Full Press Release Details
Consolidated Balance Sheets
| At December 31, | ||||||||
| (Millions) | 2017 | 2016 | ||||||
| Assets: | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 4,076 | $ | 17,996 | ||||
| Investments | 2,280 | 3,046 | ||||||
| Premiums receivable, net | 2,240 | 2,356 | ||||||
| Other receivables, net | 2,831 | 2,224 | ||||||
| Reinsurance recoverables | 1,050 | 292 | ||||||
| Accrued investment income | 193 | 232 | ||||||
| Income taxes receivable | 365 | 44 | ||||||
| Other current assets | 2,488 | 2,259 | ||||||
| Total current assets | 15,523 | 28,449 | ||||||
| Long-term investments | 17,793 | 21,833 | ||||||
| Reinsurance recoverables | 3,323 | 727 | ||||||
| Goodwill | 10,571 | 10,637 | ||||||
| Other acquired intangible assets, net | 1,180 | 1,442 | ||||||
| Property and equipment, net | 586 | 587 | ||||||
| Deferred income taxes | 195 | |||||||
| Other long-term assets | 1,684 | 1,480 | ||||||
| Separate Accounts assets | 4,296 | 3,991 | ||||||
| Total assets | $ | 55,151 | $ | 69,146 | ||||
| Liabilities and shareholders equity: | ||||||||
| Current liabilities: | ||||||||
| Health care costs payable | $ | 5,815 | $ | 6,558 | ||||
| Future policy benefits | 604 | 645 | ||||||
| Unpaid claims | 850 | 801 | ||||||
| Unearned premiums | 654 | 556 | ||||||
| Policyholders funds | 2,918 | 2,772 | ||||||
| Current portion of long-term debt | 999 | 1,634 | ||||||
| Accrued expenses and other current liabilities | 4,997 | 5,728 | ||||||
| Total current liabilities | 16,837 | 18,694 | ||||||
| Future policy benefits | 5,763 | 5,929 | ||||||
| Unpaid claims | 1,922 | 1,703 | ||||||
| Policyholders funds | 739 | 812 | ||||||
| Long-term debt, less current portion | 8,160 | 19,027 | ||||||
| Deferred income taxes | 4 | |||||||
| Other long-term liabilities | 1,597 | 1,043 | ||||||
| Separate Accounts liabilities | 4,296 | 3,991 | ||||||
| Total liabilities | 39,314 | 51,203 | ||||||
| Commitments and contingencies (Note 17) | ||||||||
| Shareholders equity: | ||||||||
| Common stock ($.01 par value; 2.5 billion shares authorized and 326.8 million shares issued and outstanding in 2017; 2.5 billion shares authorized and 351.7 million shares issued and outstanding in 2016) and additional paid-in capital | 4,706 | 4,716 | ||||||
| Retained earnings | 12,118 | 14,717 | ||||||
| Accumulated other comprehensive loss | (1,244 | ) | (1,552 | ) | ||||
| Total Aetna shareholders equity | 15,580 | 17,881 | ||||||
| Non-controlling interests | 257 | 62 | ||||||
| Total equity | 15,837 | 17,943 | ||||||
| Total liabilities and equity | $ | 55,151 | $ | 69,146 |
Refer to accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Income
| For the Years Ended December 31, | ||||||||||||
| (Millions, except per common share data) | 2017 | 2016 | 2015 | |||||||||
| Revenue: | ||||||||||||
| Health care premiums | $ | 52,022 | $ | 54,116 | $ | 51,618 | ||||||
| Other premiums | 1,872 | 2,182 | 2,171 | |||||||||
| Fees and other revenue (1) | 5,930 | 5,861 | 5,696 | |||||||||
| Net investment income | 950 | 910 | 917 | |||||||||
| Net realized capital (losses) gains | (239 | ) | 86 | (65 | ) | |||||||
| Total revenue | 60,535 | 63,155 | 60,337 | |||||||||
| Benefits and expenses: | ||||||||||||
| Health care costs (2) | 42,753 | 44,255 | 41,712 | |||||||||
| Current and future benefits | 1,875 | 2,101 | 2,121 | |||||||||
| Operating expenses: | ||||||||||||
| Selling expenses | 1,598 | 1,678 | 1,611 | |||||||||
| General and administrative expenses | 10,466 | 10,407 | 10,033 | |||||||||
| Total operating expenses | 12,064 | 12,085 | 11,644 | |||||||||
| Interest expense | 442 | 604 | 369 | |||||||||
| Amortization of other acquired intangible assets | 272 | 247 | 255 | |||||||||
| Loss on early extinguishment of long-term debt | 246 | |||||||||||
| Reduction of reserve for anticipated future losses on discontinued products | (109 | ) | (128 | ) | ||||||||
| Total benefits and expenses | 57,543 | 59,164 | 56,101 | |||||||||
| Income before income taxes | 2,992 | 3,991 | 4,236 | |||||||||
| Income tax expense | 1,087 | 1,735 | 1,841 | |||||||||
| Net income including non-controlling interests | 1,905 | 2,256 | 2,395 | |||||||||
| Less: Net income (loss) attributable to non-controlling interests | 1 | (15 | ) | 5 | ||||||||
| Net income attributable to Aetna | $ | 1,904 | $ | 2,271 | $ | 2,390 | ||||||
| Earnings per common share: | ||||||||||||
| Basic | $ | 5.71 | $ | 6.46 | $ | 6.84 | ||||||
| Diluted | $ | 5.68 | $ | 6.41 | $ | 6.78 |
Refer to accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Comprehensive Income
| For the Years Ended December 31, | ||||||||||||
| (Millions) | 2017 | 2016 | 2015 | |||||||||
| Net income including non-controlling interests | $ | 1,905 | $ | 2,256 | $ | 2,395 | ||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||
| Previously impaired debt securities | (11 | ) | (3 | ) | (16 | ) | ||||||
| All other securities | 29 | (15 | ) | (256 | ) | |||||||
| Derivatives and foreign currency | 231 | (161 | ) | (13 | ) | |||||||
| Pension and OPEB plans | 59 | (43 | ) | 66 | ||||||||
| Other comprehensive income (loss) | 308 | (222 | ) | (219 | ) | |||||||
| Comprehensive income including non-controlling interests | 2,213 | 2,034 | 2,176 | |||||||||
| Less: Comprehensive income (loss) attributable to non-controlling interests | 1 | (15 | ) | 5 | ||||||||
| Comprehensive income attributable to Aetna | $ | 2,212 | $ | 2,049 | $ | 2,171 |
Refer to accompanying Notes to Consolidated Financial Statements, including Note 14 for further information about other comprehensive income (loss).
Consolidated Statements of Shareholders Equity
| Attributable to Aetna | ||||||||||||||||||||||||||||
| (Millions) | Number of Common Shares Outstanding | Common Stock and Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Aetna Shareholders Equity | Non-Controlling Interests | Total Equity | |||||||||||||||||||||
| Balance at December 31, 2014 | 349.8 | $ | 4,542 | $ | 11,052 | $ | (1,111 | ) | $ | 14,483 | $ | 69 | $ | 14,552 | ||||||||||||||
| Net income | 2,390 | 2,390 | 5 | 2,395 | ||||||||||||||||||||||||
| Other decreases in non-controlling interest | (9 | ) | (9 | ) | ||||||||||||||||||||||||
| Other comprehensive loss (Note 14) | (219 | ) | (219 | ) | (219 | ) | ||||||||||||||||||||||
| Common shares issued for benefit plans, including tax benefits, net of employee tax withholdings | 2.7 | 105 | 105 | 105 | ||||||||||||||||||||||||
| Repurchases of common shares | (3.0 | ) | (296 | ) | (296 | ) | (296 | ) | ||||||||||||||||||||
| Dividends declared | (349 | ) | (349 | ) | (349 | ) | ||||||||||||||||||||||
| Balance at December 31, 2015 | 349.5 | 4,647 | 12,797 | (1,330 | ) | 16,114 | 65 | 16,179 | ||||||||||||||||||||
| Net income (loss) | 2,271 | 2,271 | (15 | ) | 2,256 | |||||||||||||||||||||||
| Other increases in non-controlling interest | 12 | 12 | ||||||||||||||||||||||||||
| Other comprehensive loss (Note 14) | (222 | ) | (222 | ) | (222 | ) | ||||||||||||||||||||||
| Common shares issued for benefit plans, including tax benefits, net of employee tax withholdings | 2.2 | 69 | 69 | 69 | ||||||||||||||||||||||||
| Dividends declared | (351 | ) | (351 | ) | (351 | ) | ||||||||||||||||||||||
| Balance at December 31, 2016 | 351.7 | 4,716 | 14,717 | (1,552 | ) | 17,881 | 62 | 17,943 | ||||||||||||||||||||
| Net income | 1,904 | 1,904 | 1 | 1,905 | ||||||||||||||||||||||||
| Other increases in non-controlling interest | 194 | 194 | ||||||||||||||||||||||||||
| Other comprehensive income (Note 14) | 308 | 308 | 308 | |||||||||||||||||||||||||
| Common shares issued for benefit plans, net of employee tax withholdings | 2.1 | (10 | ) | (10 | ) | (10 | ) | |||||||||||||||||||||
| Repurchases of common shares | (27.0 | ) | (3,845 | ) | (3,845 | ) | (3,845 | ) | ||||||||||||||||||||
| Dividends declared | (658 | ) | (658 | ) | (658 | ) | ||||||||||||||||||||||
| Balance at December 31, 2017 | 326.8 | $ | 4,706 | $ | 12,118 | $ | (1,244 | ) | $ | 15,580 | $ | 257 | $ | 15,837 |
Refer to accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
| For the Years Ended December 31, | ||||||||||||
| (Millions) | 2017 | 2016 | 2015 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income including non-controlling interests | $ | 1,905 | $ | 2,256 | $ | 2,395 | ||||||
| Adjustments to reconcile net income to net cash (used for) provided by operating activities: | ||||||||||||
| Net realized capital losses (gains) | 239 | (86 | ) | 65 | ||||||||
| Depreciation and amortization | 705 | 681 | 671 | |||||||||
| Debt fair value amortization | (17 | ) | (30 | ) | (30 | ) | ||||||
| Equity in earnings of affiliates, net | (105 | ) | (6 | ) | (31 | ) | ||||||
| Stock-based compensation expense | 187 | 191 | 181 | |||||||||
| Reduction of reserve for anticipated future losses on discontinued products | (109 | ) | (128 | ) | ||||||||
| Amortization of net investment premium | 69 | 79 | 84 | |||||||||
| Loss on early extinguishment of long-term debt | 246 | |||||||||||
| Gain on sale of businesses | (88 | ) | ||||||||||
| Changes in assets and liabilities: | ||||||||||||
| Premiums due and other receivables | (809 | ) | (153 | ) | (616 | ) | ||||||
| Income taxes | (672 | ) | 155 | 31 | ||||||||
| Other assets and other liabilities | (1,445 | ) | 669 | 646 | ||||||||
| Health care and insurance liabilities | (624 | ) | 91 | 470 | ||||||||
| Distributions from partnership investments | 54 | |||||||||||
| Net cash (used for) provided by operating activities | (464 | ) | 3,719 | 3,866 | ||||||||
| Cash flows from investing activities: | ||||||||||||
| Proceeds from sales and maturities of investments | 12,144 | 14,741 | 12,299 | |||||||||
| Cost of investments | (10,370 | ) | (14,852 | ) | (12,943 | ) | ||||||
| Additions to property, equipment and software | (410 | ) | (270 | ) | (363 | ) | ||||||
| Proceeds from sale of businesses, net of cash transferred | 1,390 | |||||||||||
| Cash used for acquisitions, net of cash acquired | (24 | ) | (20 | ) | ||||||||
| Net cash provided by (used for) investing activities | 2,730 | (381 | ) | (1,027 | ) | |||||||
| Cash flows from financing activities: | ||||||||||||
| Issuance of long-term debt | 988 | 12,886 | ||||||||||
| Repayment of long-term debt | (12,734 | ) | (229 | ) | ||||||||
| Repayment of short-term debt | (500 | ) | ||||||||||
| Deposits and interest credited to investment contracts net of (withdrawals) | 1 | 1 | (35 | ) | ||||||||
| Common shares issued under benefit plans, net | (180 | ) | (139 | ) | (143 | ) | ||||||
| Stock-based compensation tax benefits | 53 | |||||||||||
| Settlements from repurchase agreements | (202 | ) | ||||||||||
| Common shares repurchased | (3,845 | ) | (296 | ) | ||||||||
| Dividends paid to shareholders | (583 | ) | (351 | ) | (349 | ) | ||||||
| Net payment on interest rate derivatives | (274 | ) | (25 | ) | ||||||||
| Contributions (distributions), non-controlling interests | 167 | 11 | (9 | ) | ||||||||
| Net cash (used for) provided by financing activities | (16,186 | ) | 12,134 | (1,735 | ) | |||||||
| Net (decrease) increase in cash and cash equivalents | (13,920 | ) | 15,472 | 1,104 | ||||||||
| Cash and cash equivalents, beginning of period | 17,996 | 2,524 | 1,420 | |||||||||
| Cash and cash equivalents, end of period | $ | 4,076 | $ | 17,996 | $ | 2,524 | ||||||
| Supplemental cash flow information: | ||||||||||||
| Interest paid | $ | 453 | $ | 541 | $ | 338 | ||||||
| Income taxes paid | 1,759 | 1,580 | 1,755 |
Refer to accompanying Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
We conduct our operations in three business segments:
Effective for the first quarter of 2018, we will realign our business segments to correspond with changes to our management structure and internal management reporting which reflect our evolving business strategy of helping our members live healthier lives. As a result of this realignment, our operations will now be conducted in the Health Care reportable segment. Health Care offers a broad range of traditional, voluntary and consumer-directed health insurance products and related services to large and small employers, public sector employers, and Medicaid and Medicare beneficiaries. Our Health Care products are offered on both an Insured basis and an employer-funded basis. Health Care also includes emerging business products and services that complement and enhance our medical products.
Effective for the first quarter of 2018, we will present the remainder of our financial results in the Corporate/Other category, which will consist of:
Refer to Note 18 for segment financial information.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ( GAAP ) and include the accounts of Aetna and the subsidiaries that we control. All significant intercompany balances have been eliminated in consolidation. The Company has evaluated subsequent events from the financial statement date through the date the financial statements were issued and determined there were no subsequent events to disclose other than as disclosed in Notes 1, 13, 16 and 18.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the amounts reported in these consolidated financial statements and notes. We consider the following accounting estimates critical in the preparation of the accompanying consolidated financial statements: health care costs payable, other insurance liabilities, recoverability of goodwill and other acquired intangible assets, measurement of defined benefit pension and other postretirement employee benefit plans, other-than-temporary impairment of debt securities, revenue recognition, allowance for estimated terminations and uncollectible accounts and accounting for certain provisions of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (as amended, collectively, the ACA ). We use information available to us at the time estimates are made; however, these estimates could change materially if different information or assumptions were used. Additionally, these estimates may not ultimately reflect the actual amounts of the final transactions that occur.
Cash and Cash Equivalents
Cash and cash equivalents include cash on-hand and debt securities with an original maturity of three months or less when purchased. The carrying value of cash equivalents approximates fair value due to the short-term nature of these investments. Cash and cash equivalents at December 31, 2016 included approximately $13 billion of highly-rated money market fund investments related to the net proceeds received from the 2016 senior notes we issued in June 2016 to partially fund our then pending acquisition of Humana Inc. (the Humana Transaction ). These money market funds had average maturities of 60 days or less and were redeemable daily at par value plus accrued dividends with specified yield rates.
Debt and Equity Securities
Debt and equity securities consist primarily of U.S. Treasury and agency securities, mortgage-backed securities, corporate and foreign bonds and other debt and equity securities. Debt securities are classified as either current or long-term investments based on their contractual maturities unless we intend to sell an investment within the next twelve months, in which case it is classified as current on our Consolidated Balance Sheets. We have classified our debt and equity securities as available for sale and carry them at fair value. Refer to Note 5 for additional information on how we estimate the fair value of these investments.
The cost for mortgage-backed and other asset-backed securities is adjusted for unamortized premiums and discounts, which are amortized using the interest method over the estimated remaining term of the securities, adjusted for anticipated prepayments.
We regularly review our debt and equity securities to determine whether a decline in fair value below the carrying value is other-than-temporary. When a debt or equity security is in an unrealized capital loss position, we monitor the duration and severity of the loss to determine if sufficient market recovery can occur within a reasonable period of time. If a decline in the fair value of a debt security is considered other-than-temporary, the cost basis or carrying value of the debt security is written down. The write-down is then bifurcated into its credit and non-credit related components. The amount of the credit-related
component is included in our operating results, and the amount of the non-credit related component is included in other comprehensive income, unless we intend to sell the debt security or it is more likely than not that we will be required to sell the debt security prior to its anticipated recovery of its amortized cost basis. We do not accrue interest on debt securities when management believes the collection of interest is unlikely. If we intend to sell an equity security, we will recognize the unrealized capital gain or loss in our operating results.
We value our mortgage loan investments on our balance sheet at the unpaid principal balance, net of impairment reserves. A mortgage loan may be impaired when it is a problem loan (i.e., more than 60 days delinquent, in bankruptcy or in process of foreclosure), a potential problem loan (i.e., high probability of default) or a restructured loan. For impaired loans, a specific impairment reserve is established for the difference between the recorded investment in the loan and the estimated fair value of the collateral. We apply our loan impairment policy individually to all loans in our portfolio.
The impairment evaluation described above also considers characteristics and risk factors attributable to the aggregate portfolio. We establish an additional allowance for loan losses if it is probable that there will be a credit loss on a group of similar mortgage loans. We consider the following characteristics and risk factors when evaluating if a credit loss is probable on a group of similar mortgage loans: loan-to-value ratios, property type (e.g., office, retail, apartment, industrial), geographic location, vacancy rates and property condition. As a result of that evaluation, we determined that a credit loss was not probable and did not record any additional allowance for groups of similar mortgage loans in 2017, 2016 or 2015.
We record full or partial impairments of loans at the time an event occurs affecting the legal status of the loan, typically at the time of foreclosure or upon a loan modification giving rise to forgiveness of debt. Interest income on a potential problem loan or restructured loan is accrued to the extent we deem it collectible and the loan continues to perform under its original or restructured terms. Interest income on problem loans is recognized on a cash basis. Cash payments on loans in the process of foreclosure are treated as a return of principal. Mortgage loans with a maturity date or a committed prepayment date within twelve months are classified as current on our Consolidated Balance Sheets.
Other Investments
Other investments consist primarily of the following:
Privately-placed equity securities, which are carried at cost on our Consolidated Balance Sheets. We do not estimate the fair value of these securities if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. Additionally, as a member of the Federal Home Loan Bank of Boston ( FHLBB ), we are required to purchase and hold shares of the FHLBB. These shares are restricted and also carried at cost.
Net Investment Income
Net investment income on investments supporting Health Care and Group Insurance liabilities and Large Case Pensions products (other than experience-rated and discontinued products) is reflected in our operating results.
Experience-rated products are products in the Large Case Pensions business where the contract holder, not us, assumes investment and other risks, subject to, among other things, minimum guarantees provided by us. The effect of investment performance on experience-rated products is allocated to contract holders accounts daily, based on the underlying investment experience and, therefore, does not impact our operating results (as long as our minimum guarantees are not triggered).
When we discontinued the sale of our fully-guaranteed Large Case Pensions products, we established a reserve for anticipated future losses from these discontinued products and segregated the related investments. Investment performance on this separate portfolio is ultimately credited/charged to the reserve and, generally, does not impact our operating results.
Net investment income supporting Large Case Pensions experience-rated and discontinued products is included in net investment income in our Consolidated Statements of Income and is credited to contract holders accounts or the reserve for anticipated future losses through a charge to current and future benefits.
Realized/Unrealized Capital Gains and Losses
Realized capital gains and losses on investments supporting Health Care and Group Insurance liabilities and Large Case Pensions products (other than experience-rated and discontinued products) are reflected in our operating results. Realized capital gains and losses are determined on a specific identification basis. We reflect purchases and sales of debt and equity securities and alternative investments on the trade date. We reflect purchases and sales of mortgage loans and investment real estate on the closing date.
Realized capital gains and losses on investments supporting Large Case Pensions experience-rated and discontinued products are not included in realized capital gains and losses in our Consolidated Statements of Income and instead are credited directly to contract holders accounts, in the case of experience-rated products, or allocated to the reserve for anticipated future losses, in the case of discontinued products. The contract holders accounts are reflected in policyholders funds, and the reserve for anticipated future losses is reflected in future policy benefits on our Consolidated Balance Sheets.
Unrealized capital gains and losses on investments supporting Health Care and Group Insurance liabilities and Large Case Pensions products (other than experience-rated and discontinued products) are reflected in shareholders equity, net of tax, as a component of accumulated other comprehensive loss.
Unrealized capital gains and losses on investments supporting Large Case Pensions experience-rated products are credited directly to contract holders accounts, which are reflected in policyholders funds on our Consolidated Balance Sheets. Unrealized capital gains and losses on discontinued products are reflected in other long-term liabilities on our Consolidated Balance Sheets.
Refer to Note 19 for additional information on our discontinued products.
Premium Receivables
Premium receivables include the uncollected amounts from fully-insured groups, individuals and government programs and are reported net of an allowance for estimated terminations and uncollectible accounts of $381 million and $139 million at December 31, 2017 and 2016, respectively. We estimate the allowance for estimated terminations and uncollectible accounts using management s best estimate of collectability, taking into consideration the age of the outstanding amount, historical collection patterns and other economic factors. For details on our Medicare Part D Prescription Drug Program Plans ( Medicare Part D ) receivables at December 31, 2017 and 2016, refer to the Accounting for Medicare Part D section below.
Our premium receivable balance at December 31, 2017 from the State of Illinois was approximately $350 million. The State of Illinois experienced budget difficulties which contributed to the state being delinquent in paying certain of our premiums and fees. Given our significant cash collections during the fourth quarter of 2017 of approximately $960 million, the State of Illinois budget and bond issuance, a federal judge s ruling that prioritized Medicaid payments and the federal government s match of a percentage of payments made by the state to managed care organizations under the state s Medicaid program, we continue to believe the amounts due to us are collectible.
Other Receivables
Other receivables include uncollected amounts from self-funded groups, pharmacy rebates, other government receivables, proceeds due from brokers on investment trades, provider advances and other miscellaneous amounts due to us. These receivables are reported net of an allowance for uncollectible accounts of $74 million and $37 million at December 31, 2017 and 2016, respectively. We estimate the allowance for uncollectible accounts using management s best estimate of collectability, taking into consideration the age of the outstanding amount, historical collection patterns and other economic factors. Pharmacy rebate receivables were $1.0 billion and $916 million at December 31, 2017 and 2016, respectively. For details on our Medicare Part D receivables at December 31, 2017 and 2016, refer to the Accounting for Medicare Part D section below.
Reinsurance Recoverables
We utilize reinsurance agreements primarily to reduce our required capital and to facilitate the acquisition or disposition of certain insurance contracts (including the Group Insurance sale (as defined in Note 3)). Ceded reinsurance agreements permit us to recover a portion of our losses from reinsurers, although they do not discharge our primary liability as the direct insurer of the risks reinsured. Failure of reinsurers to indemnify us could result in losses; however, we do not expect charges for unrecoverable reinsurance to have a material effect on our operating results or financial position. We evaluate the financial condition of our reinsurers and monitor concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of our reinsurers. At December 31, 2017, our reinsurance recoverables consisted primarily of amounts due from third parties that are rated consistent with companies that are considered to have the ability to meet their obligations.
Health Care Contract Acquisition Costs
Health care benefits products included in our Health Care segment are cancelable by either the customer or the member monthly upon written notice. Acquisition costs related to our prepaid health care and health indemnity contracts are generally expensed as incurred. At December 31, 2017 and 2016, the balance of our deferred acquisition costs was $521 million and $412 million, respectively, comprised primarily of commissions paid on our Medicare Supplement products. Deferred acquisition costs are recorded as other current assets or other long-term assets on our Consolidated Balance Sheets and are
amortized over the estimated life of the contracts. The amortization of deferred acquisition costs is recorded in general and administrative expenses in our Consolidated Statements of Income.
Goodwill and Other Acquired Intangible Assets
When we complete an acquisition, we apply the acquisition method of accounting, which requires the recognition of goodwill (which represents the excess cost of the acquisition over the fair value of net assets acquired and identified intangible assets). We evaluate goodwill for impairment (at the reporting unit level) annually, or more frequently if circumstances indicate a possible impairment, by comparing an estimate of the fair value of the applicable reporting unit to its carrying value, including goodwill. If the carrying value exceeds fair value, we have historically compared the implied fair value of the applicable goodwill to its carrying amount to measure the amount of goodwill impairment, if any. Effective January 1, 2017, we adopted, on a prospective basis, new accounting guidance which simplifies the accounting for goodwill impairment. The new guidance eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. A goodwill impairment charge would be recognized if the carrying amount of a reporting unit exceeds the estimated fair value of the reporting unit. The fair value of each reporting unit substantially exceeded its carrying value in each of the three years ended December 31, 2017, 2016, or 2015, and no goodwill impairment loss was recognized in any of those years. In conjunction with the Group Insurance sale, which included a substantial portion of our Group Insurance business, the goodwill allocated to our Group Insurance segment of $113 million was included in the calculation of the total gain on the sale, with a corresponding reduction of the goodwill balance.
We report other acquired intangible assets at historical cost, net of accumulated amortization. Other acquired intangible assets primarily relate to provider networks, customer lists, value of business acquired ( VOBA ), technology and trademarks and are amortized over the useful-life based upon the pattern of future cash flows attributable to the asset. Other than VOBA and indefinite lived trademarks, other acquired intangible assets generally are amortized using the straight-line method. VOBA is amortized over the expected life of the acquired contracts in proportion to estimated premiums. Other intangible assets with indefinite lives are not amortized but are tested for impairment at least annually.
We regularly evaluate whether events or changes in circumstances indicate that the carrying value of other acquired intangible assets may not be recoverable. If we determine that the carrying value of an asset may not be recoverable, we group the asset with other assets and liabilities at the lowest level for which independent identifiable cash flows are available and estimate the future undiscounted cash flows expected to result from future use of the asset group and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying value of the asset group, we recognize an impairment loss for the amount by which the carrying value of the asset group exceeds its fair value. There were no material impairment losses on other acquired intangible assets recognized in any of the three years ended December 31, 2017, 2016 or 2015.
Property and Equipment
We report property and equipment at historical cost, net of accumulated depreciation. At December 31, 2017 and 2016, the historical cost of property and equipment was approximately $1.5 billion and $1.4 billion, respectively, and the related accumulated depreciation was $893 million and $851 million, respectively. We calculate depreciation primarily using the straight-line method over the estimated useful lives of the respective assets, which range from 10 to 40 years for buildings and 3 to 10 years for equipment. Depreciation expense was $118 million, $125 million and $131 million for the years ended
December 31, 2017, 2016 and 2015, respectively. If we determine the carrying value of our property and equipment is not recoverable, an impairment charge is recorded. There were no material impairment losses on property and equipment recognized in any of the three years ended December 31, 2017, 2016 or 2015.
Separate Accounts
Separate Accounts assets and liabilities in the Large Case Pensions segment represent funds maintained to meet specific objectives of contract holders who bear the investment risk. These assets and liabilities are carried at fair value. Net investment income and net realized capital gains and losses accrue directly to such contract holders. The assets of each account are legally segregated and are not subject to claims arising from our other businesses. Deposits, withdrawals, net investment income and net realized and net unrealized capital gains and losses on Separate Accounts assets are not reflected in our Consolidated Statements of Income or Cash Flows. Management fees charged to contract holders are included in fees and other revenue and recognized over the period earned.
Health Care Costs Payable
Health care costs payable consist principally of unpaid fee-for-service medical, dental and pharmacy claims, capitation costs, other amounts due to health care providers pursuant to risk-sharing arrangements related to the Health Care segment s Insured Commercial, Medicare and Medicaid products and accruals for state assessments. Unpaid health care claims include our estimate of payments we will make for (i) services rendered to our members but not yet reported to us and (ii) claims which have been reported to us but not yet paid, each as of the financial statement date (collectively, IBNR ) in our Health Care segment. Health care costs payable also include an estimate of the cost of services that will continue to be rendered after the financial statement date if we are obligated to pay for such services in accordance with contractual or regulatory requirements. Such estimates are developed using actuarial principles and assumptions which consider, among other things, historical and projected claim submission and processing patterns, assumed and historical medical cost trends, historical utilization of medical services, claim inventory levels, changes in membership and product mix, seasonality and other relevant factors. We reflect changes in these estimates in health care costs in our operating results in the period they are determined. Capitation costs represent contractual monthly fees paid to participating physicians and other medical providers for providing medical care, regardless of the volume of medical services provided to the member. Approximately 3% of our health care costs related to capitated arrangements in 2017 and approximately 4% of our health care costs related to capitated arrangements in both 2016 and 2015. Amounts due under risk-sharing arrangements are based on the terms of the underlying contracts with the providers and consider claims experience under the contracts through the financial statement date.
We develop our estimate of IBNR using actuarial principles and assumptions that consider numerous factors. Of those factors, we consider the analysis of historical and projected claim payment patterns (including claims submission and processing patterns) and the assumed health care cost trend rate (the year-over-year change in per member per month health care costs) to be the most critical assumptions. In developing our estimate of IBNR, we consistently apply these actuarial principles and assumptions each period, with consideration to the variability of related factors. There have been no significant changes to the methodologies or assumptions used to develop our estimate of IBNR in 2017.
We analyze historical claim payment patterns by comparing claim incurred dates (i.e., the date services were provided) to claim payment dates to estimate completion factors. We use completion factors predominantly to estimate the ultimate cost of claims incurred more than three months before the financial statement date. We estimate completion factors by aggregating claim data based on the month of service and month of claim payment and estimating the percentage of claims incurred for a given month that are complete by each month thereafter. For any given month, substantially all claims are paid within six months of the date of service, but it can take up to 48 months or longer after the date of service before all of the claims are completely resolved and paid. These historically-derived completion factors are then applied to claims paid through the financial statement date to estimate the ultimate claim cost for a given month s incurred claim activity. The difference between the estimated ultimate claim cost and the claims paid through the financial statement date represents our estimate of claims remaining to be paid as of the financial statement date and is included in our health care costs payable. We use completion factors predominantly to estimate the ultimate cost of claims with claim incurred dates greater than three months prior to the financial statement date. The completion factors we use reflect judgments and possible adjustments based on data such as claim inventory levels, claim submission and processing patterns and, to a lesser extent, other factors such as changes in health care
cost trend rates, changes in membership and changes in product mix. If claims are submitted or processed on a faster (slower) pace than prior periods, the actual claims may be more (less) complete than originally estimated using our completion factors, which may result in reserves that are higher (lower) than the ultimate cost of claims.
Because claims incurred within three months before the financial statement date are less mature, we use a combination of historically-derived completion factors and the assumed health care cost trend rate to estimate the ultimate cost of claims incurred for these months. We apply our actuarial judgment and place a greater emphasis on the assumed health care cost trend rate for the most recent claim incurred dates as these months may be influenced by seasonal patterns and changes in membership and product mix.
Our health care cost trend rate is affected by changes in per member utilization of medical services as well as changes in the unit cost of such services. Many factors influence the health care cost trend rate, including our ability to manage health care costs through product design, negotiation of favorable provider contracts and medical management programs, as well as the mix of our business. The health status of our members, aging of the population and other demographic characteristics, advances in medical technology and other factors continue to contribute to rising per member utilization and unit costs. Changes in health care practices, inflation, new technologies, increases in the cost of prescription drugs (including specialty pharmacy drugs), direct-to-consumer marketing by pharmaceutical companies, clusters of high-cost cases, claim intensity, changes in the regulatory environment, health care provider or member fraud and numerous other factors also contribute to the cost of health care and our health care cost trend rate.
For each reporting period, we use an extensive degree of judgment in the process of estimating our health care costs payable. As a result, considerable variability and uncertainty is inherent in such estimates, particularly with respect to claims with claim incurred dates of three months or less before the financial statement date; and the adequacy of such estimates is highly sensitive to changes in assumed completion factors and the assumed health care cost trend rates. For each reporting period we recognize the actuarial best estimate of health care costs payable considering the potential volatility in assumed completion factors and health care cost trend rates, as well as other factors. We believe our estimate of health care costs payable is reasonable and adequate to cover our obligations at December 31, 2017; however, actual claim payments may differ from our estimates. A worsening (or improvement) of our health care cost trend rates or changes in completion factors from those that we assumed in estimating health care costs payable at December 31, 2017 would cause these estimates to change in the near term, and such a change could be material.
Each quarter, we re-examine previously established health care costs payable estimates based on actual claim payments for prior periods and other changes in facts and circumstances. Given the extensive degree of judgment in this estimate, it is possible that our estimates of health care costs payable could develop either favorably (that is, our actual health care costs for the period were less than we estimated) or unfavorably. The changes in our estimate of health care costs payable may relate to a prior quarter, prior year or earlier periods. For our roll forward of our health care costs payable, refer to Note 7. Our reserving practice is to consistently recognize the actuarial best estimate of our ultimate liability for health care costs payable.
Unpaid claims consist primarily of reserves associated with certain short-duration group disability and term life insurance contracts in the Group Insurance segment, including an estimate for IBNR in our Group Insurance segment as of the financial statement date. Reserves associated with certain short-duration group disability and term life insurance contracts are based upon our estimate of the present value of future benefits, which is based on assumed investment yields and assumptions regarding mortality, morbidity and recoveries from the U.S. Social Security Administration. We develop our estimate of IBNR using actuarial principles and assumptions which consider, among other things, contractual requirements, claim incidence rates, claim recovery rates, seasonality and other relevant factors. We discount certain claim liabilities related to group long-term disability and life insurance waiver of premium contracts. The discount rates generally reflect our expected investment returns for the investments supporting all incurral years of these liabilities. The discount rates for retrospectively-rated contracts are set at contractually specified levels. Our estimates of unpaid claims are subject to change due to changes in the underlying experience of the insurance contracts, changes in investment yields or other factors, and these changes are recorded in current and future benefits in our Consolidated Statements of Income in the period they are determined. Substantially all of our life and
disability insurance liabilities have been fully ceded to unrelated third parties through indemnity reinsurance agreements, however we remain directly obligated to the policyholders.