FAIR VALUE

12 Months Ended

Dec. 31, 2023

Financial Assets

The following table summarizes our fair value measurements at December 31, 2023 and 2022, respectively, for financial assets measured at fair value on a recurring basis:


			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets (Level 1)		Other Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
	(in millions)
December 31, 2023
Cash equivalents	$	4,582	$	4,582	$	—	$	—
Debt securities:
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations	2,667		—		2,667		—
Mortgage-backed securities	3,522		—		3,522		—
Tax-exempt municipal securities	858		—		858		—
Mortgage-backed securities:
Residential	400		—		396		4
Commercial	1,345		—		1,345		—
Asset-backed securities	1,771		—		1,733		38
Corporate debt securities	6,445		—		6,269		176
Total debt securities	17,008		—		16,790		218
Common stock	—		—		—		—
Total invested assets	$	21,590	$	4,582	$	16,790	$	218

December 31, 2022
Cash equivalents	$	4,832	$	4,832	$	—	$	—
Debt securities:
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations	1,039		—		1,039		—
Mortgage-backed securities	3,230		—		3,230		—
Tax-exempt municipal securities	728		—		728		—
Mortgage-backed securities:
Residential	401		—		401		—
Commercial	1,399		—		1,399		—
Asset-backed securities	1,731		—		1,731		—
Corporate debt securities	5,726		—		5,625		101
Total debt securities	14,254		—		14,153		101
Common stock	7		7		—		—
Total invested assets	$	19,093	$	4,839	$	14,153	$	101

Our Level 3 assets had fair values of $218 million, or 1.0% of total invested assets, and $101 million, or 0.5% of total invested assets, at December 31, 2023 and 2022, respectively. During the years ended December 31, 2023 and 2022, the changes in the fair value of the assets measured using significant unobservable inputs (Level 3) were comprised of the following:


	For the year ended December 31, 2023		For the year ended December 31, 2022

	Private Placements
	(in millions)
Beginning balance at January 1	$	101	$	68
Total gains or losses:
Realized in earnings	—		—
Unrealized in other comprehensive income	3		(14)
Purchases	115		47
Sales	—		—
Settlements	—		—
Transfers Out	(8)		—
Transfers In	7		—
Balance at December 31	$	218	$	101

Interest Rate Swaps

During 2023, we entered into interest-rate swap agreements with major financial institutions to convert our interest-rate exposure on our $750 million of 5.875% senior notes, our $750 million of 5.500% senior notes, our $500 million of 3.950% senior notes and our $850 million of 5.950% from fixed rates to variable rates to align interest costs more closely with floating interest rates received on our cash equivalents and investment securities. Our swap agreements, which are considered derivative instruments, exchange the fixed interest rate under our 5.875%, 5.500%, 3.950% and 5.950% senior notes for a variable interest rate based on SOFR. Interest rate swaps with notional amounts of $650 million, maturing September 1, 2032, $300 million, maturing March 15, 2033, $450 million maturing August 15, 2049 and $400 million, maturing March 15, 2034, were outstanding on our 5.875%, 5.500%, 3.950% and 5.950% senior notes, respectively, at December 31, 2023. These swap agreements were qualified and designated as a fair value hedge. Our interest rate swaps are recognized in other assets or other liabilities, as appropriate, in our consolidated balance sheets at fair value as of the reporting date. Our interest rate swaps are highly effective at reflecting the fair value of our hedged fixed rate senior notes payable. We utilize market-based financing rates, forward yield curves and discount rates in determining fair value of these swaps at each reporting date, a Level 2 measure within the fair value hierarchy. The swap asset, included within other long-term assets on our consolidated balance sheet, was approximately $68 million at December 31, 2023. We include the gain or loss on the swap agreements in interest expense on our consolidated statement of income, the same line item as the offsetting loss or gain on the related senior notes. The gain or loss due to hedge ineffectiveness was not material for the year ended December 31, 2023.

Financial Liabilities

Our debt is recorded at carrying value in our consolidated balance sheets. The carrying value of our senior notes debt outstanding, net of unamortized debt issuance costs, was $10.8 billion at December 31, 2023 and $10.0 billion at December 31, 2022. The fair value of our senior note debt was $10.6 billion at December 31, 2023 and $9.4 billion at December 31, 2022. The fair value of our senior note debt is determined based on Level 2 inputs, including quoted market prices for the same or similar debt, or if no quoted market prices are available, on the current prices estimated to be available to us for debt with similar terms and remaining maturities. Carrying value approximates

fair value for our term loans and commercial paper borrowings. The commercial paper borrowings were $0.9 billion at December 31, 2023 and the term loan and commercial paper borrowings were $1.1 billion at December 31, 2022.

Put and Call Options Measured at Fair Value

Our put and call options associated with our equity method investments are measured at fair value each period using a Monte Carlo simulation.

Effective April 27, 2021, with the signing of the definitive agreement to acquire the remaining 60% interest of KAH, the respective put and call options were terminated. As such, the $63 million put and $440 million call fair values as of the first quarter of 2021 were reduced to zero, resulting in $377 million in other expense (income), net in our consolidated statements of income for the year ended December 31, 2021.

The put and call options fair values associated with our Primary Care Organization strategic partnership with WCAS, which are exercisable at a fixed revenue exit multiple and provide a minimum return on WCAS' investment if exercised, are measured at fair value each reporting period using a Monte Carlo simulation. The put and call options fair values, derived from the Monte Carlo simulation, were $595 million and $18 million, respectively, at December 31, 2023. The put and call options fair values, derived from the Monte Carlo simulation, were $267 million and $10 million, respectively, at December 31, 2022.

The significant unobservable inputs utilized in these Level 3 fair value measurements (and selected values) include the enterprise value, annualized volatility and credit spread. Enterprise value was derived from a discounted cash flow model, which utilized significant unobservable inputs for long-term revenue, to measure underlying cash flows, weighted average cost of capital and long term growth rate. The table below presents the assumptions used for December 31, 2023 and 2022, respectively:

December 31, 2023

December 31, 2022

Annualized volatility

16.1% - 17.8%

16.7% to 20.8%

Credit spread

0.9% - 1.1%

1.3% to 1.5%

Revenue exit multiple

1.5x - 2.5x

Weighted average cost of capital

11.0% - 12.5%

11.5% to 12.5%

Long term growth rate

3.0

The assumptions used for annualized volatility, credit spread and weighted average cost of capital reflect the lowest and highest values where they differ significantly across the series of put and call options due to their expected exercise dates.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a non-recurring basis subject to fair value adjustment only in certain circumstances. As disclosed in Note 3, “Acquisitions”, we completed our acquisition of KAH during the third quarter of 2021. The net assets acquired and resulting goodwill and other intangible assets were recorded at fair value primarily using Level 3 inputs. The net tangible assets including receivables and accrued liabilities were recorded at their carrying value which approximated their fair value due to their short term nature. The fair value of goodwill and other intangible assets were internally estimated based on the income approach. The income approach estimates fair value based on the present value of cash flow that the assets could be expected to generate in the future. We developed internal estimates for expected cash flows in the present value calculation using inputs and significant assumptions that include historical revenues and earnings, long-term growth rate, discount rate, contributory asset charges and future tax rates, among others. The excess purchase price over the fair value of assets and liabilities acquired is recorded as goodwill.

As disclosed in Note 3, we completed the sale of a 60% interest in Gentiva Hospice on August 11, 2022. The carrying value of the assets and liabilities of Gentiva Hospice disposed approximates fair value. The amount of

goodwill included in the carrying value is based on the relative fair value of Gentiva Hospice as compared to the total fair value of our home solutions reporting unit included within the CenterWell segment.

Additionally, as disclosed in Note 3, we completed our acquisitions of certain health and wellness related businesses during 2023, 2022, and 2021. The values of net tangible assets acquired and the resulting goodwill and other intangible assets were recorded at fair value using Level 3 inputs. The majority of the related tangible assets acquired and liabilities assumed were recorded at their carrying values as of the respective dates of acquisition, as their carrying values approximated their fair values due to their short-term nature. The fair values of goodwill and other intangible assets acquired in these acquisitions were internally estimated primarily based on the income approach. The income approach estimates fair value based on the present value of the cash flows that the assets are expected to generate in the future. We developed internal estimates for the expected cash flows and discount rates in the present value calculations. Other than assets acquired and liabilities assumed in these acquisitions, there were no material assets or liabilities measured at fair value on a nonrecurring basis during 2023, 2022, or 2021.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details