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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, 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: 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 29, 2018, there were 49,991,867 shares of the registrant's common stock, par value $0.01 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, 2018 and 2017 (unaudited)
 
Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 (unaudited)
 
Condensed Consolidated Statements of Changes in Stockholders' Equity for the nine months ended
September 30, 2018 and 2017 (unaudited)
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and
2017 (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,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Premium
4,988.8

 
4,390.9

 
14,227.7

 
12,631.5

Products and services
34.6

 

 
34.6

 

Investment and other income
34.7

 
12.0

 
81.0

 
30.6

Total revenues
5,058.1

 
4,402.9

 
14,343.3

 
12,662.1

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Medical benefits
4,195.0

 
3,740.7

 
12,023.0

 
10,938.3

Costs of products and services
33.5

 

 
33.5

 

Selling, general and administrative
433.2

 
372.3

 
1,167.0

 
1,040.2

ACA industry fee
86.5

 

 
247.0

 

Medicaid premium taxes
31.5

 
29.5

 
94.2

 
90.6

Depreciation and amortization
46.2

 
31.4

 
117.1

 
84.6

Interest
23.6

 
17.1

 
57.8

 
51.4

Total expenses
4,849.5

 
4,191.0

 
13,739.6

 
12,205.1

Income from operations
208.6

 
211.9

 
603.7

 
457.0

Loss on extinguishment of debt

 

 

 
26.1

Income before income taxes and equity in losses of unconsolidated subsidiaries
208.6

 
211.9

 
603.7

 
430.9

Equity in earnings (losses) of unconsolidated subsidiaries
6.6

 
23.2

 
(0.1
)
 
22.1

Income before income taxes
215.2

 
235.1

 
603.6

 
453.0

Income tax expense
84.6

 
63.5

 
219.7

 
140.0

Net income
$
130.6

 
$
171.6

 
$
383.9

 
$
313.0

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in net unrealized gains and losses on
available-for-sale securities, before tax
(1.1
)
 
0.4

 
(11.4
)
 
1.7

Income tax expense (benefit) related to other
comprehensive income
(0.3
)
 
0.2

 
(2.7
)
 
0.6

Other comprehensive (loss) income, net of tax
(0.8
)
 
0.2

 
(8.7
)
 
1.1

Comprehensive income
$
129.8

 
$
171.8

 
$
375.2

 
$
314.1

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
2.74

 
$
3.86

 
$
8.40

 
$
7.04

Diluted
$
2.70

 
$
3.82

 
$
8.29

 
$
6.97

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
       Basic
47,712,712

 
44,509,692

 
45,692,804

 
44,458,096

       Diluted
48,384,427

 
44,969,033

 
46,287,616

 
44,909,916


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,
2018
 
December 31,
2017
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
4,306.6

 
$
4,198.6

Short-term investments
1,034.4

 
469.5

Premiums receivable, net
969.6

 
453.4

Pharmacy rebates receivable, net
494.6

 
335.0

Funds receivable for the benefit of members
268.1

 
27.5

Prepaid expenses and other current assets, net
608.9

 
335.2

Total current assets
7,682.2

 
5,819.2

 
 
 
 
Property, equipment and capitalized software, net
384.1

 
319.5

Goodwill
1,753.5

 
660.7

Other intangible assets, net
1,326.6

 
367.9

Long-term investments
844.4

 
766.2

Restricted cash, cash equivalents and investments
234.8

 
211.0

Other assets
17.8

 
4.9

Assets of discontinued operations
215.1

 
215.2

Total Assets
$
12,458.5

 
$
8,364.6

 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

Current Liabilities:
 

 
 

Medical benefits payable
$
2,901.4

 
$
2,146.3

Unearned premiums
20.8

 
65.9

Accounts payable and accrued expenses
868.8

 
788.1

Funds payable for the benefit of members
1,569.2

 
1,075.9

Other payables to government partners
444.2

 
367.0

Total current liabilities
5,804.4

 
4,443.2

 
 
 
 
Deferred income tax liability, net
117.2

 
93.4

Long-term debt, net
2,125.4

 
1,182.4

Other liabilities
34.0

 
13.7

Liabilities of discontinued operations
215.1

 
215.2

Total Liabilities
8,296.1

 
5,947.9

Commitments and contingencies (see Note 13)

 

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, 49,979,666 and 44,522,988 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively)
0.5

 
0.4

Paid-in capital
1,961.9

 
591.5

Retained earnings
2,211.4

 
1,827.5

Accumulated other comprehensive loss
(11.4
)
 
(2.7
)
Total Stockholders' Equity
4,162.4

 
2,416.7

Total Liabilities and Stockholders' Equity
$
12,458.5

 
$
8,364.6

See notes to unaudited condensed consolidated financial statements.

3



WELLCARE HEALTH PLANS, INC.
CONDENSED CONSOLIDATED STATEMENTS 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, 2018
44,522,988

 
$
0.4

 
$
591.5

 
$
1,827.5

 
$
(2.7
)
 
$
2,416.7

Issuance of common stock, net of issuance costs
5,207,547

 
0.1

 
1,342.2

 

 

 
1,342.3

Common stock issued for vested
stock-based compensation awards
356,491

 

 

 

 

 

Repurchase and retirement of shares to
satisfy tax withholding requirements
(107,360
)
 

 
(23.3
)
 

 

 
(23.3
)
Stock-based compensation expense, net
of forfeitures

 

 
51.5

 

 

 
51.5

Comprehensive income

 

 

 
383.9

 
(8.7
)
 
375.2

Balance at September 30, 2018
49,979,666

 
$
0.5

 
$
1,961.9

 
$
2,211.4


$
(11.4
)
 
$
4,162.4

 

 

 

 

 

 

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


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,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
383.9

 
$
313.0

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

 
 

Depreciation and amortization
117.1

 
84.6

Loss on extinguishment of debt

 
26.1

Stock-based compensation expense
51.5

 
32.8

Deferred taxes, net
(9.8
)
 
(39.0
)
Other, net
13.1

 
13.4

Changes in operating accounts, net of effects from acquisitions:
 

 
 

Premiums receivable, net
(144.1
)
 
58.4

Pharmacy rebates receivable, net
(138.7
)
 
(52.7
)
Medical benefits payable
227.1

 
258.8

Unearned premiums
(74.7
)
 
574.4

Other payables to government partners
64.8

 
36.6

Accrued liabilities and other, net
(292.2
)
 
(60.9
)
Net cash provided by operating activities
198.0

 
1,245.5

 
 
 
 
Cash flows from investing activities:
 

 
 

Acquisitions and acquisition-related settlements, net of cash acquired
(2,035.7
)
 
(728.5
)
Purchases of investments
(1,322.6
)
 
(1,062.2
)
Proceeds from sales and maturities of investments
822.8

 
324.1

Additions to property, equipment and capitalized software, net
(87.5
)
 
(92.6
)
Net cash used in investing activities
(2,623.0
)
 
(1,559.2
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from issuance of debt, net of financing costs paid
739.0

 
1,182.2

Borrowings on Revolving Credit Facility, net of financing costs paid
221.3

 

Payments on debt
(25.0
)
 
(1,026.1
)
Proceeds from issuance of common stock, net of issuance fees paid
1,342.3



Repurchase and retirement of shares to satisfy employee tax withholding requirements
(23.3
)
 
(13.6
)
Funds received for the benefit of members, net
250.8

 
978.0

Other, net
29.5

 
13.4

Net cash provided by financing activities
2,534.6

 
1,133.9

 
 
 
 
Increase in cash, cash equivalents and restricted cash and cash equivalents
109.6

 
820.2

Balance at beginning of period (1)
4,263.0

 
4,121.3

Balance at end of period (1)
$
4,372.6

 
$
4,941.5

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

  Cash paid for taxes, net of refunds
$
174.6

 
$
149.5

  Cash paid for interest
$
65.5

 
$
56.3

SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
 

 
 

Non-cash additions to property, equipment, and capitalized software
$
3.7

 
$
11.3



5



(1) Beginning and ending cash, cash equivalents and restricted cash and cash equivalents balances have been retrospectively adjusted to reflect the adoption of ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash" effective January 1, 2018. See Note 1 - Organization, Basis of Presentation and Significant Accounting Policies for further discussion.

See notes to unaudited condensed consolidated financial statements.

6



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 primarily on providing government-sponsored managed care services to families, children, seniors and individuals with complex medical needs primarily through Medicaid, Medicare Advantage ("MA") and Medicare Prescription Drug Plans ("PDP"), as well as individuals in the Health Insurance Marketplace. As of September 30, 2018, we served approximately 5.5 million members nationwide. We estimate that we are among the largest managed care organizations providing Medicaid managed care services plans, MA Plans and PDPs, as measured by membership. Our broad range of experience and government focus allows us to effectively serve our members, partner with our providers, government clients and communities we serve, and efficiently manage our ongoing operations.

As of September 30, 2018, we operated Medicaid health plans, including states where we receive Medicaid premium revenues associated with dually eligible special needs plans, in Arizona, Florida, Georgia, Hawaii, Illinois, Kentucky, Michigan, Missouri, Nebraska, New Jersey, New York, South Carolina and Texas.

In addition, as of September 30, 2018, we also operated MA coordinated care plans ("CCPs") in Arizona, Arkansas, California, Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Maine, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, South Carolina, Tennessee and Texas. We also offered stand-alone Medicare PDPs in 50 states and the District of Columbia.

In September 2018, we completed the acquisition of Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc., and MeridianRx, a pharmacy benefit manager ("PBM") (collectively, “Meridian”). As a result of the acquisition, we expanded our Medicaid portfolio through the addition of Michigan, where Meridian has the leading market position; expanded our Medicaid presence in Illinois; and acquired an integrated PBM platform. Meridian also serves MA members in Illinois, Indiana, Michigan, and Ohio, as well as Health Insurance Marketplace members in Michigan.

Basis of Presentation

The accompanying unaudited condensed consolidated balance sheets and statements of comprehensive income, changes in stockholder's 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, 2017, included in our Annual Report on Form 10-K ("2017 Form 10-K"), which was filed with the U.S. Securities and Exchange Commission ("SEC") in February 2018. 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 unaudited condensed consolidated 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 2017 financial information to conform to the 2018 presentation.


7


As previously discussed, we acquired an integrated PBM platform in connection with the Meridian acquisition. The external revenues and costs for our PBM business are reported within "Products and Services" and "Cost of Products and Services", respectively, on the statements of comprehensive income. Products and services revenues from our PBM consist of the prescription price (ingredient cost plus dispensing fee) negotiated with the retail pharmacies with which we have contracted, plus any associated administrative fees. This revenue is recognized when the claim is processed. We have the contractual obligation to pay network pharmacies for benefits provided to participating members and, therefore, act as principal in the arrangement and reflect the total prescription price as revenue, on a gross basis, in accordance with applicable accounting guidance. Costs of products and services is recognized at the time prescriptions are dispensed by pharmacies in the PBM's network to eligible members and consists primarily of ingredient costs and dispensing fees paid to retail pharmacies with which we have contracted. The overall results of our PBM business are immaterial.

Unconsolidated Subsidiaries

In April 2017, 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 are 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 that are 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; therefore, we cannot consolidate their results. We perform an ongoing qualitative assessment of 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 immaterial and are reported on the face of our condensed consolidated statements of comprehensive income as equity in earnings (losses) of unconsolidated subsidiaries.
Significant Accounting Policies
Below is a discussion of our significant accounting policies, which affected the comparability of our consolidated results of operations, financial condition or cash flows for the periods presented. Refer to Note 2 - Summary of Significant Accounting Policies to the Consolidated Financial Statements included in our 2017 Form 10-K for a complete discussion of all of our significant accounting policies.
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 our 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 2017 Form 10-K. The premium receivable balance at September 30, 2018 is primarily related to Medicaid contracts with our state partners of approximately $771.8 million, as well as net risk-adjusted premiums receivable under our MA and PDP contracts of approximately $181.3 million.
Medicaid Risk-Adjusted Premiums and Retroactive Rate Changes

As discussed further in Note 2 - Summary of Significant Accounting Policies to the Consolidated Financial Statements included in our 2017 Form 10-K, Medicaid premium rate changes are recognized in the period the change becomes effective, when the effect of the change in the rate is reasonably estimable and collection is assured. In some instances, our Medicaid premiums are subject to risk score adjustments based on the health profile of our membership. Generally, the risk score is determined by the state agency's analysis of encounter submissions of processed claims data to determine the acuity of our membership relative to the entire state's Medicaid membership. The frequency of when states adjust premiums varies, but is usually done quarterly or semi-annually on a retrospective basis. We recognize periodic changes to risk-adjusted premiums as revenue when the amounts are determinable and collection is reasonably assured. As of September 30, 2018, our condensed consolidated balance sheet included a net receivable from our Medicaid state partners of $17.9 million related to retroactive rate

8


changes and risk score adjustments, compared with a net payable to our Medicaid state partners of $50.7 million as of December 31, 2017.
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 2017 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 typically 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, 2018, our condensed consolidated balance sheet includes CMS Part D payables for the 2018, 2017 and 2016 plan years, and a net receivable relating to the 2015 plan year. As of December 31, 2017, our condensed consolidated balance sheet included CMS Part D payables primarily related to the 2017 and 2016 plan years, as well as a net receivable relating to the 2015 plan year. The 2017 net payable is expected to be settled during the fourth quarter of 2018.
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, which also eliminated the associated Medicaid ACA industry fee reimbursements from our state government partners for 2017. Accordingly, we did not incur ACA industry fee expense nor recognize any Medicaid ACA industry fee reimbursement revenue for the three and nine months ended September 30, 2017. During September 2018, we remitted a total of $388.5 million to the Internal Revenue Service ("IRS") for our portion of the ACA Industry fee assessed for 2018, including $66.5 million remitted for the recently acquired Meridian business. We incurred $86.5 million and $247.0 million of such amortization as ACA industry fee expense for the three and nine months ended September 30, 2018, respectively. Additionally, we recognized $71.5 million and $199.0 million of Medicaid ACA industry fee reimbursement revenue for the three and nine months ended September 30, 2018, respectively.
While the ACA industry fee is being assessed in 2018, the continuing spending resolution passed into law in January 2018 provides for an additional one-year moratorium for the ACA industry fee in 2019.

Recently Adopted Accounting Standards
In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. We adopted this guidance prospectively on January 1, 2018. The adoption of this guidance did not have a material effect on our consolidated results of operations, financial condition or cash flows for the three and nine months ended September 30, 2018.
In January 2017, the FASB issued 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, 2018. The adoption of this guidance did not have a material effect on our consolidated results of operations, financial condition or cash flows for the three and nine months ended September 30, 2018.
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

9


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. We adopted this guidance prospectively on January 1, 2018. The adoption of this guidance did not have a material effect on our consolidated results of operations, financial condition or cash flows for the three and nine months ended September 30, 2018.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) Restricted Cash; a consensus of the FASB Emerging Issues Task Force”. This update requires entities to reconcile, on the statement of cash flows, changes in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. We adopted this guidance retrospectively on January 1, 2018. The adoption of this guidance did not have a material effect on our consolidated results of operations, financial condition or cash flows for the three and nine months ended September 30, 2018 and 2017, respectively. The following table provides a reconciliation of cash, cash equivalents and restricted cash and cash equivalents as reported within the condensed consolidated balance sheets to the total of the same such amounts shown within the condensed consolidated statements of cash flows:
 
As of
 
September 30, 2018
 
December 31, 2017
 
Cash and cash equivalents
$
4,306.6

 
$
4,198.6

 
Restricted cash and cash equivalents (1)
66.0

 
64.4

 
Total cash, cash equivalents, and restricted cash and cash equivalents
$
4,372.6

 
$
4,263.0

 
 
 
 
 
 
 
 
 
 
 
(1) Restricted cash and cash equivalents consist of restricted cash and restricted money market funds and are included in Restricted cash, cash equivalents and investments within noncurrent assets of our condensed consolidated balance sheets. Refer to Note 6 - Restricted Cash, Cash Equivalents and Investments for further detail.

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 certain 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 adopted this guidance on January 1, 2018. The adoption of this guidance did not have a material effect on our consolidated results of operations, financial condition or cash flows for the three and nine months ended September 30, 2018.

In January 2016, the FASB issued ASU 2016-01, "Financial Instrument - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01 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. In February 2018, the FASB issued ASU 2018-03, "Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which clarifies that an entity that uses the measurement alternative for equity securities without readily determinable fair values can change its measurement approach to fair value. This guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We adopted this guidance prospectively on January 1, 2018. The adoption of this guidance did not have a material effect on our consolidated results of operations, financial condition or cash flows for the three and nine months ended September 30, 2018.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)". ASU 2014-09 supersedes 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 requires that an entity 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 are required. We adopted this guidance on January 1, 2018 using the modified retrospective approach. 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, the adoption of this guidance did not have a material effect on

10


our consolidated results of operations, financial condition or cash flows for the three and nine months ended September 30, 2018.

Accounting Standards Pending Adoption

In August 2018, the FASB issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract", which requires implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the noncancellable term of the cloud computing arrangements plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. The guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted. We are currently assessing the effect this guidance will have on our consolidated results of operations, financial condition or cash flows.
In February 2018, the FASB issued ASU 2018-02 "Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income", which allows entities to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 from accumulated other comprehensive income to retained earnings. The 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 results of operations, financial condition or cash flows.

In March 2017, the FASB issued ASU 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 results of operations, financial condition or cash flows.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," 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 results of operations, financial condition or cash flows.

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. Additionally, in July 2018, the FASB issued ASU No. 2018-10, "Codification Improvements to Topic 842, Leases" and ASU 2018-11, "Leases (Topic 842), Targeted Improvements". ASU 2018-10 provides certain amendments that affect narrow aspects of the guidance issued in ASU 2016-02. ASU 2018-11 provides an additional transition method option to adopt the new lease standard. Under the new transition method, a lessee would initially apply the new lease requirements in the period of adoption and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption. 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 plan to elect the practical expedients permitted within the new standard, which among other things, allows us to carryforward the historical lease classification. In addition, we will also elect the new transition method and apply the new lease requirements in the period of adoption without adjustment to the financial statement for periods prior to adoption. We do not expect the adoption of this guidance to have a material effect on our consolidated results of operations or cash flows. The effect of ASU 2016-02 and related amendments on our consolidated financial position will be based on leases outstanding at the time of adoption.





11


2. ACQUISITIONS

Meridian Acquisition

On September 1, 2018 (the "Effective Date"), we acquired Meridian for an estimated purchase price of approximately  $2.5 billion in cash, subject to certain purchase price adjustments, as described in the purchase agreement. The Meridian acquisition was funded through a combination of cash on hand, $225.0 million drawn on our revolving credit facility, net proceeds of $739.0 million from the August 2018 issuance of $750.0 million aggregate principal amount of 5.375% of Senior Notes due 2026 ("2026 Notes") and net proceeds of approximately $1.3 billion from an issuance of 5,207,547 shares of our common stock (after deducting underwriting discounts, commissions and offering expenses of approximately $37.7 million).

As a result of the Meridian acquisition, we expanded our Medicaid portfolio through the addition of Michigan, where Meridian has the leading market position; expanded our Medicaid presence in Illinois; and acquired an integrated PBM platform. Meridian also serves MA members in Illinois, Indiana, Michigan, and Ohio, as well as Health Insurance Marketplace members in Michigan.
The following table summarizes the estimated fair values of major classes of assets acquired and liabilities assumed at the Effective Date, based on our valuation assumptions, reconciled to the total consideration transferred.
Assets
(in millions)
Cash, cash equivalents and restricted cash
$
484.4

Investments, including restricted investments
180.4

Premiums receivable, net
379.6

Other current assets
196.5

Property, equipment and capitalized software, net
49.3

Goodwill
1,086.5

Other intangible assets, net
1,000.0

     Fair value of total assets acquired
$
3,376.7

 
 
Liabilities
 
Medical benefits payable
$
528.0

ACA Fee liability
66.5

Other liabilities
262.1

     Fair value of liabilities assumed
856.6

     Fair value of net assets acquired
$
2,520.1

 
 
The fair value results from judgments about future events, which reflect certain uncertainties and rely on estimates and assumptions. The judgments used to determine the fair value assigned to each class of assets acquired and liabilities assumed, as well as intangible asset lives, can materially affect our operating results. As of the Effective Date, the expected fair value of all current assets and liabilities approximated their historical cost. We have not yet completed our evaluation and determination of certain assets acquired and liabilities assumed, primarily (i) the final valuation of intangible assets related to memberships and trade names, (ii) the final assessment and valuation of certain other assets acquired and liabilities assumed, including premiums receivable, property, equipment and capitalized software, medical benefits payable and other liabilities and (iii) the final assessment and valuation of certain income tax amounts. Therefore, the final fair values of the assets acquired and liabilities assumed may vary significantly from our preliminary estimates.

Identifiable intangible assets acquired

Under the Hart-Scott-Rodino Antitrust Improvements Act and other relevant laws and regulations, there were significant limitations on our ability to obtain specific information about Meridian's intangible assets prior to completion of the acquisition in September 2018. At this time, we do not have sufficient information as to the amount, timing and risk of cash flows of all of Meridian's identifiable intangible assets to determine their fair value. Some of the more significant assumptions inherent in the development of intangible asset values, from the perspective of a market participant, include: the amount and timing of

12


projected future cash flows (including revenue and profitability); the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset.

Therefore, using publicly available information, such as historical revenues, Meridian's cost structure, industry information for comparable intangible assets and certain other high-level assumptions, the estimated fair value of identifiable intangible assets and their weighted-average useful lives have been estimated at $1.0 billion and 11 years, respectively. These preliminary estimates of fair value and weighted-average useful life may be different from the final acquisition accounting, and the difference could have a material impact on the condensed consolidated financial statements.

The identifiable intangible assets resulting from our acquisitions typically include membership, provider networks, broker networks, trademarks, state contracts, and licenses. The fair value of certain identifiable intangible assets is determined primarily using variations of the “income approach,” which is based on the present value of the future after-tax cash flows attributable to each identified intangible asset. Other valuation methods, including the market approach and cost approach, are also considered in estimating the fair value. We amortize other intangible assets over their estimated useful lives ranging from approximately one to 15 years. The recorded other intangible assets related to the acquisition are not deductible for tax purposes.

We recorded $1.1 billion for the valuation of goodwill for the excess of the purchase price over the estimated fair value of the net assets acquired. The assignment of goodwill to our respective segments has not been completed at this time. The recorded goodwill related to the acquisition is deductible for tax purposes.

The Meridian acquisition included taxable and nontaxable components resulting in differences in amounts recognized for GAAP and tax purposes. In both taxable and nontaxable business combinations, the amounts assigned to the individual assets acquired and liabilities assumed for financial statement purposes are often different from the amounts assigned or carried forward for tax purposes. We recorded a $38.1 million deferred tax liability based on the estimated bases differences of $156.0 million.

Condensed Consolidated Statements of Comprehensive Income

We included the results of Meridian's operations since the Effective Date in our condensed consolidated financial statements. The amount of total revenues attributable to Meridian included in our condensed consolidated statement of comprehensive income for the three and nine months ended September 30, 2018 was $416.4 million. Total pre-tax net losses in our condensed consolidated statement of comprehensive income for the three and nine months ended September 30, 2018 was $15.2 million and $23.7 million, respectively, including transaction and integration-related costs discussed below.

We incurred transaction and integration-related costs of $12.5 million and $21.0 million during the three and nine months ended September 30, 2018, respectively, related to the acquisition of Meridian. 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 statement of comprehensive income.

Universal American Acquisition

On April 28, 2017, we acquired all of the issued and outstanding shares of Universal American. The transaction was 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.


13


The fair value 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. Refer to Note 3 - Acquisitions to the consolidated financial statements included in our 2017 Form 10-K for further discussion of the repurchase of the Convertible Notes.
 
(b) 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. Refer to Note 3 - Acquisitions to the consolidated financial statements included in our 2017 Form 10-K 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 April 28, 2017 converted to the right to receive cash. We estimated the fair value of these awards on April 28, 2017 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.

The final allocation of the purchase price to assets acquired and liabilities assumed at the acquisition date included total tangible net assets of $189.8 million, primarily comprised of cash and cash equivalents, investments, premiums receivable and medical benefits payable.

In addition, we recorded $298.2 million for the final valuation of identified intangible assets, primarily associated with acquired membership, tradenames and Universal American's provider networks. 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 expected pattern of economic consumption over their estimated useful lives. The weighted average amortization period for these intangible assets is 10.5 years.

We recorded $282.0 million for the 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.

Condensed Consolidated Statement of Comprehensive Income

We included the results of Universal American's operations after the acquisition in our condensed consolidated financial statements. The amount of premium revenue attributable to Universal American included in our condensed consolidated statement of comprehensive income, for the three and nine months ended September 30, 2018, was $378.6 million and $1.2 billion, respectively. Additionally, our condensed consolidated statement of comprehensive income for the three and nine months ended September 30, 2018 included pretax income of $21.8 million and $53.5 million, respectively, attributable to Universal American's operations, which includes transaction and integration-related costs of $0.6 million and $4.5 million, respectively, related to the ongoing integration of the operations. These costs include severance payments, and advisory, legal and other professional fees that are reflected in SG&A expense in our condensed consolidated statement of comprehensive income.

14



During the three and nine months ended September 30, 2017, the amount of revenue attributable to Universal American included in our condensed consolidated statements of comprehensive income was $355.4 million and $590.5 million, respectively. Pretax net income (loss) attributable to Universal American included in our condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2017 was $23.9 million and $(7.8) million, respectively. These results include transaction and integration-related costs of approximately $6.6 million and $33.3 million incurred during the three and nine months ended September 30, 2017, respectively. These costs include severance payments, and advisory, legal and other professional fees that are reflected in SG&A expense in our condensed consolidated statement of comprehensive income.

Goodwill

A summary of changes in our goodwill by reportable segment is as follows for the nine months ended September 30, 2018:

 
Medicaid Health Plans
 
Medicare Health Plans
 
Not assigned(1)
 
Total
Balance as of December 31, 2017
$
274.7

 
$
386.0

 
$

 
$
660.7

Acquisitions(1) 

 

 
1,086.5

 
1,086.5

Acquisition related adjustments

 
6.3

 

 
6.3

Balance as of September 30, 2018 (1)
$
274.7

 
$
392.3

 
$
1,086.5

 
$
1,753.5

 
 
 
 
 
 
 
 
(1) Goodwill related to our September 1, 2018 Meridian acquisition is considered preliminary, pending the final allocation of the applicable purchase price. The assignment of goodwill to our respective segments has not been completed at this time.

Unaudited Pro Forma Financial Information

The results of operations and financial condition for our 2018 and 2017 acquisitions have been included in our condensed consolidated financial statements since the respective acquisition dates. The unaudited pro forma financial information presented below reflects our 2018 acquisition of Meridian and 2017 acquisitions, including Universal American, assuming the acquisitions occurred as of January 1, 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, 2017, or project the future results of the combined company.
 
 
Pro Forma - Unaudited
 
 
Three Months ended
September 30,
 
Nine Months Ended
September 30,
(in millions, except per share data)
 
2018
 
2017
 
2018
 
2017
Total revenues
 
$
5,869.8

 
$
5,284.6

 
$
17,337.8

 
$
15,399.8

Net income
 
$
106.9

 
$
164.2

 
$
355.2

 
$
305.8

 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
   Basic
 
$
2.14

 
$
3.30

 
$
7.12

 
$
6.16

   Diluted
 
$
2.11

 
$
3.27

 
$
7.03

 
$
6.10

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
       Basic
 
49,976,863

 
49,717,239

 
49,949,219

 
47,665,643

       Diluted
 
50,648,578

 
50,176,580

 
50,514,031

 
50,117,463

 
 
 
 
 
 
 
 
 


15


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 obligations and addition of interest expense based on debt incurred to finance the Meridian transaction;
Elimination of results for Meridian operations not acquired;
Elimination of transaction and integration-related costs;
Elimination of Universal American discontinued operations;
Include 5,207,547 shares of our common stock issued to finance the Meridian transaction;
Adjustments to align the acquisitions to our accounting policies; and
Tax effects of the adjustments noted above.

Pending Acquisition

In September 2018, we entered into an asset purchase agreement with Aetna Inc. ("Aetna") to acquire Aetna's entire standalone Medicare Part D prescription drug plan business ("Aetna Part D business"), which Aetna plans to divest as part of CVS Health Corporation's proposed acquisition of Aetna ("CVS Health Transaction"). The closing of the acquisition is subject to the closing of the CVS Health Transaction and other customary closing conditions. The Aetna Part D business had an aggregate of approximately 2.2 million members as of June 30, 2018. Per the terms of the agreements, Aetna will provide administrative services to, and retain financial risk of, the Aetna Part D business through 2019.


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. In addition, the Corporate and Other category includes businesses that are not individually reportable because they do not meet the quantitative thresholds required by generally accepted accounting principles.

We allocate premium revenue, medical benefits expense, Medicaid premium taxes, the ACA industry fee incurred in 2018 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.

Our Corporate and Other category includes net investment and other income, SG&A expenses, depreciation, amortization and interest. Also included in this category are results for operating segments that are not individually reportable because they do not meet the quantitative thresholds required by generally accepted accounting principles.

16




  
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 Kentucky and Florida 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,
 
2018
 
2017
 
2018
 
2017
Kentucky
13%
 
15%
 
14%
 
15%
Florida
13%
 
15%
 
13%
 
15%

In July 2018, we received a Notice of Intent to Award a five-year contract from the Florida Department of Health to provide statewide-managed care services to more than 60,000 children with medically complex conditions through the Children's Medical Services Managed Care Plan ("CMS Plan") intended to begin on January 1, 2019. Additionally, in April 2018, we received a Notice of Agency Decision from the Florida Agency for Health Care Administration (“AHCA”) that it intends to award our subsidiary, Staywell, a new five-year contract to provide managed care services to Medicaid-eligible beneficiaries, including Managed Medical Assistance and Long-Term Care beneficiaries in 10 of 11 regions. As part of the Medicaid Managed Care program, we expect to provide statewide managed care services to beneficiaries in the Serious Mental Illness Specialty Plan, which currently has more than 75,000 beneficiaries statewide. The new statewide Medicaid Managed Care program is expected to begin implementation on December 1, 2018. These contract awards are subject to the outcome of a protest and appeal process.

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.

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.





17



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 from operations is presented in the table below.

 
Medicaid Health Plan
Medicare Health Plan
Medicare PDP
Corporate & Other
Consolidated
For the Three Months Ended September 30, 2018
(in millions)
Premium
$
3,223.3

$
1,582.0

$
182.3

$
1.2

$
4,988.8

Products and services



34.6

34.6

Total premium and products and services revenues
3,223.3

1,582.0

182.3

35.8

5,023.4



 



Medical benefits
2,738.1

1,340.8

115.1

1.0

4,195.0

Costs of products and services



33.5

33.5

ACA industry fee
54.4

27.5

4.6


86.5

Medicaid premium taxes
31.5




31.5

Total gross margin expenses
2,824.0

1,368.3

119.7

34.5

4,346.5



 



Gross margin (1)
399.3

213.7

62.6

1.3

676.9



 



Investment and other income



34.7

34.7

Other expenses (2)



(503.0
)
(503.0
)
Income from operations
$
399.3

$
213.7

$
62.6

$
(467.0
)
$
208.6







For the Three Months Ended September 30, 2017





Premium
$
2,722.7

$
1,466.3

$
201.9

$

$
4,390.9

Products and services





Total premium and products and services revenues
2,722.7

1,466.3

201.9


4,390.9

 
 
 
 
 
 
Medical benefits
2,341.7

1,256.3

142.7


3,740.7

Costs of products and services





ACA industry fee





Medicaid premium taxes
29.5




29.5

Total gross margin expenses
2,371.2

1,256.3

142.7


3,770.2

 
 
 
 
 
 
Gross margin (1)
351.5

210.0

59.2


620.7

 
 
 
 
 
 
Investment and other income



12.0

12.0

Other expenses (2)



(420.8
)
(420.8
)
Income from operations
$
351.5

$
210.0

$
59.2

$
(408.8
)
$
211.9



18



 
Medicaid Health Plan
Medicare Health Plan
Medicare PDP
Corporate & Other
Consolidated
For the Nine Months Ended September 30, 2018
(in millions)
Premium
$
8,899.4

$
4,684.9

$
642.2

$
1.2

$
14,227.7

Products and services



34.6

34.6

Total premium and products and services revenues
8,899.4

4,684.9

642.2

35.8

14,262.3



 



Medical benefits
7,601.1

3,929.8

491.1

1.0

12,023.0

Costs of products and services



33.5

33.5

ACA industry fee
151.5

81.8

13.7


247.0

Medicaid premium taxes
94.2




94.2

Total gross margin expenses
7,846.8

4,011.6

504.8

34.5

12,397.7



 



Gross margin (1)
1,052.6

673.3

137.4

1.3

1,864.6



 



Investment and other income



81.0

81.0

Other expenses (2)



(1,341.9
)
(1,341.9
)
Income from operations
$
1,052.6

$
673.3

$
137.4

$
(1,259.6
)
$
603.7

 
 
 
 
 
 
For the Nine Months Ended September 30, 2017
 
 
 
 
 
Premium
$
8,058.3

$
3,877.6

$
695.6

$

$
12,631.5

Products and services





Total premium and products and services revenues
8,058.3

3,877.6

695.6


12,631.5



 



Medical benefits
7,039.2

3,301.4

597.7


10,938.3

Costs of products and services





ACA industry fee





Medicaid premium taxes
90.6




90.6

Total gross margin expenses
7,129.8

3,301.4

597.7


11,028.9

 
 
 
 
 
 
Gross margin (1)
928.5

576.2

97.9


1,602.6

 
 
 
 
 
 
Investment and other income



30.6

30.6

Other expenses (2)



(1,176.2
)
(1,176.2
)
Income from operations
$
928.5

$
576.2

$
97.9

$
(1,145.6
)
$
457.0


(1)
Effective July 1, 2018, the Company redefined gross margin as total revenues less investment and other income, medical expenses, cost of products and services, the ACA industry fee expense, and Medicaid premium tax expense. Accordingly, results for the three and nine months ended September 30, 2017 were adjusted to include Medicaid premium taxes, which decreased gross margin by $29.5 million and $90.6 million, respectively.
(2)
Effective July 1, 2018, other expenses include SG&A expenses, depreciation, amortization and interest. Accordingly, results for the three and nine months ended September 30, 2017 were adjusted to exclude Medicaid premium taxes, which decreased other expenses by $29.5 million and $90.6 million, respectively.


19




4. EQUITY AND EARNINGS PER SHARE

Issuance of Common Stock
In August 2018, we completed a public offering of our common stock and issued 5,207,547 shares of our common stock, at an offering price of $265.00 per share. The net proceeds from the offering were approximately $1.3 billion, after deducting underwriting discounts and offering costs of approximately $37.7 million. We used the net proceeds to fund the acquisition of Meridian.
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,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding — basic
47,712,712

 
44,509,692

 
45,692,804

 
44,458,096

Dilutive effect of outstanding stock-based compensation awards
671,715

 
459,341

 
594,812

 
451,820

Weighted-average common shares outstanding — diluted
48,384,427

 
44,969,033

 
46,287,616

 
44,909,916

Anti-dilutive stock-based compensation awards excluded from computation
136,428

 
147,141

 
184,964

 
51,475

 
 
 
 
 
 
 
 


20




5. INVESTMENTS

The Company considers all of its investments as available-for-sale securities. Excluding restricted cash, cash equivalents and 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, 2018
 
 
 
 
 
 
 
Asset-backed securities
$
127.3

 
$

 
$
(0.6
)
 
$
126.7

Corporate debt securities
941.0

 
0.3

 
(9.4
)
 
931.9

Municipal securities
266.0

 
0.1

 
(3.2
)
 
262.9

Residential mortgage-backed securities
36.7

 

 
(0.5
)
 
36.2

Short-term time deposits
341.6

 

 

 
341.6

Government and agency obligations
98.3

 

 
(1.0
)
 
97.3

Other securities
82.3

 

 
(0.1
)
 
82.2

Total
$
1,893.2

 
$
0.4

 
$
(14.9
)
 
$
1,878.8

December 31, 2017
 

 
 

 
 

 
 

Asset-backed securities
$
88.9

 
$

 
$
(0.2
)
 
$
88.7

Corporate debt securities
400.6

 
0.7

 
(1.2
)
 
400.1

Municipal securities
223.7

 
1.0

 
(1.9
)
 
222.8

Residential mortgage-backed securities
11.2

 

 

 
11.2

Short-term time deposits
300.4

 

 

 
300.4

Government and agency obligations
148.7

 

 
(1.2
)
 
147.5

Other securities
65.2

 

 
(0.2
)
 
65.0

Total
$
1,238.7

 
$
1.7

 
$
(4.7
)
 
$
1,235.7

 
 
 
 
 
 
 
 

Contractual maturities of available-for-sale securities at September 30, 2018 are as follows:
 
 
Total
 
Within
1 Year
 
1 Through 5
Years
 
5 Through 10
Years
 
Thereafter
Asset-backed securities
$
126.7

 
$
51.1

 
$
71.6

 
$
1.2

 
$
2.8

Corporate debt securities
931.9

 
525.6

 
319.8

 
75.8

 
10.7

Municipal securities
262.9

 
12.6

 
146.4

 
79.5

 
24.4

Residential mortgage-backed securities
36.2

 

 
0.4

 
0.3

 
35.5

Short-term time deposits
341.6

 
341.6

 

 

 

Government and agency obligations
97.3

 
53.7

 
39.3

 
4.3

 

Other securities
82.2

 
49.8

 

 
3.0

 
29.4

 Total
$
1,878.8

 
$
1,034.4

 
$
577.5

 
$
164.1

 
$
102.8

 
 
 
 
 
 
 
 
 
 

Actual maturities may differ from contractual maturities due to the exercise of pre-payment options.

We sold available-for-sale investments totaling $252.4 million and $141.9 million during the three months ended September 30, 2018 and 2017, respectively, and $471.2 million and $224.8 million during the nine months ended September 30, 2018 and 2017, respectively. Realized gains and losses resulting from sales and redemptions of our available-for-sale investments were immaterial for all periods presented. Additionally, we did not realize any other-than-temporary impairment during any of these periods.


21



6. RESTRICTED CASH, CASH EQUIVALENTS AND 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 cash, cash equivalents and 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 cash, cash equivalents and investment securities are as follows: 

 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
September 30, 2018
 
 
 
 
 
 
 
Cash
$
4.9

 
$

 
$

 
$
4.9

Money market funds
61.1

 

 

 
61.1

U.S. government securities and other
169.6

 

 
(0.8
)
 
168.8

Total
$
235.6

 
$

 
$
(0.8
)
 
$
234.8

December 31, 2017
 

 
 

 
 

 
 

Cash
$
5.7

 
$

 
$

 
$
5.7

Money market funds
58.7

 

 

 
58.7

U.S. government securities and other
147.4

 

 
(0.8
)
 
146.6

Total
$
211.8

 
$

 
$
(0.8
)
 
$
211.0

 
 
 
 
 
 
 
 
 
Realized gains and losses on sales and redemptions of our restricted cash, cash equivalents and investments were not material for all periods presented.


22




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, through 2015, market stock units ("MSUs"). Compensation expense related to our stock-based compensation awards was $21.4 million and $9.3 million for the three months ended September 30, 2018 and 2017, respectively, and $51.5 million and $32.8 million for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, there was $91.0 million of unrecognized compensation cost related to unvested stock-based compensation arrangements that is expected to be recognized over a weighted-average period of 1.9 years. 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 $320.49 as of September 28, 2018 and amounted to approximately $33.3 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, 2018, 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, 2018
274,643

 
552,618

 
45,230

 
872,491

Granted
121,902

 
256,679

 
45,075

 
423,656

Vested
(128,210
)
 
(154,055
)
 
(90,150
)
 
(372,415
)
Forfeited
(15,251
)
 
(33,361
)
 
(155
)
 
(48,767
)
Outstanding as of September 30, 2018
253,084

 
621,881

 

 
874,965

 
 
 
 
 
 
 
 

The weighted-average grant-date fair value of all equity awards granted during the nine months ended September 30, 2018 was $199.39.

Refer to Note 2 - Summary of Significant Accounting Policies and Note 15 - Stock-based Compensation to the Consolidated Financial Statements included in our 2017 Form 10-K for additional information regarding our equity-compensation awards and related compensation cost measurement.

8. DEBT

The following table summarizes our outstanding debt obligations and their classification in the accompanying condensed consolidated balance sheets (in millions):
 
September 30, 2018
 
December 31, 2017
Long-term debt, net:
 
 
 
5.25% Senior Notes, due April 1, 2025
$
1,200.0

 
$
1,200.0

5.375% Senior Notes, due August 15, 2026
750.0

 

Revolving Credit Facility
200.0

 

Debt issuance costs
(24.6
)
 
(17.6
)
     Total long-term debt, net
$
2,125.4

 
$
1,182.4

 
 
 
 

5.375% Senior Notes due 2026

On August 13, 2018, we completed the offering and sale of 5.375% unsecured senior notes due 2026 in the aggregate principal amount of $750.0 million (the “2026 Notes”). The aggregate net proceeds from the issuance of the 2026 Notes were $739.0 million, which were used to fund a portion of the cash consideration for our acquisition of Meridian.


23



The 2026 Notes will mature on August 15, 2026, and bear interest at a rate of 5.375% per annum, payable semi-annually on February 15 and August 15 of each year, commencing on February 15, 2019.

The 2026 Notes were issued under an indenture, dated as of August 13, 2018 (the “Indenture”), between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. The Indenture 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) exits 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 2026 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 2026 Notes will be structurally subordinated to all indebtedness and other liabilities of our subsidiaries (unless our subsidiaries become guarantors of the 2026 Notes).

At any time prior to August 15, 2021, we may, on any one or more occasions redeem up to 40% of the aggregate principal amount of 2026 Notes at a redemption price equal to 105.375% of the principal amount of the 2026 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 50% of the aggregate principal amount of the 2026 Notes issued under the Indenture (including any additional 2026 Notes, but excluding 2026 Notes held by the Company or its subsidiaries) remains outstanding immediately after the occurrence of such redemption, unless all such 2026 Notes are redeemed substantially concurrently with the redemption of 2026 Notes; and
(2)
the redemption occurs within 180 days of the date of the closing of such equity offering.

At any time prior to August 15, 2021, we may on any one or more occasions redeem all or a part of the 2026 Notes, at a redemption price equal to 100% of the principal amount of the 2026 Notes redeemed, plus the Applicable Premium, as defined in the Indenture.

Except pursuant to the preceding two paragraphs, the 2026 Notes will not be redeemable at our option prior to August 15, 2021.

On or after August 15, 2021, we may on any one or more occasions redeem all or a part of the 2026 Notes, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest, if any, on the 2026 Notes redeemed, to, but not including, the applicable date of redemption, if redeemed during the twelve-month period beginning on August 15 of the years indicated below, subject to the rights of holders of 2026 Notes on the relevant record date to receive interest due on the relevant interest payment date:
Period
Redemption Price
2021
104.031%
2022
102.688%
2023
101.344%
2024 and thereafter
100.000%

24




The 2026 Notes are classified as long-term debt in our condensed consolidated balance sheet at September 30, 2018 based on their August 2026 maturity date.

5.25% Senior Notes due 2025

On March 22, 2017, we completed the offering and sale of 5.25% unsecured 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 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% unsecured senior notes (the "2020 Notes") on April 7, 2017, which is discussed further below. The remaining net proceeds from the offering of the 2025 Notes were used for general corporate purposes, including organic growth and working capital.

The 2025 Notes are classified as long-term debt in our condensed consolidated balance sheet at September 30, 2018, based on their April 2025 maturity date. Refer to Note 10 - Debt to the consolidated financial statements included in our 2017 Form 10-K for additional information regarding these 2025 Notes, including applicable covenants.

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 aggregate principal amount of our 2020 Notes pursuant to a reopening of our existing series of such notes. The offering was completed at an issue price of 104.50%, plus accrued interest.

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 The Bank of New York Trust Company, N.A., as trustee, were satisfied and discharged on April 7, 2017. In connection with the redemption of the 2020 Notes, we incurred a one-time loss on extinguishment of debt 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 was reflected in our consolidated statements of comprehensive income upon redemption.

Revolving Credit Facility

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.

On July 23, 2018, we entered into an amended and restated Credit Agreement (“Amended and Restated Credit Agreement”) which increased the aggregate principle amount available under our Revolving Credit Facility from $1.0 billion to $1.3 billion. Additionally, in July 2018, we extended the maturity date under the Revolving Credit Facility from January 2021 to July 2023 and decreased the applicable margins for borrowings under the Revolving Credit Facility to a range of (A) 0.375% to 1.00% per annum for ABR Loans (as defined in the Amended and Restated Credit Agreement) and (B) 1.375% to 2.00% per annum for Eurodollar Loans (as defined in the Amended and Restated Credit Agreement), in each case depending on our ratio of total debt to consolidated EBITDA, as calculated in accordance with the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement also includes an accordion feature which allows the Company to increase the total commitments under the revolving credit facility by up to an additional $500 million, subject to certain conditions.

Unutilized commitments under the Amended and Restated Credit Agreement are subject to a fee of 0.20% to 0.30% depending upon our ratio of total debt to consolidated EBITDA, as calculated in accordance with the Amended and Restated Credit Agreement.

The Amended and Restated Credit Agreement includes negative and financial covenants that limit certain of our and our subsidiaries’ activities, including (i) restrictions on our and our subsidiaries’ ability to incur additional indebtedness; and (ii) financial covenants that require (a) the ratio of total debt to consolidated EBITDA not to exceed a maximum and (b) a minimum interest expense and principal payment coverage ratio.


25



The Amended and Restated Credit Agreement also contains customary representations and warranties that must be accurate in order for us to borrow under the Revolving Credit Facility. In addition, the Amended and Restated Credit Agreement contains customary events of default. If an event of default occurs and is continuing, we may be required immediately to repay all amounts outstanding under the Amended and Restated Credit Agreement. Lenders holding greater than 50% of the loans and commitments under the Amended and Restated Credit Agreement may elect to accelerate the maturity of the loans.

In August 2018, $225.0 million was drawn on our Revolving Credit Facility to partially fund the Meridian acquisition, of which $25.0 million was repaid during September 2018. As of September 30, 2018, $200.0 million was outstanding under the Revolving Credit Facility, and was classified as long-term in accordance with the contractual terms of the Amended and Restated Credit Agreement.

As of September 30, 2018, and the date of this filing, we were in compliance with all covenants under the 2026 Notes, the 2025 Notes and the Amended and Restated Credit Agreement.

9. 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 any 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 2017 Form 10-K.

Recurring Fair Value Measurements

Assets and liabilities measured at fair value on a recurring basis at September 30, 2018 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
$
126.7

 
$

 
$
126.7

 
$

Corporate debt securities
931.9

 

 
931.9

 

Municipal securities
262.9

 

 
262.9

 

Residential mortgage-backed securities
36.2

 

 
36.2

 

Short-term time deposits
341.6

 

 
341.6

 

Government and agency obligations
97.3

 
97.3

 

 

Other securities
82.2

 
49.8

 
32.4

 

Total investments
$
1,878.8

 
$
147.1

 
$
1,731.7

 
$

Restricted cash, cash equivalents and investments:
 

 
 

 
 

 
 

Cash
$
4.9

 
$
4.9

 
$

 
$

Money market funds
61.1

 
61.1

 

 

U.S. government securities and other
168.8

 
168.6

 
0.2

 

Total restricted cash, cash equivalents and investments
$
234.8

 
$
234.6

 
$
0.2

 
$

 
 
 
 
 
 
 
 


26



Assets and liabilities measured at fair value on a recurring basis at December 31, 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
$
88.7

 
$

 
$
88.7

 
$

Corporate debt securities
400.1

 

 
400.1

 

Municipal securities
222.8

 

 
210.5

 
12.3

Residential mortgage-backed securities
11.2

 

 
11.2

 

Short-term time deposits
300.4

 

 
300.4

 

Government and agency obligations
147.5

 
147.5

 

 

Other securities
65.0

 
52.8

 
12.2

 

Total Investments
$
1,235.7

 
$
200.3

 
$
1,023.1

 
$
12.3

Restricted cash, cash equivalents and investments:
 

 
 

 
 

 
 

Cash
$
5.7

 
$
5.7

 
$

 
$

Money market funds
58.7

 
58.7

 

 

U.S. government securities and other
146.6

 
146.4

 
0.2

 

Total restricted cash, cash equivalents and investments
$
211.0

 
$
210.8

 
$
0.2

 
$

 
 
 
 
 
 
 
 
 
The following table presents the carrying value and fair value of our long-term debt outstanding as of September 30, 2018 and December 31, 2017:

 
 
 
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, 2018
2,125.4

 
1,985.8

 
200.0

 

Long-term debt - December 31, 2017
1,182.4

 
1,274.3

 

 


The fair value of our 2026 Notes and 2025 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 September 30, 2018, approximated carrying value and would be classified within Level 2 of the fair value hierarchy. There were no borrowings outstanding under our Revolving Credit Facility as of December 31, 2017.
 

27



During June 2018, we sold the remaining auction rate securities in our portfolio. The sale resulted in a loss of $1.2 million that was included within investment and other income in the condensed consolidated statements of comprehensive income for the nine months ended September 30, 2018. There was no activity recorded during the three months ended September 30, 2018. The following table presents the changes in the fair value of our Level 3 auction rate securities for the nine months ended September 30, 2018 and the three and nine months ended September 30, 2017.

 
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
 
2017
 
2018
 
2017
Balance at beginning of period
 
$
12.3

 
$
12.3

 
$
12.4

Realized gains (losses) in earnings
 

 
(1.2
)
 

Changes in unrealized gains (losses) in other comprehensive income
 

 
1.4

 


Purchases, sales and redemptions
 

 
(12.5
)
 
(0.1
)
Net transfers in or (out) of Level 3
 

 

 

Balance at end of period
 
$
12.3

 
$

 
$
12.3