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EX-32 - EX-32 - HUMANA INChum-20150930xex32.htm
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EX-31.1 - EX-31.1 - HUMANA INChum-20150930xex31x1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 1-5975
HUMANA INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
61-0647538
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
500 West Main Street
Louisville, Kentucky 40202
(Address of principal executive offices, including zip code)
(502) 580-1000
(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  ¨
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  ¨
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
Class of Common Stock
Outstanding at
September 30, 2015
$0.16 2/3 par value
148,223,927 shares



Humana Inc.
FORM 10-Q
SEPTEMBER 30, 2015
INDEX
 
 
Page
Part I: Financial Information
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
 
Certifications
 




Humana Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30,
2015
 
December 31,
2014
 
(in millions, except share amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,597

 
$
1,935

Investment securities
7,423

 
7,598

Receivables, less allowance for doubtful accounts of $104 in 2015
and $98 in 2014:
986

 
1,053

Other current assets
5,767

 
4,007

Assets held-for-sale

 
943

Total current assets
15,773

 
15,536

Property and equipment, net
1,343

 
1,228

Long-term investment securities
1,879

 
1,949

Goodwill
3,266

 
3,231

Other long-term assets
2,035

 
1,583

Total assets
$
24,296

 
$
23,527

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Benefits payable
$
4,922

 
$
4,475

Trade accounts payable and accrued expenses
2,216

 
2,095

Book overdraft
296

 
334

Unearned revenues
297

 
361

Short-term borrowings
11

 

Liabilities held-for-sale

 
206

Total current liabilities
7,742

 
7,471

Long-term debt
3,822

 
3,825

Future policy benefits payable
2,154

 
2,349

Other long-term liabilities
225

 
236

Total liabilities
13,943

 
13,881

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock, $1 par; 10,000,000 shares authorized; none issued

 

Common stock, $0.16 2/3 par; 300,000,000 shares authorized;
198,350,100 shares issued at September 30, 2015 and 197,951,551 shares
issued at December 31, 2014
33

 
33

Capital in excess of par value
2,515

 
2,330

Retained earnings
10,960

 
9,916

Accumulated other comprehensive income
137

 
223

Treasury stock, at cost, 50,126,173 shares at September 30, 2015 and
48,347,541 shares at December 31, 2014
(3,292
)
 
(2,856
)
Total stockholders’ equity
10,353

 
9,646

Total liabilities and stockholders’ equity
$
24,296

 
$
23,527

See accompanying notes to condensed consolidated financial statements.

3


Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three months ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions, except per share results)
Revenues:
 
 
 
 
 
 
 
Premiums
$
12,987

 
$
11,607

 
$
39,447

 
$
34,274

Services
246

 
536

 
1,143

 
1,620

Investment income
130

 
95

 
338

 
278

Total revenues
13,363

 
12,238

 
40,928

 
36,172

Operating expenses:
 
 
 
 
 
 
 
Benefits
10,896

 
9,666

 
33,153

 
28,417

Operating costs
1,688

 
1,898

 
5,450

 
5,518

Depreciation and amortization
84

 
85

 
267

 
246

Total operating expenses
12,668

 
11,649

 
38,870

 
34,181

Income from operations
695

 
589

 
2,058

 
1,991

Gain on sale of business

 

 
267

 

Interest expense
47

 
38

 
140

 
108

Income before income taxes
648

 
551

 
2,185

 
1,883

Provision for income taxes
334

 
261

 
1,010

 
881

Net income
$
314

 
$
290

 
$
1,175

 
$
1,002

Basic earnings per common share
$
2.11

 
$
1.87

 
$
7.85

 
$
6.46

Diluted earnings per common share
$
2.09

 
$
1.85

 
$
7.77

 
$
6.39

Dividends declared per common share
$
0.29

 
$
0.28

 
$
0.86

 
$
0.83

See accompanying notes to condensed consolidated financial statements.

4


Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three months ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Net income
$
314

 
$
290

 
$
1,175

 
$
1,002

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Change in gross unrealized investment
gains/losses
25

 
(36
)
 
(48
)
 
128

Effect of income taxes
(9
)
 
13

 
18

 
(47
)
Total change in unrealized
investment gains/losses, net of tax
16

 
(23
)
 
(30
)
 
81

Reclassification adjustment for net
realized gains included in
investment income
(51
)
 
(6
)
 
(88
)
 
(9
)
Effect of income taxes
19

 
2

 
32

 
3

Total reclassification adjustment, net
of tax
(32
)
 
(4
)
 
(56
)
 
(6
)
Other comprehensive (loss) income, net
of tax
(16
)
 
(27
)
 
(86
)
 
75

Comprehensive income
$
298

 
$
263

 
$
1,089

 
$
1,077

See accompanying notes to condensed consolidated financial statements.

5


Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
For the nine months ended
September 30,
 
2015
 
2014
 
(in millions)
Cash flows from operating activities
 
 
 
Net income
$
1,175

 
$
1,002

Adjustments to reconcile net income to net cash provided by
operating activities:
 
 
 
Gain on sale of business
(267
)
 

Net realized capital gains
(88
)
 
(9
)
Stock-based compensation
92

 
76

Depreciation
263

 
240

Other intangible amortization
72

 
85

Provision (benefit) for deferred income taxes
13

 
(30
)
Changes in operating assets and liabilities, net of effect of
businesses acquired and dispositions:
 
 
 
Receivables
56

 
(68
)
Other assets
(1,080
)
 
(960
)
Benefits payable
447

 
783

Other liabilities
(140
)
 
238

Unearned revenues
(64
)
 
40

Other, net
52

 
28

Net cash provided by operating activities
531

 
1,425

Cash flows from investing activities
 
 
 
Proceeds from sale of business
1,055

 
72

Acquisitions, net of cash acquired
(38
)
 
(3
)
Purchases of property and equipment
(384
)
 
(361
)
Purchases of investment securities
(4,345
)
 
(1,949
)
Maturities of investment securities
881

 
702

Proceeds from sales of investment securities
3,448

 
1,171

Net cash provided by (used in) investing activities
617

 
(368
)
Cash flows from financing activities
 
 
 
Receipts (withdrawals) from contract deposits, net
(984
)
 
(743
)
Proceeds from issuance of senior notes, net

 
1,733

Proceeds from issuance of commercial paper, net
10

 

Change in book overdraft
(38
)
 
(136
)
Common stock repurchases
(380
)
 
(270
)
Dividends paid
(129
)
 
(129
)
Excess tax benefit from stock-based compensation
15

 
10

Proceeds from stock option exercises and other
20

 
45

Net cash (used in) provided by financing activities
(1,486
)
 
510

(Decrease) increase in cash and cash equivalents
(338
)
 
1,567

Cash and cash equivalents at beginning of period
1,935

 
1,138

Cash and cash equivalents at end of period
$
1,597

 
$
2,705

Supplemental cash flow disclosures:
 
 
 
Interest payments
$
105

 
$
83

Income tax payments, net
$
1,038

 
$
852

See accompanying notes to condensed consolidated financial statements.

6



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1. BASIS OF PRESENTATION AND SIGNIFICANT EVENTS
The accompanying condensed consolidated financial statements are presented in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America, or GAAP, or those normally made in an Annual Report on Form 10-K. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. For further information, the reader of this Form 10-Q should refer to our Form 10-K for the year ended December 31, 2014, that was filed with the Securities and Exchange Commission, or the SEC, on February 18, 2015. We refer to the Form 10-K as the “2014 Form 10-K” in this document. References throughout this document to “we,” “us,” “our,” “Company,” and “Humana” mean Humana Inc. and its subsidiaries.
The preparation of our condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The areas involving the most significant use of estimates are the estimation of benefits payable, future policy benefits payable, the impact of risk adjustment provisions related to our Medicare contracts, the valuation and related impairment recognition of investment securities, and the valuation and related impairment recognition of long-lived assets, including goodwill. These estimates are based on knowledge of current events and anticipated future events, and accordingly, actual results may ultimately differ materially from those estimates. Refer to Note 2 to the consolidated financial statements included in our 2014 Form 10-K for information on accounting policies that we consider in preparing our consolidated financial statements.
The financial information has been prepared in accordance with our customary accounting practices and has not been audited. In our opinion, the information presented reflects all adjustments necessary for a fair statement of interim results. All such adjustments are of a normal and recurring nature.
Proposed Merger
On July 2, 2015, we entered into an Agreement and Plan of Merger, which we refer to in this report as the Merger Agreement, with Aetna Inc. and certain wholly owned subsidiaries of Aetna Inc., which we refer to collectively as Aetna, which sets forth the terms and conditions under which we will merge with, and become a wholly owned subsidiary of Aetna, a transaction we refer to in this report as the Merger. Under the terms of the Merger Agreement, at the closing of the transaction, each outstanding share of our common stock will be converted into the right to receive (i) 0.8375 of a share of Aetna common stock and (ii) $125 in cash. The total transaction was estimated at approximately $37 billion including the assumption of Humana debt, based on the closing price of Aetna common shares on July 2, 2015. The Merger Agreement includes customary restrictions on the conduct of our business prior to the completion of the Merger, generally requiring us to conduct our business in the ordinary course and subjecting us to a variety of customary specified limitations absent Aetna’s prior written consent, including, for example, limitations on dividends (we agreed that our quarterly dividend will not exceed $0.29 per share) and repurchases of our securities (we agreed to suspend our share repurchase program), restrictions on our ability to enter into material contracts, and negotiated thresholds for capital expenditures, capital contributions, acquisitions and divestitures of businesses.
On October 19, 2015, our stockholders approved the adoption of the Merger Agreement at a special stockholder meeting. Also on October 19, 2015, the holders of Aetna outstanding shares approved the issuance of Aetna common stock in the Merger at a special meeting of Aetna shareholders.
The transaction is subject to customary closing conditions, including, among other things, (i) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of necessary approvals under state insurance and healthcare laws and regulations and pursuant to certain licenses of certain of Humana’s subsidiaries, (ii) the absence of legal restraints and prohibitions on the consummation of the Merger, (iii) the effectiveness of the registration statement in respect of the Aetna common stock to be issued in the Merger, (iv) listing of the Aetna common stock to be issued in the Merger on the New York Stock Exchange, (v) subject to the relevant standards set forth in the Merger Agreement, the accuracy of the representations and warranties made by each party, (vi) material compliance by each party with its covenants in the Merger Agreement,

7



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

and (vii) no “Company Material Adverse Effect” with respect to us and no “Parent Material Adverse Effect” with respect to Aetna, in each case since the execution of and as defined in the Merger Agreement. In addition, Aetna’s obligation to consummate the Merger is subject to (a) the condition that the required regulatory approvals do not impose any condition that, individually or in the aggregate, would reasonably be expected to have a “Regulatory Material Adverse Effect” (as such term is defined in the Merger Agreement), and (b) the Centers for Medicare and Medicaid Services, or CMS, has not imposed any sanctions with respect to our Medicare Advantage, or MA, business that, individually or in the aggregate, is or would reasonably be expected to be material and adverse to us and our subsidiaries, taken as a whole. The Merger is currently expected to close in the second half of 2016.
Business Segment Reclassifications
On January 1, 2015, we realigned certain of our businesses among our reportable segments to correspond with internal management reporting changes and renamed our Employer Group segment to the Group segment. Our three reportable segments remain Retail, Group, and Healthcare Services. The more significant realignments included reclassifying Medicare benefits offered to groups to the Retail segment from the Group segment, bringing all of our Medicare offerings, which are now managed collectively, together in one segment, recognizing that in some instances we market directly to individuals that are part of a group Medicare account. In addition, we realigned our military services business, primarily consisting of our TRICARE South Region contract previously included in the Other Businesses category, to our Group segment as we consider this contract with the government to be a group account. Prior period segment financial information has been recast to conform to the 2015 presentation. See Note 14 for segment financial information.

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2015, the Financial Accounting Standards Board, or FASB, issued new guidance requiring insurance entities to provide additional disclosures about claim liabilities including paid claims development information by accident year and claim frequency data and related methodologies. The guidance is effective for us beginning with the 2016 annual reporting period and interim periods beginning in 2017. We are currently evaluating the impact the new guidance will have on our disclosures.
In April 2015, the FASB issued new guidance to help entities determine whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software or as a service contract. The guidance is effective for us beginning with interim and annual reporting periods in 2016, with early adoption permitted. Upon adoption, an entity has the option to apply the provisions either prospectively to all arrangements entered into or materially modified, or retrospectively. We are currently evaluating the impact, if any, on our results of operations, financial position, and cash flows.
In March 2015, the FASB issued new guidance which changes the presentation of debt issuance costs from an asset to a direct reduction of the related debt liability. The new guidance is effective for us beginning with annual and interim periods in 2016 with early adoption permitted. The adoption of the new guidance will not have a material impact on our results of operations, financial condition, or cash flows.
In February 2015, the FASB issued an amendment to current consolidation guidance that modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, eliminating the presumption that a general partner should consolidate a limited partnership, and affects the consolidation analysis of reporting entities that are involved with variable interest entities. The new guidance is effective for us beginning with interim and annual reporting periods in 2016, with early adoption permitted. All legal entities are subject to reevaluation under the revised consolidation model. We are currently evaluating the impact, if any, on our results of operations, financial position, and cash flows.
In May 2014, the FASB issued new guidance that amends the accounting for revenue recognition. The amendments are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices, and improve disclosure requirements. Insurance contracts are not included in the scope of this new guidance. In July 2015, the FASB decided to defer the effective date provided in the new revenue guidance by one year. Giving effect to this deferral, the new guidance is effective for us beginning with annual and interim periods in 2018. We are currently evaluating the impact on our results of operations, financial condition, and cash flows.

8



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

There are no other recently issued accounting standards that apply to us or that are expected to have a material impact on our results of operations, financial condition, or cash flows.
3. ACQUISITIONS AND DIVESTITURES
On June 1, 2015, we completed the sale of our wholly owned subsidiary, Concentra Inc., or Concentra, to MJ Acquisition Corporation, a joint venture between Select Medical Holdings Corporation and Welsh, Carson, Anderson & Stowe XII, L.P., a private equity fund, for approximately $1,055 million in cash, excluding approximately $25 million of transaction costs. In connection with the sale, we recognized a pre-tax gain, net of transaction costs, of $267 million which is reported as gain on sale of business in the accompanying condensed consolidated statements of income for the nine months ended September 30, 2015.
In March 2015, we classified Concentra as held-for-sale and aggregated Concentra's assets and liabilities separately on the balance sheet, including a reclassification of the December 31, 2014 balance sheet for comparative purposes. The assets and liabilities of Concentra that were disposed of on June 1, 2015 and classified as held-for-sale as of December 31, 2014 were as follows:
 
June 1, 2015
 
December 31, 2014
Assets
(in millions)
Receivables, net
$
130

 
$
115

Property and equipment, net
197

 
191

Goodwill
480

 
480

Other intangible assets, net
124

 
131

Other assets
27

 
26

Total assets disposed/held-for-sale
958

 
943

Liabilities
 
 
 
Trade accounts payable and accrued expenses
81

 
90

Other liabilities
114

 
116

Total liabilities disposed/held-for-sale
195

 
206

Net assets disposed
$
763

 
$
737

For the nine months ended September 30, 2015, the accompanying condensed consolidated statement of income includes revenues related to Concentra of $411 million and income before income taxes of $15 million. Given that the sale of Concentra closed on June 1, 2015, the accompanying condensed consolidated statement of income for the three months ended September 30, 2015, does not include any results of operations for Concentra.
During 2015 and 2014, we acquired health and wellness related businesses which, individually or in the aggregate, have not had a material impact on our results of operations, financial condition, or cash flows. The results of operations and financial condition of these businesses have been included in our condensed consolidated statements of income and condensed consolidated balance sheets from the acquisition dates. Acquisition-related costs recognized in 2015 and 2014 were not material to our results of operations. The pro forma financial information assuming the acquisitions had occurred as of the beginning of the calendar year prior to the year of acquisition, as well as the revenues and earnings generated during the year of acquisition, were not material for disclosure purposes.

9



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

4. INVESTMENT SECURITIES
Investment securities classified as current and long-term were as follows at September 30, 2015 and December 31, 2014, respectively:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(in millions)
September 30, 2015
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
$
325

 
$
3

 
$

 
$
328

Mortgage-backed securities
1,553

 
19

 
(5
)
 
1,567

Tax-exempt municipal securities
2,680

 
79

 
(8
)
 
2,751

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
13

 

 

 
13

Commercial
1,048

 
11

 
(28
)
 
1,031

Asset-backed securities
273

 
1

 
(1
)
 
273

Corporate debt securities
3,185

 
195

 
(41
)
 
3,339

Total debt securities
$
9,077

 
$
308

 
$
(83
)
 
$
9,302

 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
$
365

 
$
10

 
$
(1
)
 
$
374

Mortgage-backed securities
1,453

 
50

 
(5
)
 
1,498

Tax-exempt municipal securities
2,931

 
140

 
(3
)
 
3,068

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
17

 

 

 
17

Commercial
846

 
16

 
(19
)
 
843

Asset-backed securities
28

 
1

 

 
29

Corporate debt securities
3,432

 
299

 
(13
)
 
3,718

Total debt securities
$
9,072

 
$
516

 
$
(41
)
 
$
9,547


10



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows at September 30, 2015 and December 31, 2014, respectively:
 
Less than 12 months
 
12 months or more
 
Total
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
(in millions)
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and other U.S.
government corporations
and agencies:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
obligations
$
35

 
$

 
$
19

 
$

 
$
54

 
$

Mortgage-backed
securities
863

 
(3
)
 
90

 
(2
)
 
953

 
(5
)
Tax-exempt municipal
securities
518

 
(7
)
 
24

 
(1
)
 
542

 
(8
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
2

 

 
4

 

 
6

 

Commercial
236

 
(3
)
 
274

 
(25
)
 
510

 
(28
)
Asset-backed securities
165

 
(1
)
 

 

 
165

 
(1
)
Corporate debt securities
690

 
(33
)
 
57

 
(8
)
 
747

 
(41
)
Total debt securities
$
2,509

 
$
(47
)
 
$
468

 
$
(36
)
 
$
2,977

 
$
(83
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and other U.S.
government corporations
and agencies:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
obligations
$
79

 
$

 
$
80

 
$
(1
)
 
$
159

 
$
(1
)
Mortgage-backed
securities
22

 

 
320

 
(5
)
 
342

 
(5
)
Tax-exempt municipal
securities
131

 
(1
)
 
118

 
(2
)
 
249

 
(3
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
1

 

 
4

 

 
5

 

Commercial
31

 
(1
)
 
267

 
(18
)
 
298

 
(19
)
Asset-backed securities
13

 

 

 

 
13

 

Corporate debt securities
219

 
(6
)
 
128

 
(7
)
 
347

 
(13
)
Total debt securities
$
496

 
$
(8
)
 
$
917

 
$
(33
)
 
$
1,413

 
$
(41
)
Approximately 98% of our debt securities were investment-grade quality, with a weighted average credit rating of AA- by S&P at September 30, 2015. Most of the debt securities that were below investment-grade were rated BB, the higher end of the below investment-grade rating scale. At September 30, 2015, 9.1% of our tax-exempt municipal securities were pre-refunded, generally with U.S. government and agency securities. Tax-exempt municipal securities that were not pre-refunded were diversified among general obligation bonds of U.S. states and local municipalities as well as special revenue bonds. General obligation bonds, which are backed by the taxing power and full faith of the issuer, accounted for 39% of the tax-exempt municipals that were not pre-refunded in the portfolio. Special revenue

11



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

bonds, issued by a municipality to finance a specific public works project such as utilities, water and sewer, transportation, or education, and supported by the revenues of that project, accounted for the remaining 61% of these municipals. Our general obligation bonds are diversified across the United States with no individual state exceeding 14%. Our investment policy limits investments in a single issuer and requires diversification among various asset types.
The recoverability of our non-agency commercial mortgage-backed securities is supported by factors such as seniority, underlying collateral characteristics and credit enhancements. At September 30, 2015, these commercial mortgage-backed securities primarily were composed of senior tranches having high credit support. The weighted average credit rating of all commercial mortgage-backed securities was AA+ at September 30, 2015.
The percentage of corporate securities associated with the financial services industry was 25% at September 30, 2015 and 21% at December 31, 2014.
All issuers of securities we own that were trading at an unrealized loss at September 30, 2015 remain current on all contractual payments. After taking into account these and other factors previously described, we believe these unrealized losses primarily were caused by an increase in market interest rates in the current markets since the time the securities were purchased. At September 30, 2015, we did not intend to sell the securities with an unrealized loss position in accumulated other comprehensive income, and it is not likely that we will be required to sell these securities before recovery of their amortized cost basis. As a result, we believe that the securities with an unrealized loss were not other-than-temporarily impaired at September 30, 2015.
The detail of realized gains (losses) related to investment securities and included within investment income was as follows for the three and nine months ended September 30, 2015 and 2014:
 
Three months ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Gross realized gains
$
62

 
$
7

 
$
108

 
$
14

Gross realized losses
(11
)
 
(1
)
 
(20
)
 
(5
)
Net realized capital gains
$
51

 
$
6


$
88


$
9

There were no material other-than-temporary impairments for the three and nine months ended September 30, 2015 or 2014.
The contractual maturities of debt securities available for sale at September 30, 2015, regardless of their balance sheet classification, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
Amortized
Cost
 
Fair
Value
 
(in millions)
Due within one year
$
420

 
$
422

Due after one year through five years
1,980

 
2,055

Due after five years through ten years
1,691

 
1,737

Due after ten years
2,099

 
2,204

Mortgage and asset-backed securities
2,887

 
2,884

Total debt securities
$
9,077

 
$
9,302


12



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

5. FAIR VALUE
Financial Assets
The following table summarizes our fair value measurements at September 30, 2015 and December 31, 2014, 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)
September 30, 2015
 
 
 
 
 
 
 
Cash equivalents
$
1,459

 
$
1,459

 
$

 
$

Debt securities:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
328

 

 
328

 

Mortgage-backed securities
1,567

 

 
1,567

 

Tax-exempt municipal securities
2,751

 

 
2,746

 
5

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
13

 

 
13

 


Commercial
1,031

 

 
1,031

 

Asset-backed securities
273

 

 
272

 
1

Corporate debt securities
3,339

 

 
3,334

 
5

Total debt securities
9,302

 

 
9,291

 
11

Total invested assets
$
10,761

 
$
1,459

 
$
9,291

 
$
11

 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
Cash equivalents
$
1,712

 
$
1,712

 
$

 
$

Debt securities:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
374

 

 
374

 

Mortgage-backed securities
1,498

 

 
1,498

 

Tax-exempt municipal securities
3,068

 

 
3,060

 
8

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
17

 

 
17

 

Commercial
843

 

 
843

 

Asset-backed securities
29

 

 
28

 
1

Corporate debt securities
3,718

 

 
3,695

 
23

Total debt securities
9,547

 

 
9,515

 
32

Total invested assets
$
11,259

 
$
1,712

 
$
9,515

 
$
32


13



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

There were no material transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2015 or September 30, 2014.
Our Level 3 assets had a fair value of $11 million at September 30, 2015, or 0.1% of our total invested assets. During the three and nine months ended September 30, 2015 and 2014, the changes in the fair value of the assets measured using significant unobservable inputs (Level 3) were comprised of the following:
 
For the three months ended September 30,
 
2015
 
2014
 
Private
Placements
 
Auction
Rate
Securities
 
Total
 
Private
Placements
 
Auction
Rate
Securities
 
Total
 
(in millions)
Beginning balance at July 1
$
6

 
$
5

 
$
11

 
$
24

 
$
13

 
$
37

Total gains or losses:
 
 
 
 
 
 
 
 
 
 
 
Realized in earnings

 

 

 

 

 

Unrealized in other
comprehensive income

 

 

 
1

 

 
1

Purchases

 

 

 

 

 

Sales

 

 

 

 

 

Settlements

 

 

 

 

 

Balance at September 30
$
6

 
$
5

 
$
11

 
$
25

 
$
13

 
$
38

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the nine months ended September 30,
 
2015
 
2014
 
Private
Placements
 
Auction
Rate
Securities
 
Total
 
Private
Placements
 
Auction
Rate
Securities
 
Total
 
(in millions)
Beginning balance at January 1
$
24

 
$
8

 
$
32

 
$
24

 
$
13

 
$
37

Total gains or losses:
 
 
 
 
 
 
 
 
 
 
 
Realized in earnings
(1
)
 

 
(1
)
 

 

 

Unrealized in other
comprehensive income

 

 

 
1

 

 
1

Purchases

 

 

 

 

 

Sales
(17
)
 
(3
)
 
(20
)
 

 

 

Settlements

 

 

 

 

 

Balance at September 30
$
6

 
$
5

 
$
11

 
$
25

 
$
13

 
$
38

Financial Liabilities
Our long-term debt is recorded at carrying value in our consolidated balance sheets. The carrying value of our long-term debt outstanding was $3,822 million at September 30, 2015 and $3,825 million at December 31, 2014. The fair value of our long-term debt was $4,007 million at September 30, 2015 and $4,102 million at December 31, 2014. The fair value of our long-term 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.

14



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
As disclosed in Note 3, we completed the acquisition of certain health and wellness related businesses during 2015 and 2014. 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 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 used 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 the three and nine months ended September 30, 2015 or 2014.
6. MEDICARE PART D
We cover prescription drug benefits in accordance with Medicare Part D under multiple contracts with the Centers for Medicare and Medicaid Services, or CMS, as described in Note 2 to the consolidated financial statements included in our 2014 Form 10-K. The accompanying condensed consolidated balance sheets include the following amounts associated with Medicare Part D at September 30, 2015 and December 31, 2014. CMS subsidies/discounts in the table below include the reinsurance and low-income cost subsidies funded by CMS for which we assume no risk as well as brand name prescription drug discounts for Part D plan participants in the coverage gap funded by CMS and pharmaceutical manufacturers. The risk corridor settlement includes amounts classified as long-term because settlement associated with the 2015 provision will exceed 12 months at September 30, 2015.
 
September 30, 2015
 
December 31, 2014
Risk
Corridor
Settlement
 
CMS
Subsidies/
Discounts
 
Risk
Corridor
Settlement
 
CMS
Subsidies/
Discounts
 
(in millions)
Other current assets
$
107

 
$
2,763

 
$
105

 
$
1,690

Trade accounts payable and accrued expenses
(11
)
 
(66
)
 
(36
)
 
(32
)
Net current asset
96

 
2,697

 
69

 
1,658

Other long-term assets
53

 

 

 

Other long-term liabilities
(11
)
 

 

 

Net long-term asset
42

 

 

 

Total net asset
$
138

 
$
2,697

 
$
69

 
$
1,658

On October 30, 2015, we collected approximately $1.7 billion upon settlement with CMS for the 2014 plan year, including $1.6 billion for reinsurance and low-income cost subsidies.


15



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

7. HEALTH CARE REFORM
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (which we collectively refer to as the Health Care Reform Law) established risk spreading premium stabilization programs including a permanent risk adjustment program and temporary risk corridor and reinsurance programs, which we collectively refer to as the 3Rs, effective January 1, 2014. The 3Rs are applicable to certain of our commercial medical insurance products as further discussed in Note 2 to our 2014 Form 10-K. On June 30, 2015 we received notification from CMS of risk adjustment and reinsurance settlement amounts for 2014. We revised our 2014 coverage year estimates to reflect actual amounts and also made a corresponding adjustment to our risk corridor estimate based on these results. As expected, the change in estimate for risk adjustment was substantially offset by the corresponding change in estimate for risk corridor, both of which are reflected as changes in premiums revenue in our condensed consolidated statements of income. The change in estimate related to the 3Rs for the 2014 coverage year was a decline in the estimated net receivable of approximately $43 million for the nine months ended September 30, 2015. In addition, we revised our 3Rs estimates for the 2015 coverage year based on the data from CMS for 2014.
During the three months ended September 30, 2015, we paid $186 million in risk adjustment charges and received payments of $481 million for reinsurance recoverables and $50 million for risk adjustment settlements associated with the 2014 coverage year. We expect to collect the remaining reinsurance recoverable and risk adjustment receivable for the 2014 coverage year of approximately $50 million in the aggregate in the fourth quarter of 2015.
On October 1, 2015, we and other industry participants received notification from CMS that 12.6% of risk corridor receivables for the 2014 coverage year would be paid between December 2015 and January 2016 based on expected risk corridor collections under the program for the 2014 coverage year. The risk corridor program is a three year program and HHS guidance provides that risk corridor collections over the life of the three year program will first be applied to any shortfalls from previous benefit years before application to current year obligations. Risk corridor payables to issuers are obligations of the United States Government under the Health Care Reform law which requires the Secretary of HHS to make full payments to issuers. In the event of a shortfall at the end of the three year program, HHS has asserted it will explore other sources of funding for risk corridor payments, subject to the availability of appropriations. Based on the notice from CMS, we classified 12.6%, or $31 million, of our gross risk corridor receivable for the 2014 coverage year as current and classified our remaining gross risk corridor receivables for both the 2014 and 2015 coverage years as long-term because settlement is expected to exceed 12 months at September 30, 2015.

16



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

The accompanying condensed consolidated balance sheets include the following amounts associated with the 3Rs at September 30, 2015 and December 31, 2014. Amounts classified as long-term represent settlements that we expect to exceed 12 months at September 30, 2015.
 
September 30, 2015
 
December 31, 2014
 
Risk Adjustment
Settlement
 
Reinsurance
Recoverables
 
Risk
Corridor
Settlement
 
Risk Adjustment
Settlement
 
Reinsurance
Recoverables
 
Risk
Corridor
Settlement
 
(in millions)
2014 Coverage Year
 
 
 
 
 
 
 
 
 
 
 
Premiums receivable
$
10
 
 
$

 
$

 
$
131
 
 
$

 
$

Other current assets
 
 
40

 
31

 
 
 
586

 
55

Trade accounts payable and
accrued expenses
 
 

 
(1
)
 
(89
)
 

 
(4
)
Net current asset
10
 
 
40

 
30

 
42
 
 
586

 
51

Other long-term assets
 
 

 
211

 
 
 

 

Other long-term liabilities
 
 

 

 
 
 

 

Net long-term asset
 
 

 
211

 
 
 

 

Total 2014 coverage year net
asset
10
 
 
40

 
241

 
42
 
 
586

 
51

2015 Coverage Year
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums receivable
88
 
 

 

 
 
 

 

Other current assets
 
 
344

 

 
 
 

 

Trade accounts payable and
accrued expenses
(154
)
 

 
(1
)
 
 
 

 

Net current (liability) asset
(66
)
 
344

 
(1
)
 
 
 

 

Other long-term assets
7
 
 
27

 
206

 
 
 

 

Other long-term liabilities
 
 

 

 
 
 

 

Net long-term asset
7
 
 
27

 
206

 
 
 

 

Total 2015 coverage year net
(liability) asset
(59
)
 
371

 
205

 
 
 

 

Total net (liability) asset
$
(49
)
 
$
411

 
$
446

 
$
42
 
 
$
586

 
$
51


Our portion of the annual health insurance industry fee attributed to calendar year 2015 and payable to the federal government in 2015 in accordance with the Health Care Reform Law was approximately $867 million. This fee is not deductible for tax purposes. Each year on January 1, we record a liability for this fee in other current liabilities which we carry until the fee is paid. We record a corresponding deferred cost in other current assets in our condensed consolidated financial statements which is amortized ratably to expense over the calendar year. Amortization of the deferred cost resulted in operating cost expense of approximately $217 million for the three months ended September 30, 2015 and $650 million for the nine months ended September 30, 2015. For the three and nine months ended September 30, 2014 there was approximately $141 million and $421 million, respectively, of operating cost expense resulting from the amortization of the 2014 annual health insurance fee of $562 million. The remaining deferred cost asset balance was approximately $217 million at September 30, 2015.

17



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

8. GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amount of goodwill for our reportable segments has been retrospectively adjusted to conform to the 2015 presentation as discussed in Note 1. Changes in the carrying amount of goodwill for our reportable segments for the nine months ended September 30, 2015 were as follows:
 
Retail
 
Group
 
Healthcare
Services
 
Other
Businesses
 
Total
 
(in millions)
Balance at January 1, 2015
$
1,069

 
$
385

 
$
1,777

 
$

 
$
3,231

Acquisitions

 

 
35

 

 
35

Balance at September 30, 2015
$
1,069

 
$
385

 
$
1,812

 
$

 
$
3,266

Healthcare Services segment goodwill of $480 million associated with the sale of Concentra was reclassified to assets held-for-sale as of January 1, 2015 and excluded from the table above. This $480 million of goodwill was disposed of on June 1, 2015 with the completion of the sale of Concentra.
The following table presents details of our other intangible assets included in other long-term assets in the accompanying condensed consolidated balance sheets at September 30, 2015 and December 31, 2014 and excludes Concentra amounts classified as held-for-sale as of December 31, 2014:
 
 
 
September 30, 2015
 
December 31, 2014
 
Weighted
Average
Life
 
Cost
 
Accumulated
Amortization
 
Net
 
Cost
 
Accumulated
Amortization
 
Net
 
(in millions)
Other intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer contracts/
relationships
9.9 yrs
 
$
567

 
$
278

 
$
289

 
$
657

 
$
326

 
$
331

Trade names and
technology
8.2 yrs
 
105

 
50

 
55

 
115

 
50

 
65

Provider contracts
14.6 yrs
 
51

 
23

 
28

 
52

 
21

 
31

Noncompetes and
other
8.2 yrs
 
32

 
25

 
7

 
41

 
28

 
13

Total other intangible
assets
9.9 yrs
 
$
755

 
$
376

 
$
379

 
$
865

 
$
425

 
$
440


18



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

    
Amortization expense for other intangible assets was approximately $22 million for the three months ended September 30, 2015 and $29 million for the three months ended September 30, 2014. For the nine months ended September 30, 2015 and 2014, amortization expense for other intangible assets was approximately $72 million and $85 million, respectively. The following table presents our estimate of amortization expense for 2015 and each of the five next succeeding years:
 
(in millions)
For the years ending December 31,:
 
2015
$
93

2016
78

2017
71

2018
63

2019
51

2020
47

9. EARNINGS PER COMMON SHARE COMPUTATION
Detail supporting the computation of basic and diluted earnings per common share was as follows for the three and nine months ended September 30, 2015 and 2014:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(dollars in millions, except per common share results; number of shares in thousands)
Net income available for common stockholders
$
314

 
$
290

 
$
1,175

 
$
1,002

Weighted average outstanding shares of common stock
used to compute basic earnings per common share
148,889

 
154,502

 
149,617

 
155,006

Dilutive effect of:
 
 
 
 
 
 
 
Employee stock options
182

 
203

 
198

 
233

Restricted stock
1,395

 
1,525

 
1,506

 
1,402

Shares used to compute diluted earnings per common share
150,466

 
156,230

 
151,321

 
156,641

Basic earnings per common share
$
2.11

 
$
1.87

 
$
7.85

 
$
6.46

Diluted earnings per common share
$
2.09

 
$
1.85

 
$
7.77

 
$
6.39

Number of antidilutive stock options and restricted stock
excluded from computation
320

 
43

 
451

 
420


19



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

10. STOCKHOLDERS’ EQUITY
Dividends
The following table provides details of dividend payments, excluding dividend equivalent rights, in 2014 and 2015 under our Board approved quarterly cash dividend policy:
Record
Date
 
Payment
Date
 
Amount
per Share
 
Total
Amount
 
 
 
 
 
 
(in millions)
2014 payments
 
 
 
 
 
 
12/31/2013
 
1/31/2014
 
$
0.27

 
$
42

3/31/2014
 
4/25/2014
 
$
0.27

 
$
42

6/30/2014
 
7/25/2014
 
$
0.28

 
$
43

9/30/2014
 
10/31/2014
 
$
0.28

 
$
43

2015 payments
 
 
 
 
 
 
12/31/2014
 
1/30/2015
 
$
0.28

 
$
42

3/31/2015
 
4/24/2015
 
$
0.28

 
$
42

6/30/2015
 
7/31/2015
 
$
0.29

 
$
43

9/30/2015
 
10/30/2015
 
$
0.29

 
$
43

The Merger discussed in Note 1 does not impact our ability and intent to continue quarterly dividend payments prior to the closing of the Merger consistent with our historical dividend payments. Under the terms of the Merger Agreement, we have agreed with Aetna that our quarterly dividend will not exceed $0.29 per share prior to the closing of the Merger. Declaration and payment of future quarterly dividends is at the discretion of our Board and may be adjusted as business needs or market conditions change. In addition, under the terms of the Merger Agreement, we have agreed with Aetna to coordinate the declaration and payment of dividends so that our stockholders do not fail to receive a quarterly dividend around the time of the closing of the Merger.
Stock Repurchases
In September 2014, our Board of Directors replaced a previous share repurchase authorization of up to $1 billion (of which $816 million remained unused) with a new authorization for repurchases of up to $2 billion of our common shares exclusive of shares repurchased in connection with employee stock plans, expiring on December 31, 2016. Under the share repurchase authorization, shares may be purchased from time to time at prevailing prices in the open market, by block purchases, through plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or in privately-negotiated transactions (including pursuant to accelerated share repurchase agreements with investment banks), subject to certain regulatory restrictions on volume, pricing, and timing. Pursuant to the Merger Agreement, after July 2, 2015, we are prohibited from repurchasing any of our outstanding securities without the prior written consent of Aetna, other than repurchases of shares of our common stock in connection with the exercise of outstanding stock options or the vesting or settlement of outstanding restricted stock awards. Accordingly, as announced on July 3, 2015, we have suspended our share repurchase program due to the Merger Agreement. Our remaining repurchase authorization was $1.04 billion as of July 3, 2015.
On November 7, 2014, we announced that we had entered into an accelerated share repurchase agreement, or ASR Agreement, with Goldman, Sachs & Co., or Goldman Sachs, to repurchase $500 million of our common stock as part of the $2 billion share repurchase program authorized in September 2014. Under the ASR Agreement, on November 10, 2014, we made a payment of $500 million to Goldman Sachs from available cash on hand and received an initial delivery of 3.06 million shares of our common stock from Goldman Sachs based on the then current market price of Humana common stock. The payment to Goldman Sachs was recorded as a reduction to stockholders’ equity, consisting of a $400 million increase in treasury stock, which reflected the value of the initial 3.06 million shares received upon initial settlement, and a $100 million decrease in capital in excess of par value, which reflected the value of stock held back by Goldman Sachs pending final settlement of the ASR Agreement. Upon settlement of the ASR on March 13,

20



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

2015, we received an additional 0.36 million shares as determined by the average daily volume weighted-average share price of our common stock during the term of the ASR Agreement of $146.21, bringing the total shares received under this program to 3.42 million. In addition, upon settlement we reclassified the $100 million value of stock initially held back by Goldman Sachs from capital in excess of par value to treasury stock.
Excluding the 0.36 million shares received in March 2015 upon final settlement of our ASR Agreement for which no cash was paid during the period, share repurchases were as follows during the nine months ended September 30, 2015 and 2014:
 
 
 
 
Nine months ended September 30,
 
 
 
 
2015
 
2014
Authorization Date
 
Purchase Not to Exceed
 
Shares
 
Cost
 
Shares
 
Cost
 
 
(in millions)
September 2014
 
$
2,000

 
1.85

 
$
329

 
0.27

 
$
35

April 2014
 
1,000

 

 

 
1.50

 
184

April 2013
 
1,000

 

 

 
0.10

 
11

Total repurchases
 
 
 
1.85

 
$
329

 
1.87

 
$
230

In connection with employee stock plans, we acquired 0.3 million common shares for $51 million and 0.4 million common shares for $40 million during the nine months ended September 30, 2015 and 2014, respectively, which amounts are not included in the table above.
Treasury Stock Reissuance
We reissued 0.7 million shares of treasury stock during the nine months ended September 30, 2015 at a cost of $44 million associated with restricted stock unit vestings and option exercises.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income included, net of tax, net unrealized gains on our investment securities of $142 million at September 30, 2015 and $301 million at December 31, 2014. In addition, accumulated other comprehensive income included, net of tax, $5 million at September 30, 2015 and $78 million at December 31, 2014 for an additional liability that would exist on our closed block of long-term care insurance policies if unrealized gains on the sale of the investments backing such products had been realized and the proceeds reinvested at then current yields. Refer to Note 18 to the consolidated financial statements in our 2014 Form 10-K for further discussion of our long-term care insurance policies.
11. INCOME TAXES
The effective income tax rate was 51.5% for the three months ended September 30, 2015, compared to 47.5% for the three months ended September 30, 2014 primarily reflecting an increase in the non-deductible health insurance industry fee from 2014 as well as the impact of non-deductible transaction costs associated with the Merger. For the nine months ended September 30, 2015, the effective tax rate was 46.2% compared to 46.8% for the nine months ended September 30, 2014. The tax effect of the sale of Concentra reduced our effective tax rate by approximately 4.6 percentage points for the nine months ended September 30, 2015, substantially offset by the same items impacting the three months ended September 30, 2015, as noted above. Humana Inc., our parent company, recognized the deferred tax asset for the excess of the tax basis over the book basis of its Concentra subsidiary of approximately $53 million during the first quarter of 2015 because realization of the asset in the foreseeable future was apparent with the classification of the assets and liabilities of Concentra as held-for-sale.

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(Unaudited)

12.  DEBT
The carrying value of long-term debt outstanding was as follows at September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
December 31, 2014
 
(in millions)
Senior notes:
 
 
 
  $500 million, 7.20% due June 15, 2018
$
504

 
$
504

  $300 million, 6.30% due August 1, 2018
309

 
312

  $400 million, 2.625% due October 1, 2019
400

 
400

  $600 million, 3.15% due December 1, 2022
598

 
598

  $600 million, 3.85% due October 1, 2024
599

 
599

  $250 million, 8.15% due June 15, 2038
266

 
266

  $400 million, 4.625% due December 1, 2042
400

 
400

  $750 million, 4.95% due October 1, 2044
746

 
746

     Total long-term debt
$
3,822

 
$
3,825


Senior Notes    

In September 2014, we issued $400 million of 2.625% senior notes due October 1, 2019, $600 million of 3.85% senior notes due October 1, 2024 and $750 million of 4.95% senior notes due October 1, 2044. Our net proceeds, reduced for the underwriters' discount and commission and offering expenses, were $1.73 billion. We used a portion of the net proceeds to redeem the 6.45% senior unsecured notes as discussed below.

In October 2014, we redeemed the $500 million 6.45% senior unsecured notes due June 1, 2016, at 100% of the principal amount plus applicable premium for early redemption and accrued and unpaid interest to the redemption date, for cash totaling approximately $560 million. We recognized a loss on extinguishment of debt of approximately $37 million in October 2014 for the redemption of these notes.

Our senior notes, which are unsecured, may be redeemed at our option at any time at 100% of the principal amount plus accrued interest and a specified make-whole amount. The 7.20% and 8.15% senior notes are subject to an interest rate adjustment if the debt ratings assigned to the notes are downgraded (or subsequently upgraded). In addition, each series of our senior notes (other than the 6.30% senior notes) contain a change of control provision that may require us to purchase the notes under certain circumstances. On July 2, 2015 we entered into a Merger Agreement with Aetna that, when closed, may require redemption of the notes if the notes are downgraded below investment grade by both Standard & Poor’s Rating Services, or S&P and Moody’s Investors Services, Inc., or Moody’s.
Prior to 2009, we were parties to interest-rate swap agreements that exchanged the fixed interest rate under our senior notes for a variable interest rate based on LIBOR. As a result, the carrying value of the senior notes was adjusted to reflect changes in value caused by an increase or decrease in interest rates. During 2008, we terminated all of our swap agreements. The cumulative adjustment to the carrying value of our senior notes was $103 million as of the termination date which is being amortized as a reduction to interest expense over the remaining term of the senior notes. In October 2014, the redemption of our 6.45% senior notes reduced the unamortized carrying value adjustment by $12 million. The unamortized carrying value adjustment was $29 million as of September 30, 2015 and $32 million as of December 31, 2014.
Credit Agreement
Our 5-year $1.0 billion unsecured revolving credit agreement expires July 2018. Under the credit agreement, at our option, we can borrow on either a competitive advance basis or a revolving credit basis. The revolving credit portion bears interest at either LIBOR plus a spread or the base rate plus a spread. The LIBOR spread, currently 110 basis

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(Unaudited)

points, varies depending on our credit ratings ranging from 90.0 to 150.0 basis points. We also pay an annual facility fee regardless of utilization. This facility fee, currently 15 basis points, may fluctuate between 10.0 and 25.0 basis points, depending upon our credit ratings. The competitive advance portion of any borrowings will bear interest at market rates prevailing at the time of borrowing on either a fixed rate or a floating rate based on LIBOR, at our option.
The terms of the credit agreement include standard provisions related to conditions of borrowing, including a customary material adverse effect clause which could limit our ability to borrow additional funds. In addition, the credit agreement contains customary restrictive and financial covenants as well as customary events of default, including financial covenants regarding the maintenance of a minimum level of net worth of $8.4 billion at September 30, 2015 and a maximum leverage ratio of 3.0. We are in compliance with the financial covenants, with actual net worth of $10.4 billion and an actual leverage ratio of 1.2, as measured in accordance with the credit agreement as of September 30, 2015. In addition, the credit agreement includes an uncommitted $250 million incremental loan facility.
At September 30, 2015, we had no borrowings outstanding under the credit agreement and we had outstanding letters of credit of $1 million secured under the credit agreement. No amounts have been drawn on these letters of credit. Accordingly, as of September 30, 2015, we had $999 million of remaining borrowing capacity under the credit agreement, none of which would be restricted by our financial covenant compliance requirement. We have other customary, arms-length relationships, including financial advisory and banking, with some parties to the credit agreement.
Commercial Paper
In October 2014, we entered into a commercial paper program pursuant to which we may issue short-term, unsecured commercial paper notes privately placed on a discount basis through certain broker dealers. Amounts available under the program may be borrowed, repaid and re-borrowed from time to time, with the aggregate face or principal amount outstanding under the program at any time not to exceed $1 billion. The net proceeds of issuances have been and are expected to be used for general corporate purposes. The maximum principal amount outstanding at any one time during the nine months ended September 30, 2015 was $320 million. There were outstanding borrowings of $11 million at September 30, 2015. There were no outstanding borrowings at December 31, 2014.
13. GUARANTEES AND CONTINGENCIES
Government Contracts
Our Medicare products, which accounted for approximately 72% of our total premiums and services revenue for the nine months ended September 30, 2015, primarily consisted of products covered under the Medicare Advantage and Medicare Part D Prescription Drug Plan contracts with the federal government. These contracts are renewed generally for a calendar year term unless CMS notifies us of its decision not to renew by May 1 of the calendar year in which the contract would end, or we notify CMS of our decision not to renew by the first Monday in June of the calendar year in which the contract would end. All material contracts between Humana and CMS relating to our Medicare products have been renewed for 2016, and all of our product offerings filed with CMS for 2016 have been approved.
CMS uses a risk-adjustment model which apportions premiums paid to Medicare Advantage, or MA, plans according to health severity of covered members. The risk-adjustment model pays more for enrollees with predictably higher costs. Under this model, rates paid to MA plans are based on actuarially determined bids, which include a process whereby our prospective payments are based on a comparison of our beneficiaries’ risk scores, derived from medical diagnoses, to those enrolled in the government’s traditional fee-for-service Medicare program (referred to as "Medicare FFS"). Under the risk-adjustment methodology, all MA plans must collect and submit the necessary diagnosis code information from hospital inpatient, hospital outpatient, and physician providers to CMS within prescribed deadlines. The CMS risk-adjustment model uses the diagnosis data to calculate the risk-adjusted premium payment to MA plans, which CMS adjusts for coding pattern differences between the health plans and the government fee-for-service program. We generally rely on providers, including certain providers in our network who are our employees, to code their claim submissions with appropriate diagnoses, which we send to CMS as the basis for our payment received from CMS under the actuarial risk-adjustment model. We also rely on these providers to document appropriately all medical data,

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(Unaudited)

including the diagnosis data submitted with claims. In addition, we conduct medical record reviews as part of our data and payment accuracy compliance efforts, to more accurately reflect diagnosis conditions under the risk adjustment model. These compliance efforts include the internal contract level audits described in more detail below.
CMS is continuing to perform audits of various companies’ selected MA contracts related to this risk adjustment diagnosis data. We refer to these audits as Risk-Adjustment Data Validation Audits, or RADV audits. RADV audits review medical records in an attempt to validate provider medical record documentation and coding practices which influence the calculation of premium payments to MA plans.
In 2012, CMS released a “Notice of Final Payment Error Calculation Methodology for Part C Medicare Advantage Risk Adjustment Data Validation (RADV) Contract-Level Audits.” The payment error calculation methodology provides that, in calculating the economic impact of audit results for an MA contract, if any, the results of the audit sample will be extrapolated to the entire MA contract based upon a comparison to “benchmark” audit data in Medicare FFS (which we refer to as the "FFS Adjuster"). This comparison to the FFS Adjuster is necessary to determine the economic impact, if any, of audit results because the government program data set, including any attendant errors that are present in that data set, provides the basis for MA plans’ risk adjustment to payment rates. CMS already makes other adjustments to payment rates based on a comparison of coding pattern differences between MA plans and Medicare FFS data (such as for frequency of coding for certain diagnoses in MA plan data versus the government program data set).
The final methodology, including the first application of extrapolated audit results to determine audit settlements, is expected to be applied to RADV contract level audits currently being conducted on 2011 premium payments in which two of our Medicare Advantage plans are being audited. Per CMS guidance, selected MA contracts will be notified of an audit at some point after the close of the final reconciliation for the payment year being audited. The final reconciliation occurs in August of the calendar year following the payment year. We were notified on September 15, 2015, that five of our Medicare Advantage contracts have been selected for audit for contract year 2012.
Estimated audit settlements are recorded as a reduction of premiums revenue in our consolidated statements of income, based upon available information. We perform internal contract level audits based on the RADV audit methodology prescribed by CMS. Included in these internal contract level audits is an audit of our Private Fee-For-Service business which we used to represent a proxy of the FFS Adjuster which has not yet been released. We based our accrual of estimated audit settlements for each contract year on the results of these internal contract level audits and update our estimates as each audit is completed. Estimates derived from these results were not material to our results of operations, financial position, or cash flows. However, as indicated, we are awaiting additional guidance from CMS regarding the FFS Adjuster. Accordingly, we cannot determine whether such RADV audits will have a material adverse effect on our results of operations, financial position, or cash flows.
In addition, CMS' comments in formalized guidance regarding “overpayments” to MA plans appear to be inconsistent with CMS' prior RADV audit guidance. These statements, contained in the preamble to CMS’ final rule release regarding Medicare Advantage and Part D prescription drug benefit program regulations for Contract Year 2015, appear to equate each Medicare Advantage risk adjustment data error with an “overpayment” without reconciliation to the principles underlying the FFS Adjuster referenced above. We will continue to work with CMS to ensure that MA plans are paid accurately and that payment model principles are in accordance with the requirements of the Social Security Act, which, if not implemented correctly could have a material adverse effect on our results of operations, financial position, or cash flows.
At September 30, 2015, our military services business, which accounted for approximately 1% of our total premiums and services revenue for the nine months ended September 30, 2015, primarily consisted of the TRICARE South Region contract. The current 5-year South Region contract, which expires March 31, 2017, is subject to annual renewals on April 1 of each year during its term at the government’s option. On March 31, 2015, the Defense Health Agency, or DHA, exercised its option to extend the TRICARE South Region contract through March 31, 2016. On April 24, 2015, a request for proposal was issued for the next generation of TRICARE contracts for the period beginning April 1, 2017. The proposal provides for the consolidation of three regions into two - East and West.  The current North

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Region and South Region are to be combined to form the East Region. We responded to the request for proposal on July 22, 2015.
Our state-based Medicaid business accounted for approximately 4% of our total premiums and services revenue for the nine months ended September 30, 2015. In addition to our state-based Temporary Assistance for Needy Families, or TANF, Medicaid contracts in Florida and Kentucky, we have contracts in Illinois and Virginia for stand-alone dual eligible demonstration programs serving individuals dually eligible for both the federal Medicare program and the applicable state-based Medicaid program as well as an Integrated Care Program, or ICP, Medicaid contract in Illinois. We began serving members in Illinois in the first quarter of 2014 and in Virginia in the second quarter of 2014. In addition, we began serving members in Long-Term Support Services (LTSS) regions in Florida at various effective dates ranging from the second half of 2013 through the first quarter of 2014.
The loss of any of the contracts above or significant changes in these programs as a result of legislative or regulatory action, including reductions in premium payments to us, regulatory restrictions on profitability, including by comparison of our Medicare Advantage profitability to our non-Medicare Advantage business profitability and a requirement that they remain within certain ranges of each other, or increases in member benefits without corresponding increases in premium payments to us, may have a material adverse effect on our results of operations, financial position, and cash flows.
Legal Proceedings and Certain Regulatory Matters
Florida Matters
On January 6, 2012, the Civil Division of the United States Attorney’s Office for the Southern District of Florida advised us that it is seeking documents and information from us and several of our affiliates relating to several matters including the coding of medical claims by one or more South Florida medical providers, and loans to physician practices. On May 1, 2014, the U.S. Attorney's Office filed a Notice of Non-Intervention in connection with a civil qui tam suit related to one of these matters captioned United States of America ex rel. Olivia Graves v. Plaza Medical Centers, et al., and the Court ordered the complaint unsealed. Subsequently, the individual plaintiff amended the complaint and served the Company, opting to continue to pursue the action. The individual plaintiff has filed a third amended complaint, which we answered on October 16, 2015. The Court has ordered trial to commence on April 18, 2016 if the matter is not resolved prior to trial. We continue to cooperate with and respond to information requests from the U.S. Attorney’s office. These matters could result in additional qui tam litigation.
As previously disclosed, the Civil Division of the United States Department of Justice had provided us with an information request, separate from but related to the Plaza Medical matter, concerning our Medicare Part C risk adjustment practices. The request relates to our oversight and submission of risk adjustment data generated by providers in our Medicare Advantage network, including the providers identified in the Plaza Medical matter, as well as to our business and compliance practices related to risk adjustment data generated by our providers and by us, including medical record reviews conducted as part of our data and payment accuracy compliance efforts, the use of health and well-being assessments, and our fraud detection efforts. We believe that this request for information is in connection with a wider review of Medicare Risk Adjustment generally that includes a number of Medicare Advantage plans, providers, and vendors. We continue to cooperate with and voluntarily respond to the information requests from the Department of Justice and the U.S. Attorney’s Office. These matters are expected to result in additional qui tam litigation.
Litigation Related to the Merger
In connection with the Merger, three putative class action complaints were filed by purported Humana stockholders challenging the Merger, two in the Circuit Court of Jefferson County, Kentucky and one in the Court of Chancery of the State of Delaware. The complaints are captioned Solak v. Broussard et al., Civ. Act. No. 15CI03374 (Kentucky state court), Litwin v. Broussard et al., Civ. Act. No. 15CI04054 (Kentucky state court) and Scott v. Humana Inc. et al., C.A. No. 11323-VCL (Delaware state court). The complaints name as defendants each member of Humana’s board of directors, Aetna, and, in the case of the Delaware complaint, Humana. The complaints generally allege, among other things, that the individual members of our board of directors breached their fiduciary duties owed to our stockholders by entering into the Merger Agreement, approving the mergers as contemplated by the Merger Agreement, and failing

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Humana Inc.
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(Unaudited)

to take steps to maximize the value of Humana to our stockholders, and that Aetna, and, in the case of the Delaware complaint, Humana aided and abetted such breaches of fiduciary duties. In addition, the complaints allege that the merger undervalues Humana, that the process leading up to the execution of the Merger Agreement was flawed, that the members of our board of directors improperly placed their own financial interests ahead of those of our stockholders, and that certain provisions of the Merger Agreement improperly favor Aetna and impede a potential alternative transaction. Among other remedies, the complaints seek equitable relief rescinding the Merger Agreement and enjoining the defendants from completing the mergers as well as costs and attorneys’ fees. We refer to all these cases collectively in this report as the Merger Litigation. On August 20, 2015, the parties in the Kentucky state cases filed a stipulation and proposed order with the court to consolidate these cases into a single action captioned In re Humana Inc. Shareholder Litigation, Civ. Act. No. 15CI03374.
On October 9, 2015, solely to avoid the costs, risks, and uncertainties inherent in litigation, and without admitting any liability or wrongdoing, we and the other named defendants in the Merger Litigation signed a memorandum of understanding, which we refer to as the MOU, to settle the Merger Litigation. Subject to court approval and further definitive documentation in a stipulation of settlement that will be subject to customary conditions, the MOU resolved the claims brought in the Merger Litigation and provided that we would make certain additional disclosures related to the proposed mergers. The MOU further provided for, among other things, dismissal of the Merger Litigation with prejudice and a release and settlement by the purported class of our stockholders of all claims against the defendants and their affiliates and agents in connection with the Merger Agreement and transactions and disclosures related to the Merger Agreement. The asserted claims will not be released until such stipulation of settlement receives court approval. The foregoing terms and conditions will be defined by the stipulation of settlement, and class members will receive a separate notice describing the settlement terms and their rights in connection with the approval of the settlement. In connection with the settlement, the parties contemplate that plaintiffs’ counsel will file a petition for an award of attorneys’ fees and expenses. We will pay or cause to be paid any court awarded attorneys’ fees and expenses. There can be no assurance that the parties will ultimately enter into a stipulation of settlement or that a court will approve such settlement even if the parties were to enter into such stipulation. In such event, the proposed settlement as contemplated by the MOU may be terminated. Because the MOU co