 2017, respectively, primarily the result of net gains associated with the 2016 MSSP program year.

Significant Accounting Policies

Medicare Part D Settlements

We receive certain Part D prospective subsidy payments from the Centers for Medicare & Medicaid Services ("CMS") for our MA and PDP members as a fixed monthly per member amount, based on the estimated costs of providing prescription drug benefits over the plan year, as reflected in our bids. A discussion of the subsidy components under Part D is included in Note 2- Summary of Significant Accounting Policies to the Consolidated Financial Statements included in our 2016 Form 10-K. CMS will fully reimburse these subsidies, or recoup overpaid subsidies made during the plan year, as part of its annual settlement process that occurs in the fourth quarter of the subsequent year and, accordingly, there is no insurance risk to us. Therefore, amounts received for these subsidies are not considered premium revenue, and are reported, net of the subsidy benefits paid, as Funds receivable (payable) for the benefit of members in the Condensed Consolidated Balance Sheets. As of September 30, 2017, our Condensed Consolidated Balance Sheet includes a CMS Part D payable for the 2017 plan year, which reflects a $386.5 million advance receipt of October 2017 CMS Medicare subsidy payments in September 2017. Our Condensed Consolidated Balance Sheet as of September 30, 2017 also includes a CMS Part D payable for the 2016 plan year, as well as a net receivable relating to plan years prior to 2016. Both the 2017 and 2016 payables are reflected within current liabilities in Funds payable for the benefit of members. As of December 31, 2016, our Condensed Consolidated Balance Sheet included a CMS Part D payable primarily related to the 2016 plan year, as well as a net receivable relating to plan years prior to 2016.

Premium Receivables and Unearned Premiums

We record premiums earned but not received as premiums receivable and record premiums received in advance of the period of service as unearned premiums in the Condensed Consolidated Balance Sheets. A complete discussion of premiums receivable and unearned premiums is included in Note 2 - Summary of Significant Accounting Policies to the Consolidated Financial Statements included in our 2016 Form 10-K. The premium receivable balance at September 30, 2017 is primarily related to Medicaid contracts with our state partners of approximately $392.8 million, as well as risk-adjusted premiums receivable under our Medicare Advantage and PDP contracts. Unearned premiums at September 30, 2017 consist primarily of the October 2017 CMS Medicare premium advance of approximately $538.8 million.

ACA Industry Fee

The ACA imposed certain new taxes and fees, including an annual premium-based health insurance industry assessment (the "ACA industry fee") on health insurers, which began in 2014. In December 2015, President Obama signed the Consolidated Appropriations Act, 2016 which, among other provisions, included a one-year moratorium on the ACA industry fee for 2017, and, as a result, eliminated the associated Medicaid ACA industry fee reimbursements from our state government partners. Accordingly, we did not incur ACA industry fee expense for the three and nine months ended September 30, 2017, compared with $57.1 million and $171.0 million incurred for the three and nine months ended September 30, 2016, respectively. Additionally, we did not recognize any Medicaid ACA industry fee reimbursement revenue for the three and nine months ended September 30, 2017, compared with $67.2 million and $183.6 million recognized for the three and nine months ended September 30, 2016, respectively.

Refer to Note 2 - Summary of Significant Accounting Policies to the Consolidated Financial Statements included in our 2016 Form 10-K for a complete discussion of all of our significant accounting policies.


7


Recently Adopted Accounting Standards

In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". This update eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. As a result, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. We adopted this guidance prospectively on January 1, 2017. The adoption of this guidance did not have a material effect on our consolidated results of operations, financial condition or cash flows.

In October 2016, the FASB issued ASU 2016-17, “Consolidation (Topic 810).” This update changes how a reporting entity evaluates consolidation, including whether an entity is considered a variable interest entity, determination of the primary beneficiary and how related parties are considered in the analysis. We adopted this guidance effective January 1, 2017. The adoption of this guidance did not have a material effect on our consolidated results of operations, financial condition or cash flows.

In March 2016, the FASB issued ASU 2016-07, "Simplifying the Transition to the Equity Method of Accounting," which eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. Instead, the equity method of accounting should be applied prospectively from the date significant influence is obtained. Investors should add the cost of acquiring the additional interest in the investee (if any) to the current basis of their previously held interest. The new standard should be applied prospectively for investments that qualify for the equity method of accounting after the effective date. We adopted this guidance effective January 1, 2017. The adoption of this guidance did not have a material effect on our consolidated results of operations, financial condition or cash flows.

Accounting Standards Pending Adoption

In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718) - Scope of Modification Accounting". This guidance addresses which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting pursuant to Topic 718. An entity should account for the effects of a modification unless (a) the fair value of the modified award is the same as the fair value of the original award, (b) the vesting conditions of the modified award are the same as the vesting conditions of the original award and (c) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in this guidance should be applied prospectively for public business entities effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. As this standard requires prospective application, the effect to our consolidated financial statements will depend on the terms of our future award modifications.

In March 2017, the FASB issued ASU No. 2017-08, "Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities". This update shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Currently, entities generally amortize the premium as a yield adjustment over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount. This guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. We are currently assessing the effect this guidance will have on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendments in this update provide guidance to assist entities with evaluating when a group of transferred assets and activities (collectively referred to as a "set") is a business.  This new guidance provides for a "screen", which requires a determination that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen's threshold is not met, a set cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create output, eliminating the evaluation of whether a market participant could replace missing elements. This guidance is effective for prospective business combinations for public entities for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. As this standard requires prospective application, the effect on our consolidated financial statements will depend on the terms of our future business combinations.


8


In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments (Topic 230)." This update targets eight specific areas to clarify how these cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance is effective for public entities for interim and annual periods beginning after December 15, 2017, with early adoption permitted. We are currently assessing the effect this guidance will have on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326)," which requires entities to use a current expected credit loss model, which is a new impairment model based on expected losses rather than incurred losses. Under this model, an entity would recognize an impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect from financial assets measured at amortized cost. The entity's estimate would consider relevant information about past events, current conditions, and reasonable and supportable forecasts, which will result in recognition of lifetime expected credit losses upon loan origination. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted for annual reporting periods beginning after December 15, 2018. We are currently assessing the effect this guidance will have on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments in its balance sheet. This standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. This guidance is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this guidance to have a material effect on our results of operations or cash flows. The effect of ASU 2016-02 on our consolidated financial position will be based on leases outstanding at the time of adoption.

In January 2016, the FASB issued ASU 2016-01, "Financial Instrument - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which requires entities to measure equity securities that are not consolidated or accounted for under the equity method at fair value through net income. This amendment also simplifies the impairment test of equity investments without readily determinable fair values. This guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted in certain circumstances. We are currently assessing the effect this guidance will have on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 will supersede existing revenue recognition standards with a single model unless those contracts are within the scope of other standards (e.g., an insurance entity’s insurance contracts). The revenue recognition principle in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, new and enhanced disclosures will be required. Companies can adopt the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date", which deferred the effective dates of ASU 2014-09 by one year. As such, the standard becomes effective for annual and interim reporting periods beginning after December 15, 2017. Given that substantially all of our revenues are derived from insurance contracts accounted for in accordance with ASC 944, Financial Services-Insurance, which are specifically excluded from the scope of ASU 2014-09, we do not anticipate this guidance will have a material effect on our consolidated results of operations, financial condition or cash flows.

2. ACQUISITIONS

Phoenix Health Plan Assets Acquisition

On May 1, 2017, we completed our acquisition of certain assets from Phoenix Health Plan ("PHP"), including Arizona Medicaid membership and certain provider contracts. The transaction included the transfer of approximately 42,000 Medicaid members to Care1st Arizona Health Plan, Inc. ("Care1st Arizona"), a wholly owned subsidiary of the Company. The transaction was funded with available cash on hand.


9


Universal American Acquisition

On April 28, 2017 (the "Effective Date"), we acquired all of the issued and outstanding shares of Universal American. The transaction is valued at approximately $770.0 million, including the cash purchase price of $10.00 per outstanding share ("Per Share Merger Consideration") of Universal American's common stock, the assumption of $145.3 million fair value of Universal American's convertible debt, the cash settlement of Universal American's $40.0 million par value of Series A Mandatorily Redeemable Preferred Shares (the "Preferred Shares") and the cash settlement of outstanding vested and unvested stock-based compensation awards. The acquisition of Universal American, with approximately 119,000 MA members in Texas, New York and Maine, strengthens our business by increasing our MA membership by one-third, deepening our presence in two key markets, Texas and New York, and diversifying our business portfolio. In addition, Universal American has joined with provider groups to operate ACOs, under the MSSP and Next Generation ACO models. As a result of the acquisition, we currently operate 16 MSSP ACOs and two Next Generation ACOs.

The fair value at the Effective Date of the consideration transferred in the Universal American acquisition consisted of the following:
(in millions)
 
Number of shares of Universal American common stock outstanding on April 28, 2017 (57.1 million) multiplied by the Per Share Merger Consideration
$
570.8

Assumed debt(a)
145.3

Repurchase of Preferred Shares (b)
41.0

Stock-based award cash consideration(c)
12.9

Total consideration transferred
$
770.0

 
 
 
 
(a) Following the consummation of the Universal American transaction, all of the holders of Universal American's 4.00% convertible senior notes (the "Convertible Notes") elected to convert their notes into the right to receive cash equal to the par value of the notes plus a make whole premium. We paid the noteholders the amounts due and all of the Convertible Notes were redeemed in the second quarter of 2017.

The fair value of the Convertible Notes was determined based on quoted market prices; therefore, have been classified within Level 1 of the fair value hierarchy. See Universal American Convertible Notes below for further discussion of the repurchase of the Convertible Notes.
 
(b) On the Effective Date, we redeemed an aggregate of $40.0 million of Universal American's Preferred Shares, which became redeemable by the holders on April 28, 2017 due to certain change in control provisions for the Preferred Shares. We redeemed the Preferred Shares for $41.0 million, which includes the $40.0 million par value of the Preferred Shares and $1.0 million of accrued dividends. See Universal American Mandatorily Redeemable Preferred Shares below for further discussion of the redemption of the Preferred Shares.
 
(c) Pursuant to the terms of the Universal American acquisition, outstanding vested and unvested stock-based compensation awards as of the Effective Date converted to the right to receive cash. We estimated the fair value of these awards at the Effective Date and attributed that fair value to pre-acquisition and post-acquisition services in accordance with GAAP. Accordingly, $12.9 million of the fair value of these awards was attributed to pre-acquisition services and is included in the estimated consideration transferred, and approximately $20.0 million has been, or will be, included in our post-acquisition financial statements as compensation costs and reflected as a selling, general and administrative expense in our Condensed Consolidated Statements of Comprehensive Income.


10


The following table summarizes the estimated fair values of major classes of assets acquired and liabilities assumed at the Effective Date, based on our preliminary valuation assumptions, reconciled to the total consideration transferred.
Assets
(in millions)
Cash and cash equivalents
$
66.4

Investments, including restricted investments
254.4

Premiums receivable, net
90.7

Pharmacy rebates receivable, net, and other current assets
56.2

Property, equipment and capitalized software, net
7.5

Goodwill
262.4

Other intangible assets, net
298.2

Assets of discontinued operations
219.6

     Estimated fair value of total assets acquired
$
1,255.4

 
 
Liabilities
 
Medical benefits payable
128.1

Deferred tax liabilities, net
59.7

Other liabilities
78.9

Liabilities of discontinued operations
218.7

     Estimated fair value of liabilities assumed
$
485.4

     Estimated fair value of net assets acquired
$
770.0

 
 

The estimate of fair value results from judgments about future events which reflect certain uncertainties and relies on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as intangible asset lives, can materially affect our operating results. We will finalize the Universal American purchase accounting for the various preliminary items as soon as reasonably possible during the measurement period. Measurement period adjustments will be recorded in the period in which they are determined, as if they had been completed at the acquisition date. The finalization of our purchase accounting assessment could result in changes in the valuation of assets acquired and liabilities assumed which could be material.

As of the Effective Date, the expected fair value of all current assets and liabilities, as well as assets and liabilities of discontinued operations (refer to Note 13- Discontinued Operations for further discussion), approximated their historical cost. For certain noncurrent assets and liabilities, we have made preliminary fair value adjustments based on information reviewed through September 30, 2017. Significant fair value adjustments are noted as follows.

Identifiable intangible assets acquired

The following table summarizes the preliminary fair values and weighted average useful lives for identifiable intangible assets acquired in the Universal American acquisition which are subject to change as we finalize our purchase accounting.
 
 
Gross Fair Value
(in millions)
 
Weighted Average
Useful Life (in years)
Membership
 
$
240.0

 
10.0
Tradenames
 
36.0

 
13.9
Provider network
 
9.5

 
15.0
Other
 
12.7

 
6.2
Total
 
$
298.2

 
10.5
 
 
 
 
 


11


We valued the acquired membership and tradename intangible assets using an income approach (discounted future cash flow analysis) based on our consideration of historical financial results and expected industry and market trends. We discounted the future cash flows by a weighted-average cost of capital based on an analysis of the cost of capital for comparable companies within our industry. We valued the acquired provider network using a cost approach, which utilizes cost assumptions applicable at the valuation date to determine the cost of constructing a similar asset. Our other intangible assets include acquired operating licenses, certain non-compete agreements and acquired technology, which were valued using a combination of income and cost approaches. We amortize the intangible assets over the period we expect these assets to contribute directly or indirectly to our future cash flows on a straight-line basis, which approximates the pattern of economic consumption over their estimated useful lives.

Deferred taxes

The purchase price allocation includes net deferred tax liabilities of $59.7 million, primarily relating to deferred tax liabilities established on the identifiable acquired intangible assets, partially offset by federal net operating losses and foreign tax credit carryforwards acquired in the Universal American transaction.

Goodwill

We recorded $262.4 million for the preliminary valuation of goodwill, assigned to our Medicare Health Plans reportable segment, for the excess of the purchase price over the estimated fair value of the net assets acquired. The recorded goodwill and other intangible assets related to the acquisition are not deductible for tax purposes.

Universal American Convertible Notes

In 2016, Universal American completed the offering of $115.0 million of their 4.00% Convertible Notes due 2021. The acquisition by WellCare constituted a “Make-Whole Fundamental Change” under the indenture for the convertible notes. During the three months ended June 30, 2017, all of the holders of the Convertible Notes elected to convert their notes into the right to receive cash equal to the par value of the notes plus a make whole premium. We paid the noteholders the amounts due and all of the notes were redeemed during the second quarter of 2017. The fair value of the Convertible Notes was $145.3 million on the Effective Date and was included in the purchase consideration for the Universal American acquisition.

Universal American Mandatorily Redeemable Preferred Shares

In April 2011, Universal American issued an aggregate of $40.0 million of its Preferred Shares, representing 1,600,000 shares with a par value of $0.01 per share and a liquidation preference of $25.00 per share. During the three months ended June 30, 2017, the Preferred Shares were redeemed for $41.0 million, which includes the $40.0 million par value of the Preferred Shares and $1.0 million of accrued dividends. The $41.0 million redemption amount was included in purchase consideration for the Universal American acquisition.

Condensed Consolidated Statement of Comprehensive Income

We included the results of Universal American's operations after the Effective Date in our consolidated financial statements. The amount of revenue attributable to Universal American included in our Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 was $355.4 million and $590.5 million, respectively. Excluding the transaction and integration-related costs discussed below, pretax net income attributable to Universal American included in our Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 was $30.5 million and $25.5 million, respectively.

We incurred transaction and integration-related costs of $6.6 million and $33.3 million during the three and nine months ended September 30, 2017, respectively, related to the acquisition of Universal American. These costs include severance payments to former executives, advisory, legal and other professional fees that are reflected in selling, general and administrative ("SG&A") expense in our Condensed Consolidated Statements of Comprehensive Income.


12


Care1st Arizona Acquisition

On December 31, 2016, we completed the acquisition of Care1st Arizona. The purchase price was approximately $163.8 million, inclusive of statutory capital and subject to certain adjustments. We included the results of Care1st Arizona's operations from the date of acquisition in our consolidated financial statements. As of September 30, 2017, Care1st Arizona served approximately 156,000 Medicaid members in Arizona, including the previously noted membership acquired from PHP.

The preliminary allocation of the purchase price to assets acquired and liabilities assumed at the acquisition date included total tangible assets of $169.9 million, primarily comprised of cash and cash equivalents, and total liabilities of $117.8 million.

In addition, we recorded $24.0 million for the preliminary valuation of identified intangible assets, including acquired membership, provider networks and the Care1st tradename. We valued the acquired membership and tradename intangible assets using an income approach (discounted future cash flow analysis) based on our consideration of historical financial results and expected industry and market trends. We discounted the future cash flows by a weighted-average cost of capital based on an analysis of the cost of capital for comparable companies within our industry. We valued the acquired provider network using a cost approach, which utilizes cost assumptions applicable at the valuation date to determine the cost of constructing a similar asset. We amortize the intangible assets on a straight-line basis over the period we expect these assets to contribute directly or indirectly to our future cash flows. The weighted average amortization period for these intangible assets is 11.2 years.

We recorded $87.7 million for the preliminary valuation of goodwill, assigned to our Medicaid segment, for the excess of the purchase price over the estimated fair value of the net assets acquired. The recorded goodwill and other intangible assets related to the Care1st Arizona acquisition are not deductible for tax purposes.

Any necessary adjustments from our preliminary estimates of the allocation will be finalized within one year from the date of acquisition. Measurement period adjustments will be recorded in the period in which they are determined, as if they had been completed at the acquisition date.

Unaudited Pro Forma Financial Information

The results of operations and financial condition for our 2017 and 2016 acquisitions have been included in our condensed consolidated financial statements since the respective acquisition dates. The unaudited pro forma financial information presented below reflects all of our 2017 and 2016 acquisitions, including PHP, Universal American, Care1st Arizona and our June 2016 acquisition of certain assets of Advicare Corp., assuming the acquisitions occurred as of January 1, 2016. Proforma results are not provided for the three months ended September 30, 2017, as our 2016 and 2017 acquisitions were included in our results of operations for the entire third quarter of 2017.

These pro forma results are based on estimates and assumptions, and do not reflect any anticipated synergies, efficiencies or other cost savings that we expect to realize from the acquisitions. The following unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have occurred had the acquisitions actually consummated at January 1, 2016, or project the future results of the combined company.

 
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions, except per share data)
 
2016

2017

2016
Total revenues
 
$
4,064.3

 
$
12,818.0

 
$
12,201.9

Net income
 
$
61.2

 
$
323.4

 
$
209.9

Earnings per common share:
 
 
 
 
 
 
   Basic
 
$
1.38

 
$
7.27

 
$
4.74

   Diluted
 
$
1.37

 
$
7.20

 
$
4.71

 
 
 
 
 
 
 


13


The pro forma results presented in the schedule above include adjustments related to the following purchase accounting and other acquisition-related costs:

Elimination of historical intangible asset amortization expense and addition of amortization expense based on the current preliminary values of identified intangible assets;
Elimination of interest expense associated with retired Universal American obligations;
Elimination of transaction and integration-related costs;
Elimination of Universal American discontinued operations;
Adjustments to align the acquisitions to our accounting policies; and
Tax effects of the adjustments noted above.


3. SEGMENT REPORTING

On a regular basis, we evaluate discrete financial information and assess the performance of our three reportable segments, Medicaid Health Plans, Medicare Health Plans and Medicare PDPs, to determine the most appropriate use and allocation of Company resources.

We allocate premium revenue, medical benefits expense, the ACA industry fee incurred in 2016 and goodwill to our reportable segments. We do not allocate to our reportable segments any other assets and liabilities, investment and other income, selling, general and administrative expenses, depreciation and amortization, or interest expense. The Company's decision makers primarily use premium revenue, medical benefits expense and gross margin to evaluate the performance of our reportable segments.
  
Medicaid Health Plans

Our Medicaid Health Plans segment includes plans for beneficiaries of Temporary Assistance for Needy Families ("TANF"), Supplemental Security Income ("SSI"), Aged Blind and Disabled ("ABD") and other state-based programs that are not part of the Medicaid program, such as Children's Health Insurance Program ("CHIP") and Long-Term Services and Supports ("LTSS") programs. TANF generally provides assistance to low-income families with children. ABD and SSI generally provide assistance to low-income aged, blind or disabled individuals. CHIP provides assistance to qualifying families who are not eligible for Medicaid because their income exceeds the applicable income thresholds. The LTSS program is designed to help people with chronic illnesses or who have disabilities and need health and long-term care services, such as home care or adult day care, to enable them to stay in their homes and communities as long as possible.

Our Medicaid operations in certain states individually account for 10% or more of our consolidated premium revenue. Those states and the respective Medicaid premium revenue as a percentage of total consolidated premium revenue are as follows: 
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Kentucky
15%
 
18%
 
15%
 
18%
Florida
15%
 
18%
 
15%
 
17%
Georgia
*
 
12%
 
*
 
12%
* Effective July 1, 2017, we began services under a new Medicaid contract with the State of Georgia serving TANF and CHIP beneficiaries. Due to the addition of a fourth managed care organization to the state program, our membership declined approximately 80,000 members as of September 30, 2017 compared to September 30, 2016. As a result of the decline in membership, premium revenue attributable to our Georgia Medicaid health plan accounted for less than 10% of our consolidated premium revenue for both the three and nine months ended September 30, 2017.

Medicare Health Plans

Medicare is a federal program that provides eligible persons age 65 and over and some disabled persons with a variety of hospital, medical and prescription drug benefits. MA is Medicare's managed care alternative to the original Medicare program, which provides individuals standard Medicare benefits directly through CMS. Our MA CCPs generally require members to seek health care services and select a primary care physician from a network of health care providers. In addition, we offer coverage of prescription drug benefits under the Medicare Part D program as a component of most of our MA plans.


14



Medicare PDPs

We offer stand-alone Medicare Part D coverage to Medicare-eligible beneficiaries in our Medicare PDPs segment. The Medicare Part D prescription drug benefit is supported by risk sharing with the federal government through risk corridors designed to limit the losses and gains of the participating drug plans and by reinsurance for catastrophic drug costs. The government subsidy is based on the national weighted average monthly bid for this coverage, adjusted for risk factor payments. Additional subsidies are provided for dually-eligible beneficiaries and specified low-income beneficiaries. The Part D program offers national in-network prescription drug coverage that is subject to limitations in certain circumstances.

Summary of Financial Information

Reportable operating segments are defined as components of an enterprise for which discrete financial information is available and evaluated on a regular basis by the enterprise's decision-makers to determine how resources should be allocated to an individual segment and to assess performance of those segments. Accordingly, we have three reportable segments: Medicaid Health Plans, Medicare Health Plans and Medicare PDPs.

A summary of financial information for our reportable segments through the gross margin level and reconciliation to income before income taxes is presented in the table below.
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Premium revenue:
 
Medicaid Health Plans
$
2,722.7

 
$
2,443.9

 
$
8,058.3

 
$
7,134.0

Medicare Health Plans
1,466.3

 
959.0

 
3,877.6

 
2,920.6

Medicare PDPs
201.9

 
175.9

 
695.6

 
650.8

Total premium revenue
4,390.9

 
3,578.8

 
12,631.5

 
10,705.4

Medical benefits expense:
 

 
 
 
 
 
 

Medicaid Health Plans
2,341.7

 
2,134.8

 
7,039.2

 
6,124.8

Medicare Health Plans
1,256.3

 
802.1

 
3,301.4

 
2,458.2

Medicare PDPs
142.7

 
103.3

 
597.7

 
508.0

Total medical benefits expense
3,740.7

 
3,040.2

 
10,938.3

 
9,091.0

ACA industry fee expense:
 
 
 
 
 
 
 
Medicaid Health Plans

 
37.3

 

 
110.6

Medicare Health Plans

 
15.9

 

 
48.2

Medicare PDPs

 
3.9

 

 
12.2

Total ACA industry fee expense

 
57.1

 

 
171.0

Gross margin
 

 
 
 
 
 
 
Medicaid Health Plans
381.0

 
271.8

 
1,019.1

 
898.6

Medicare Health Plans
210.0

 
141.0

 
576.2

 
414.2

Medicare PDPs
59.2

 
68.7

 
97.9

 
130.6

Total gross margin
650.2

 
481.5

 
1,693.2

 
1,443.4

Investment and other income
12.0

 
5.2

 
30.6

 
13.5

Other expenses(1)
(450.3
)
 
(333.8
)
 
(1,266.8
)
 
(1,008.4
)
Income from operations
$
211.9

 
$
152.9

 
$
457.0

 
$
448.5

 
 
 
 
 
 
 
 

(1)
Other expenses include selling, general and administrative expenses, Medicaid premium taxes, depreciation and amortization and interest.

15




4. EARNINGS PER COMMON SHARE

We compute basic earnings per common share on the basis of the weighted-average number of unrestricted common shares outstanding. We compute diluted earnings per common share on the basis of the weighted-average number of unrestricted common shares outstanding plus the dilutive effect of our stock-based compensation awards using the treasury stock method.

The calculation of the weighted-average common shares outstanding — diluted is as follows:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding — basic
44,509,692

 
44,276,035

 
44,458,096

 
44,234,001

Dilutive effect of outstanding stock-based compensation awards
459,341

 
363,407

 
451,820

 
327,050

Weighted-average common shares outstanding — diluted
44,969,033

 
44,639,442

 
44,909,916

 
44,561,051

Anti-dilutive stock-based compensation awards excluded from computation
147,141

 
535

 
51,475

 
19,595

 
 
 
 
 
 
 
 


5. INVESTMENTS

The Company considers all of its investments as available-for-sale securities. Excluding Restricted Investments, the amortized cost, gross unrealized gains or losses and estimated fair value of short-term and long-term investments by security type are summarized in the following tables.
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
September 30, 2017
 
 
 
 
 
 
 
Asset-backed securities
$
39.1

 
$

 
$

 
$
39.1

Commercial mortgage-backed securities
5.8

 

 

 
5.8

Corporate debt securities
374.1

 
1.4

 
(0.3
)
 
375.2

Preferred equity securities
6.5

 

 
(0.1
)
 
6.4

Municipal securities
127.1

 
1.2

 
(1.5
)
 
126.8

Residential mortgage-backed securities
13.7

 

 

 
13.7

Short-term time deposits
300.4

 

 

 
300.4

Government and agency obligations
175.0

 

 
(0.3
)
 
174.7

Other securities
52.8

 

 

 
52.8

Total
$
1,094.5

2.0

$
2.6

 
$
(2.2
)
 
$
1,094.9

December 31, 2016
 

 
 

 
 

 
 

Asset backed securities
$
3.3

 
$

 
$

 
$
3.3

Corporate debt securities
67.2

 

 

 
67.2

Municipal securities
53.7

 
0.1

 
(1.5
)
 
52.3

Government and agency obligations
1.0

 

 

 
1.0

Other securities
57.8

 

 
(0.1
)
 
57.7

Total
$
183.0

 
$
0.1

 
$
(1.6
)
 
$
181.5

 
 
 
 
 
 
 
 


16



Contractual maturities of available-for-sale securities at September 30, 2017 are as follows:
 
 
Total
 
Within
1 Year
 
1 Through 5
Years
 
5 Through 10
Years
 
Thereafter
Asset backed securities
$
39.1

 
$
7.8

 
$
31.1

 
$
0.2

 
$

Commercial mortgage-backed securities
5.8

 
0.5

 
2.2

 
3.1

 

Corporate debt securities
375.2

 
117.6

 
148.5

 
94.5

 
14.6

Municipal securities
126.8

 
14.6

 
59.7

 
38.0

 
14.5

Residential mortgage-backed securities
13.7

 

 
3.9

 
9.8

 

Short term time deposits
300.4

 
300.4

 

 

 

Government and agency obligations
174.7

 
10.9

 
156.9

 
6.9

 

Other securities
52.8

 
52.8

 

 

 

 
$
1,088.5

 
$
504.6

 
$
402.3

 
$
152.5

 
$
29.1

 
 
 
 
 
 
 
 
 
 

Actual maturities may differ from contractual maturities due to the exercise of pre-payment options. Preferred equity securities may be redeemed at the option of the issuer.

We sold available-for-sale investments totaling $141.9 million and $66.5 million during the three months ended September 30, 2017 and 2016, respectively, and $224.8 million and $68.2 million, during the nine months ended September 30, 2017 and 2016, respectively. Realized gains and losses resulting from these sales were not material for any of the periods presented. Additionally, we did not realize any other-than-temporary impairment during any of these periods.

6. RESTRICTED INVESTMENTS

As a condition for licensure, we are required to maintain certain funds on deposit or pledged to various state agencies. Certain of our state contracts require the issuance of surety bonds. We classify restricted investments as long-term regardless of the contractual maturity date of the securities held, due to the nature of the states' requirements. The amortized cost, gross unrealized gains, gross unrealized losses and fair value of our restricted investment securities are as follows: 

 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
September 30, 2017
 
 
 
 
 
 
 
Cash
$
4.2

 
$

 
$

 
$
4.2

Money market funds
58.4

 

 

 
58.4

U.S. government securities and other
151.3

 

 
(0.3
)
 
151.0

 
$
213.9

 
$

 
$
(0.3
)
 
$
213.6

December 31, 2016
 

 
 

 
 

 
 

Cash
$
92.1

 
$

 
$

 
$
92.1

Money market funds
67.8

 

 

 
67.8

U.S. government securities and other
74.5

 

 
(0.1
)
 
74.4

 
$
234.4

 
$

 
$
(0.1
)
 
$
234.3

 
 
 
 
 
 
 
 
 
Realized gains and losses on sales and redemptions of restricted investments were not material for the three and nine months ended September 30, 2017 and 2016.


17




7. STOCK-BASED COMPENSATION

Our Compensation Committee awards certain equity-based compensation under our stock plans, including restricted stock units ("RSUs"), performance stock units ("PSUs") and market stock units ("MSUs"). Compensation expense related to our stock-based compensation awards was $9.3 million and $9.2 million for the three months ended September 30, 2017 and 2016, respectively, and $32.8 million and $24.2 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, there was $65.0 million of unrecognized compensation cost related to unvested stock-based compensation arrangements that is expected to be recognized over a weighted-average period of 2.0. The unrecognized compensation cost for certain of our PSUs, which are subject to variable accounting, was determined based on our closing common stock price of $171.74 as of September 29, 2017 and amounted to approximately $19.8 million of the total unrecognized compensation cost. Due to the nature of the accounting for these awards, future compensation cost will fluctuate based on changes in our common stock price.

A summary of RSU, PSU and MSU award activity, at target, for the nine months ended September 30, 2017, is presented in the table below. For our PSUs and MSUs, shares attained over target upon vesting are reflected as awards granted during the period, while shares canceled due to vesting below target are reflected as awards forfeited during the period.
 

 RSUs
 
PSUs
 
MSUs
 
Total
Outstanding as of January 1, 2017
275,926

 
471,852

 
85,910

 
833,688

Granted
147,047

 
234,609

 
36,009

 
417,665

Vested
(129,298
)
 
(126,505
)
 
(74,471
)
 
(330,274
)
Forfeited
(12,804
)
 
(25,385
)
 
(2,218
)
 
(40,407
)
Outstanding as of September 30, 2017
280,871

 
554,571

 
45,230

 
880,672

 
 
 
 
 
 
 
 

The weighted-average grant-date fair value of all equity awards granted during the nine months ended September 30, 2017 was $145.80.

Refer to Note 2 - Summary of Significant Accounting Policies and Note 15 - Stock-based Compensation to the Consolidated Financial Statements included in our 2016 Form 10-K for additional information regarding our equity-compensation awards and related compensation cost measurement.

8. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

A summary of changes in our goodwill by reportable segment is as follows for 2017:
 
Medicaid Health Plans
 
Medicare Health Plans
 
Total
Balance as of December 31, 2016 (1)
282.1

 
110.4

 
392.5

Acquired goodwill (2)
8.3

 
262.4

 
270.7

Measurement period adjustments (1)
(15.0
)
 

 
$
(15.0
)
Balance as of September 30, 2017
$
275.4

 
$
372.8

 
$
648.2

 
 
 
 
 
 

(1) Medicaid Health Plans goodwill, as of December 31, 2016, includes approximately $102.7 million of goodwill resulting from our acquisition of Care1st Arizona effective on December 31, 2016. During the nine months ended September 30, 2017, we reallocated $24.0 million of this goodwill to identifiable intangible assets, net of a $9.0 million corresponding deferred tax liability, based on our preliminary valuation of these assets. Refer to Note 2 – Acquisitions for additional discussion of the Care1st Arizona transaction.
(2) Goodwill related to our 2017 acquisitions is considered preliminary, pending the final allocation of the applicable purchase price. Refer to Note 2 – Acquisitions for additional discussion of our 2017 acquisitions.


18



Other intangible assets and the related weighted-average amortization periods as of September 30, 2017 and December 31, 2016, are as follows: 
 
September 30, 2017
 
December 31, 2016
 
Weighted Average Amortization Period (In Years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Other Intangibles, Net
 
Gross Carrying Amount
 
Accumulated Amortization
 
Other Intangibles, Net
Provider networks
15.0
 
$
27.3

 
$
(4.7
)
 
$
22.6

 
$
8.4

 
$
(3.7
)
 
$
4.7

Licenses and permits
13.5
 
7.1

 
(3.9
)
 
3.2

 
5.1

 
(3.6
)
 
1.5

Trademarks and tradenames
13.7
 
53.3

 
(12.0
)
 
41.3

 
11.4

 
(9.8
)
 
1.6

Membership and state contracts
10.4
 
344.4

 
(44.2
)
 
300.2

 
94.3

 
(29.8
)
 
64.5

Other
5.7
 
14.9

 
(3.8
)
 
11.1

 
4.2

 
(2.4
)
 
1.8

Total other intangible assets (1)
11.0
 
$
447.0

 
$
(68.6
)
 
$
378.4

 
$
123.4

 
$
(49.3
)
 
$
74.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 

We recorded amortization expense of $10.6 million and $22.1 million for the three and nine months ended September 30, 2017, respectively, compared with $2.7 million and $7.8 million for the same periods in 2016. The increase is primarily driven by the previously noted 2017 and 2016 acquisitions, discussed in Note 2 – Acquisitions.

9. DEBT

The following table summarizes our outstanding debt obligations and their classification in the accompanying Condensed Consolidated Balance Sheets (in millions):
 
September 30, 2017
 
December 31, 2016
Long-term debt, net:
 
 
 
5.25% Senior Notes, due April 1, 2025
$
1,200.0

 
$

5.75% Senior Notes, due November 15, 2020 (1)

 
909.6

Revolving Credit Facility

 
100.0

Debt issuance costs
(18.4
)
 
(12.0
)
     Total long-term debt, net
$
1,181.6

 
$
997.6

 
 
 
 

(1)
Inclusive of $9.6 million of unamortized debt premium at December 31, 2016.

5.25% Senior Notes due 2025

On March 22, 2017, we completed the offering and sale of 5.25% senior notes due 2025 in the aggregate principal amount of $1,200.0 million (the “2025 Notes”). The aggregate net proceeds from the issuance of the 2025 Notes were $1,182.2 million, with a portion of the net proceeds from the offering being used to repay the $100.0 million outstanding under our credit agreement dated January 8, 2016 (the "Credit Agreement", discussed further below) and to redeem the full $900.0 million aggregate principal amount of our 5.75% Senior Notes due 2020 (the "2020 Notes") on April 7, 2017, which is discussed further below. The remaining net proceeds from the offering of the 2025 Notes are being used for general corporate purposes, including organic growth and working capital.

The 2025 Notes will mature on April 1, 2025, and will bear interest at a rate of 5.25% per annum, payable semi-annually on April 1 and October 1 of each year, commencing on October 1, 2017.

The 2025 Notes were issued under an indenture, dated as of March 22, 2017 (the "Base Indenture"), as supplemented by the First Supplemental Indenture, dated as of March 22, 2017 (the "First Supplemental Indenture" and, together with the Base Indenture, the "Indenture"), each between the Company and The Bank of New York Mellon Trust Company, N.A. (“BNY

19



Mellon”), as trustee. The Indenture under which the notes were issued contains covenants that, among other things, limit our ability and the ability of our subsidiaries under certain circumstances to:

incur additional indebtedness and issue preferred stock;
pay dividends or make other distributions;
make other restricted payments and investments;
sell assets, including capital stock of restricted subsidiaries;
create certain liens;
incur restrictions on the ability of restricted subsidiaries to pay dividends or make other payments, and in the case of our subsidiaries, guarantee indebtedness;
engage in transactions with affiliates; and
create unrestricted subsidiaries.

In addition, the Indenture requires that for the company to merge, consolidate or sell all or substantially all of its assets, (i) either the company must be the surviving entity, or the surviving entity or purchaser must be a U.S. entity; (ii) the surviving entity or purchaser must assume all the obligations of the company under the notes and the Indenture; (iii) no default or event of default (as defined under the Indenture) exists and (iv) the surviving entity, after giving pro forma effect to the transaction, (x) may incur at least $1.00 of additional indebtedness pursuant to the fixed charge coverage ratio or (y) have a fixed charge coverage ratio that is no worse than the fixed charge coverage ratio of the Company without giving pro forma effect to the transactions.

Ranking and Optional Redemption

The 2025 Notes are senior obligations of our company and rank equally in right of payment with all of our other existing and future unsecured and unsubordinated indebtedness. In addition, the 2025 Notes are structurally subordinated to all indebtedness and other liabilities of our subsidiaries (unless our subsidiaries become guarantors of the 2025 Notes).

At any time prior to April 1, 2020, we may, on any one or more occasions, redeem up to 40% of the aggregate principal amount of 2025 Notes at a redemption price equal to 105.250% of the principal amount of the 2025 Notes redeemed, plus accrued and unpaid interest, if any, with the net cash proceeds of an equity offering by the Company; provided that:

(1) at least 60% of the aggregate principal amount of 2025 Notes issued under the Indenture (including any additional Senior Notes, but excluding Senior Notes held by the Company or its subsidiaries) remains outstanding immediately after the occurrence of such redemption; and
(2) the redemption occurs within 90 days of the date of the closing of such equity offering.

At any time prior to April 1, 2020, we may on any one or more occasions redeem all or a part of the 2025 Notes, at a redemption price equal to 100% of the principal amount of the 2025 Notes redeemed, plus the Applicable Premium. The Applicable Premium means the greater of (i) 1.0% of the then outstanding principal amount of the note or (ii) the excess of the present value at such redemption date of the redemption price set forth in the optional redemption table below plus all required interest payments on the notes due through April 1, 2020 over the then outstanding principal amount of the notes, using the yield-to-maturity treasury rate most nearly equal to the period from the redemption date to April 1, 2020, as further set forth in the Indenture.

Except pursuant to the preceding two paragraphs, the 2025 Notes will not be redeemable at our option prior to April 1, 2020.


20



On or after April 1, 2020, we may on any one or more occasions redeem all or a part of the 2025 Notes, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest, if any, on the 2025 Notes redeemed, to, but not including, the applicable date of redemption, if redeemed during the twelve-month period beginning on November 15 of the years indicated below, subject to the rights of holders of 2025 Notes on the relevant record date to receive interest due on the relevant interest payment date:
Period
Redemption Price
2020
103.938
%
2021
102.625
%
2022
101.313
%
2023 and thereafter
100.000
%

The 2025 Notes are classified as long-term debt in our Condensed Consolidated Balance Sheet at September 30, 2017, based on their April 2025 maturity date.

5.75% Senior Notes due 2020

In November 2013, we issued $600.0 million in aggregate principal amount of our 2020 Notes. In June 2015, we issued an additional $300.0 million of 2020 Notes, pursuant to a reopening of such notes. Refer to Note 10 - Debt to the Consolidated Financial Statements included in our 2016 Form 10-K for additional information regarding these 2020 Notes.

On April 7, 2017, we redeemed the full $900.0 million in aggregate principal amount outstanding of our 2020 Notes at a redemption price of 102.875% of the principal amount, plus accrued and unpaid interest. Our obligations under the related base indenture and supplemental indenture, each dated as of November 14, 2013, by and among us and BNY Mellon, as trustee, were satisfied and discharged on April 7, 2017. In connection with the redemption and repurchase of the 2020 Notes, we incurred a one-time loss on extinguishment of debt of approximately $25.9 million related to the redemption premium, the write-off of associated deferred financing costs and the write-off of the unamortized portion of associated premiums paid on the 2020 Notes. The loss on extinguishment of debt is reflected in our Condensed Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2017.

Credit Agreement

In January 2016, we entered into the Credit Agreement, which provides for a senior unsecured revolving loan facility (the "Revolving Credit Facility"), which had an initial aggregate principal amount at any time outstanding not to exceed $850.0 million. On March 22, 2017, we increased the aggregate principal amount available under our Credit Agreement from $850.0 million to $1.0 billion.

In March 2017, we repaid the $100.0 million outstanding under our Revolving Credit Facility, and as a result, there were no borrowings outstanding under the Revolving Credit Facility as of September 30, 2017. Refer to Note 10 - Debt to the Consolidated Financial Statements included in our 2016 Form 10-K for additional information regarding the Credit Agreement, including applicable covenants.

As of September 30, 2017, and the date of this filing, we were in compliance with all covenants under the 2025 Notes and the Credit Agreement.

10. FAIR VALUE MEASUREMENTS

Our Condensed Consolidated Balance Sheets include the following financial instruments: cash and cash equivalents, investments, receivables, accounts payable, medical benefits payable, long-term debt, including our current portion of long-term debt, and other liabilities. We consider the carrying amounts of cash and cash equivalents, receivables, other current assets and current liabilities to approximate their fair value due to the short period of time between the origination of these instruments and the expected realization or payment. Certain assets and liabilities are measured at fair value on a recurring basis and are disclosed below. These assets and liabilities are classified into one of three levels of a hierarchy defined by GAAP. For a description of the methods and assumptions that are used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument, see the consolidated financial statements and notes thereto included in our 2016 Form 10-K.


21



Recurring Fair Value Measurements

Assets and liabilities measured at fair value on a recurring basis at September 30, 2017 are as follows:

 
 
 
Fair Value Measurements Using
 
Carrying Value
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Investments:
 
 
 
 
 
 
 
Asset-backed securities
$
39.1

 
$

 
$
39.1

 
$

Commercial mortgage backed securities
5.8

 

 
5.8

 

Corporate debt securities
375.2

 

 
375.2

 

Preferred equity securities
6.4

 

 
6.4

 

Municipal securities
126.8

 

 
114.5

 
12.3

Residential mortgage-backed securities
13.7

 

 
13.7

 

Short-term time deposits
300.4

 

 
300.4

 

Government and agency obligations
174.7

 
174.7

 

 

Other securities
52.8

 
52.8

 

 

Total investments
$
1,094.9

 
$
227.5

 
$
855.1

 
$
12.3

Restricted investments:
 

 
 

 
 

 
 

Cash
$
4.2

 
$
4.2

 
$

 
$

Money market funds
58.4

 
58.4

 

 

U.S. government securities and other
151.0

 
150.8

 
0.2

 

Total restricted investments
$
213.6

 
$
213.4

 
$
0.2

 
$

 
 
 
 
 
 
 
 

Assets and liabilities measured at fair value on a recurring basis at December 31, 2016 are as follows:

 
 
 
Fair Value Measurements Using
 
Carrying Value
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Investments:
 
 
 
 
 
 
 
Asset backed securities
$
3.3

 
$

 
$
3.3

 
$

Corporate debt securities
67.2

 

 
67.2

 

Municipal securities
52.3

 

 
39.9

 
12.4

Government and agency obligations
1.0

 
1.0

 

 

Other securities
57.7

 
57.7

 

 

Total Investments
$
181.5

 
$
58.7

 
$
110.4

 
$
12.4

Restricted investments:
 

 
 

 
 

 
 

Cash
$
92.1

 
$
92.1

 
$

 
$

Money market funds
67.8

 
67.8

 

 

U.S. government securities and other
74.4

 
74.2

 
0.2

 

Total restricted investments
$
234.3

 
$
234.1

 
$
0.2

 
$

 
 
 
 
 
 
 
 
 

22



The following table presents the carrying value and fair value of our long-term debt (including our current portion of long-term debt) outstanding as of September 30, 2017 and December 31, 2016:

 
 
 
Fair Value Measurements Using
 
Carrying Value
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Long-term debt - September 30, 2017
$
1,181.6

 
$
1,267.2

 
$

 
$

Long-term debt - December 31, 2016
997.6

 
927.0

 
96.2

 


The fair values of our 2025 and 2020 Notes were determined based on quoted market prices; therefore, would be classified within Level 1 of the fair value hierarchy. The fair value of obligations outstanding under our Revolving Credit Facility, as of December 31, 2016, was determined based on a discounted cash flow analysis, utilizing current rates estimated to be available to us for debt of similar terms and remaining maturities; therefore, would be classified within Level 2 of the fair value hierarchy. There were no borrowings outstanding under our Revolving Credit Facility as of September 30, 2017.
 
The following table presents the changes in the fair value of our Level 3 auction rate securities for the three and nine months ended September 30, 2017 and 2016.

 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Balance at beginning of period
$
12.3

 
$
30.6

 
$
12.4

 
$
31.7

Realized gains (losses) in earnings

 

 

 

Unrealized gains (losses) in other comprehensive income

 
0.5

 

 
(0.6
)
Purchases, sales and redemptions

 
(0.1
)
 
(0.1
)
 
(0.1
)
Net transfers in or (out) of Level 3

 

 

 

Balance at end of period
$
12.3

 
$
31.0

 
$
12.3

 
$
31.0

 
 
 
 
 
 
 
 



23



11. MEDICAL BENEFITS PAYABLE

A reconciliation of the beginning and ending balances of medical benefits payable, by segment, is as follows:
 
 
Medicaid Health Plans
 
Medicare Health Plans
 
Medicare PDPs
 
Consolidated
 
 
For the nine months ended September 30,
 
 
2017
2016
 
2017
2016
 
2017
2016
 
2017
2016
Beginning balance
 
$
1,135.8

$
1,040.2

 
$
510.0

$
473.9

 
$
44.7

$
21.9

 
$
1,690.5

$
1,536.0

Acquisitions
 


 
128.1


 


 
128.1


Medical benefits incurred related to:
 
 
 
 
 
 
 
 
 
 
 
 
Current year
 
7,229.9

6,316.9

 
3,397.4

2,510.0

 
662.7

525.3

 
11,290.0

9,352.2

Prior years
 
(190.7
)
(192.1
)
 
(96.0
)
(51.8
)
 
(65.0
)
(17.3
)
 
(351.7
)
(261.2
)
Total
 
7,039.2

6,124.8

 
3,301.4

2,458.2

 
597.7

508.0

 
10,938.3

9,091.0

Medical benefits paid related to:
 
 
 
 
 
 
 
 
 
 
 
 
Current year
 
(6,104.3
)
(5,378.3
)
 
(2,905.4
)
(2,097.5
)
 
(633.7
)
(500.0
)
 
(9,643.4
)
(7,975.8
)
Prior years
 
(749.6
)
(685.0
)
 
(308.6
)
(337.2
)
 
21.5

(3.5
)
 
(1,036.7
)
(1,025.7
)
Total
 
(6,853.9
)
(6,063.3
)
 
(3,214.0
)
(2,434.7
)
 
(612.2
)
(503.5
)
 
(10,680.1
)
(9,001.5
)
Ending balance
 
$
1,321.1

$
1,101.7

 
$
725.5

$
497.4

 
$
30.2

$
26.4

 
$
2,076.8

$
1,625.5

 
 
 
 
 
 
 
 
 
 
 
 
 

We recognize the cost of medical benefits in the period in which services are provided, including an estimate of the cost of medical benefits incurred but not reported ("IBNR"). At September 30, 2017, consolidated IBNR plus expected development on reported claims was $1.5 billion, primarily related to the current year. Medical benefits expense includes direct medical expenses and certain medically-related administrative costs. We evaluate our estimates of medical benefits payable as we obtain more complete claims information and medical expense trend data over time. We record differences between actual experience and estimates used to establish the liability, which we refer to as favorable and unfavorable prior year reserve developments, as increases or decreases to medical benefits expense in the period we identify the differences.

Our consolidated medical benefits payable developed favorably by approximately $351.7 million and $261.2 million for the nine months ended September 30, 2017 and 2016, respectively. The release of the provision for moderately adverse conditions included in our prior year estimates was substantially offset by the provision for moderately adverse conditions established for claims incurred in the current year. Accordingly, the favorable development in our estimate of medical benefits payable related to claims incurred in prior years does not directly correspond to a decrease in medical benefits expense recognized during the period in which the favorable development is recognized.

Excluding the prior year development related to the release of the provision for moderately adverse conditions, our estimates of consolidated medical benefits payable developed favorably by approximately $205.0 million and $140.5 million for the nine months ended September 30, 2017 and 2016, respectively. Such amounts are net of the development relating to refunds due to government customers with minimum loss ratio provisions. The net favorable development is primarily due to lower than expected medical benefits trends as well as the actual claim submission time being faster than we originally assumed (i.e., our completion factors were higher than we originally assumed) in establishing our medical benefits payable in the prior year. This development does not directly correspond to an increase in our current year operating results as these reductions were offset by estimated current period medical benefits expense when we established our estimate of the current year medical benefits payable.

Our Universal American acquisition in April 2017 resulted in an increase to medical benefits payable as of the Effective Date of $128.1 million. See Note 2- Acquisitions, for additional information on the Universal American acquisition.


24



12. INCOME TAXES

Our effective income tax rate was 27.0% and 30.9% for the three and nine months ended September 30, 2017, respectively, and 55.1% and 56.0% for the three and nine months ended September 30, 2016, respectively. The decline in our effective rate was primarily driven by the one-year moratorium on the non-deductible ACA industry fee for 2017, higher excess tax benefits resulting from the settlement of stock-compensation awards in 2017 and the favorable effect of the recognition of certain previously unrecognized tax benefits during the three and nine months ended September 30, 2017, discussed below.

In September 2014, the IRS issued final regulations on the ACA's $0.5 million limit on the deduction for compensation for health insurance providers under Internal Revenue Code ("IRC") section 162(m)(6). We recorded incremental tax expense based upon the more-likely-than-not outcomes of uncertain tax positions. This resulted in a cumulative liability for unrecognized tax benefits amounting to $22.2 million at December 31, 2016.

During April 2017, the IRS completed its audit of our 2015 consolidated income tax return, which effectively settled the 2015 tax year. In August 2017, the IRS approved our prior year refund claim with respect to this IRC 162(m)(6) uncertain tax position. Based on our ongoing assessments of more-likely-than-not outcomes, this position was effectively settled for all years. The effect of the settlement regarding the current and prior year positions was recognized as a reduction of income tax expense in our Condensed Consolidated Statements of Comprehensive Income in the amount of $23.7 million and $27.3 million for the three and nine months ended September 30, 2017, respectively.

13. DISCONTINUED OPERATIONS

On August 3, 2016, our subsidiary, Universal American, completed the sale of its Traditional Insurance business prior to our acquisition of Universal American. This was accomplished by selling two life insurance subsidiaries, while retaining ownership of a third life insurance subsidiary, American Progressive Life & Health Insurance of New York ("Progressive"). The sale of the Traditional Insurance business underwritten by Progressive was accomplished through a 100% quota-share reinsurance treaty with a wholly-owned subsidiary of Nassau Re, that, when considered in combination with other reinsurance transactions previously entered into, resulted in the reinsurance of all of the Traditional Insurance policies that were underwritten by Progressive. Accordingly, the discontinued Traditional Insurance business did not materially affect our Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017.

In accordance with ASC 360-10, Property, Plant and Equipment and ASC 205-20, Presentation of Financial Statements—Discontinued Operations, the Traditional Insurance business has been reported in discontinued operations in this Form 10-Q for the quarterly period ended September 30, 2017.

The following table summarizes the total assets and liabilities of our discontinued operations:
 
 
 
 
 
 
 
September 30, 2017
 
April 28, 2017
 
 
(in millions)
Assets
 
 
 
 
Cash and cash equivalents
 
$
1.0

 
$
0.8

Investments
 
46.1

 
47.7

Reinsurance recoverables
 
168.8

 
170.4

Other assets
 
0.7

 
0.7

Total Assets
<