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EX-32 - EXHIBIT 32 - HUMANA INChum-20170630xex32.htm
EX-31.2 - EXHIBIT 31.2 - HUMANA INChum-20170630xex31x2.htm
EX-31.1 - EXHIBIT 31.1 - HUMANA INChum-20170630xex31x1.htm
EX-12 - EXHIBIT 12 - HUMANA INChum-20170630xex12.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 June 30, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
 
 
 
 
 
Emerging growth company
¨
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act.  ¨
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
June 30, 2017
$0.16 2/3 par value
144,517,202 shares



Humana Inc.
FORM 10-Q
JUNE 30, 2017
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)
 
June 30,
2017
 
December 31,
2016
 
(in millions, except share amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
8,139

 
$
3,877

Investment securities
8,115

 
7,595

Receivables, less allowance for doubtful accounts of $92 in 2017
and $118 in 2016
2,430

 
1,280

Other current assets
3,884

 
3,438

Total current assets
22,568

 
16,190

Property and equipment, net
1,543

 
1,505

Long-term investment securities
2,670

 
2,203

Goodwill
3,280

 
3,272

Other long-term assets
2,192

 
2,226

Total assets
$
32,253

 
$
25,396

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Benefits payable
$
4,838

 
$
4,563

Trade accounts payable and accrued expenses
4,693

 
2,467

Book overdraft
117

 
212

Unearned revenues
3,356

 
280

Short-term debt
701

 
300

Total current liabilities
13,705

 
7,822

Long-term debt
4,279

 
3,792

Future policy benefits payable
2,899

 
2,834

Other long-term liabilities
417

 
263

Total liabilities
21,300

 
14,711

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;
198,569,658 shares issued at June 30, 2017 and 198,495,007 shares
issued at December 31, 2016
33

 
33

Capital in excess of par value
2,306

 
2,562

Retained earnings
13,101

 
11,454

Accumulated other comprehensive loss
(5
)
 
(66
)
Treasury stock, at cost, 54,052,456 shares at June 30, 2017 and
49,189,811 shares at December 31, 2016
(4,482
)
 
(3,298
)
Total stockholders’ equity
10,953

 
10,685

Total liabilities and stockholders’ equity
$
32,253

 
$
25,396

See accompanying notes to condensed consolidated financial statements.

3


Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2017
 
2016
 
2017
 
2016
 
(in millions, except per share results)
Revenues:
 
 
 
 
 
 
 
Premiums
$
13,203

 
$
13,650

 
$
26,601

 
$
27,090

Services
230

 
262

 
483

 
522

Investment income
101

 
95

 
212

 
195

Total revenues
13,534

 
14,007

 
27,296

 
27,807

Operating expenses:
 
 
 
 
 
 
 
Benefits
10,889

 
11,509

 
22,215

 
22,906

Operating costs
1,453

 
1,699

 
3,006

 
3,433

Merger termination fee and related costs, net

 
27

 
(947
)
 
61

Depreciation and amortization
92

 
89

 
184

 
177

Total operating expenses
12,434

 
13,324

 
24,458

 
26,577

Income from operations
1,100

 
683

 
2,838

 
1,230

Interest expense
58

 
47

 
107

 
94

Income before income taxes
1,042

 
636

 
2,731

 
1,136

Provision for income taxes
392

 
325

 
966

 
571

Net income
$
650

 
$
311

 
$
1,765

 
$
565

Basic earnings per common share
$
4.49

 
$
2.08

 
$
12.07

 
$
3.79

Diluted earnings per common share
$
4.46

 
$
2.06

 
$
11.98

 
$
3.75

Dividends declared per common share
$
0.40

 
$
0.29

 
$
0.80

 
$
0.58

See accompanying notes to condensed consolidated financial statements.

4


Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Net income
$
650

 
$
311

 
$
1,765

 
$
565

Other comprehensive income:
 
 
 
 
 
 
 
Change in gross unrealized investment
gains/losses
88

 
111

 
126

 
159

Effect of income taxes
(33
)
 
(41
)
 
(47
)
 
(58
)
Total change in unrealized
investment gains/losses, net of tax
55

 
70

 
79

 
101

Reclassification adjustment for net
realized gains included in
investment income
(2
)
 
(19
)
 
(28
)
 
(39
)
Effect of income taxes

 
7

 
10

 
14

Total reclassification adjustment, net
of tax
(2
)
 
(12
)
 
(18
)
 
(25
)
Other comprehensive income, net
of tax
53

 
58

 
61

 
76

Comprehensive income
$
703

 
$
369

 
$
1,826

 
$
641

See accompanying notes to condensed consolidated financial statements.

5


Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
For the six months ended
June 30,
 
2017
 
2016
 
(in millions)
Cash flows from operating activities
 
 
 
Net income
$
1,765

 
$
565

Adjustments to reconcile net income to net cash provided by
operating activities:
 
 
 
Net realized capital gains
(28
)
 
(39
)
Stock-based compensation
83

 
48

Depreciation
201

 
190

Other intangible amortization
36

 
41

Provision (benefit) for deferred income taxes
2

 
(24
)
Changes in operating assets and liabilities, net of effect of
businesses acquired and dispositions:
 
 
 
Receivables
(1,150
)
 
(1,392
)
Other assets
(545
)
 
(678
)
Benefits payable
275

 
282

Other liabilities
317

 
1,198

Unearned revenues
3,076

 
(53
)
Other, net
67

 
68

Net cash provided by operating activities
4,099

 
206

Cash flows from investing activities
 
 
 
Acquisitions, net of cash acquired
(9
)
 
(1
)
Purchases of property and equipment
(233
)
 
(256
)
Purchases of investment securities
(3,208
)
 
(2,528
)
Maturities of investment securities
649

 
635

Proceeds from sales of investment securities
1,723

 
1,853

Net cash used in investing activities
(1,078
)
 
(297
)
Cash flows from financing activities
 
 
 
Receipts from contract deposits, net
2,081

 
221

Proceeds from issuance of senior notes, net
985

 

Repayment of commercial paper, net
(102
)
 

Change in book overdraft
(95
)
 
(109
)
Common stock repurchases
(1,578
)
 
(73
)
Dividends paid
(104
)
 
(90
)
Proceeds from stock option exercises and other
54

 

Net cash provided by (used in) financing activities
1,241

 
(51
)
Increase (decrease) in cash and cash equivalents
4,262

 
(142
)
Cash and cash equivalents at beginning of period
3,877

 
2,571

Cash and cash equivalents at end of period
$
8,139

 
$
2,429

Supplemental cash flow disclosures:
 
 
 
Interest payments
$
92

 
$
92

Income tax payments, net
$
694

 
$
536

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, 2016, that was filed with the Securities and Exchange Commission, or the SEC, on February 17, 2017. We refer to the Form 10-K as the “2016 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 2016 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.
Aetna 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 set forth the terms and conditions under which we agreed to merge with, and become a wholly owned subsidiary of Aetna, a transaction we refer to in this report as the Merger.
The Merger was 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, and (ii) the absence of legal restraints and prohibitions on the consummation of the Merger.
On July 21, 2016, the U.S. Department of Justice and the attorneys general of certain U.S. jurisdictions filed a civil antitrust complaint in the U.S. District Court for the District of Columbia against us and Aetna, alleging that the Merger would violate Section 7 of the Clayton Antitrust Act and seeking a permanent injunction to prevent the Merger from being completed. On January 23, 2017, the Court ruled in favor of the DOJ and granted a permanent injunction of the proposed transaction. On February 14, 2017, we and Aetna agreed to mutually terminate the Merger Agreement, as our Board determined that an appeal of the Court's ruling would not be in the best interest of our stockholders. On February 16, 2017, under terms of the Merger Agreement, we received a breakup fee of $1 billion from Aetna , which is included in our condensed consolidated statement of income in the line captioned Merger termination fee and related costs, net. Prior period Merger related transaction costs, previously included in operating costs, have been reclassified to conform to the 2017 presentation.
Business Segment Reclassifications
During the three months ended March 31, 2017, we realigned certain of our businesses among our reportable segments to correspond with internal management reporting changes and our previously announced planned exit from

7



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

the Individual Commercial medical business on January 1, 2018. Additionally, we renamed our Group segment to the Group and Specialty segment, and began presenting the Individual Commercial business results as a separate segment rather than as part of the Retail segment. Specialty health insurance benefits, including dental, vision, other supplement health, and financial protection products, marketed to individuals are now included in the Group and Specialty segment. Specialty health insurance benefits marketed to employer groups continue to be included in the Group and Specialty segment. As a result of this realignment, our reportable segments now include Retail, Group and Specialty, Healthcare Services, and Individual Commercial. Prior period segment financial information has been recast to conform to the 2017 presentation. See Note 15 for segment financial information.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board, or 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. Accordingly, our premiums revenue and investment income, collectively representing approximately 98% of our consolidated external revenues for 2016, are not included in the scope of the new guidance. We expect to adopt the guidance using the modified retrospective approach with a cumulative effect adjustment, if any, to retained earnings. We are analyzing how we may recognize revenue under the new guidance by reviewing selected sample contracts presently in place. While we expect revenue related to our Pharmacy, Provider Services, ASO and other services businesses to remain primarily unchanged, we are still reviewing the impact of the new guidance on the customer arrangements for these businesses. Accordingly, we continue to evaluate the impact of the new standard on our results of operations, financial condition and cash flows. The new guidance is effective for us beginning with annual and interim periods in 2018.
In February 2016, the FASB issued new guidance related to accounting for leases which requires lessees to record
assets and liabilities reflecting the leased assets and lease obligations, respectively, while following the dual model for recognition in statements of income requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). The new guidance is effective for us beginning with annual and interim periods in 2019, with earlier adoption permitted, and requires retrospective application to previously issued annual and interim financial statements. We have begun the process of identifying the population of lease agreements and other arrangements that may contain embedded leases for purposes of adopting the new standard. While we expect to record significant leased assets and corresponding lease obligations based on our existing population of individual leases, we continue to evaluate the impact on our results of operations, financial position and cash flows.
In June 2016, the FASB issued guidance introducing a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The guidance is effective for us beginning January 1, 2020. The new current expected credit losses (CECL) model generally calls for the immediate recognition of all expected credit losses and applies to loans, accounts and trade receivables as well as other financial assets measured at amortized cost, loan commitments and off-balance sheet credit exposures, debt securities and other financial assets measured at fair value through other comprehensive income, and beneficial interests in securitized financial assets. The
new guidance replaces the current incurred loss model for measuring expected credit losses, requires expected losses
on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions
in the amortized cost of the securities, and provides for additional disclosure requirements. Our investment portfolio consists of available for sale debt securities. We are currently evaluating the impact on our results of operations, financial condition, or cash flows.
In January 2017, the FASB issued 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 new guidance is effective for us beginning with annual and interim periods in 2020, with early adoption permitted, and is to be applied prospectively. The adoption of this new guidance is not expected to have a material impact on our financial position or operating results.


8



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

In March 2017, the FASB issued new guidance that amends the accounting for premium amortization on purchased callable debt securities by shortening the amortization period. This amended guidance requires the premium to be amortized to the earliest call date instead of maturity date. The new guidance is effective for us beginning with annual and interim periods in 2019. We do not expect adoption of this guidance will have a material impact on our results of operations, financial condition and cash flows.
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
During 2017 and 2016, 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 respective acquisition dates. Acquisition-related costs recognized in 2017 and 2016 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 June 30, 2017 and December 31, 2016, respectively:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(in millions)
June 30, 2017
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
$
724

 
$
1

 
$
(9
)
 
$
716

Mortgage-backed securities
1,567

 
4

 
(25
)
 
1,546

Tax-exempt municipal securities
3,304

 
23

 
(21
)
 
3,306

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
8

 

 

 
8

Commercial
394

 
2

 
(2
)
 
394

Asset-backed securities
135

 

 

 
135

Corporate debt securities
4,514

 
206

 
(40
)
 
4,680

Total debt securities
$
10,646

 
$
236

 
$
(97
)
 
$
10,785

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
$
800

 
$
1

 
$
(15
)
 
$
786

Mortgage-backed securities
1,662

 
6

 
(31
)
 
1,637

Tax-exempt municipal securities
3,358

 
15

 
(68
)
 
3,305

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
9

 

 

 
9

Commercial
307

 
1

 
(4
)
 
304

Asset-backed securities
160

 

 

 
160

Corporate debt securities
3,530

 
145

 
(78
)
 
3,597

Total debt securities
$
9,826

 
$
168

 
$
(196
)
 
$
9,798


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 June 30, 2017 and December 31, 2016, 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)
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and other U.S.
government corporations
and agencies:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
obligations
$
645

 
$
(9
)
 
$
3

 
$

 
$
648

 
$
(9
)
Mortgage-backed
securities
1,310

 
(25
)
 
3

 

 
1,313

 
(25
)
Tax-exempt municipal
securities
1,898

 
(20
)
 
39

 
(1
)
 
1,937

 
(21
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential

 

 
4

 

 
4

 

Commercial
99

 
(2
)
 
1

 

 
100

 
(2
)
Asset-backed securities
92

 

 

 

 
92

 

Corporate debt securities
1,200

 
(37
)
 
64

 
(3
)
 
1,264

 
(40
)
Total debt securities
$
5,244

 
$
(93
)
 
$
114

 
$
(4
)
 
$
5,358

 
$
(97
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and other U.S.
government corporations
and agencies:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
obligations
$
697

 
$
(15
)
 
$
3

 
$

 
$
700

 
$
(15
)
Mortgage-backed
securities
1,528

 
(31
)
 
3

 

 
1,531

 
(31
)
Tax-exempt municipal
securities
2,756

 
(67
)
 
43

 
(1
)
 
2,799

 
(68
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential

 

 
4

 

 
4

 

Commercial
182

 
(3
)
 
24

 
(1
)
 
206

 
(4
)
Asset-backed securities
51

 

 
63

 

 
114

 

Corporate debt securities
1,544

 
(71
)
 
69

 
(7
)
 
1,613

 
(78
)
Total debt securities
$
6,758

 
$
(187
)
 
$
209

 
$
(9
)
 
$
6,967

 
$
(196
)
Approximately 98% of our debt securities were investment-grade quality, with a weighted average credit rating of AA by S&P at June 30, 2017. Most of the debt securities that were below investment-grade were rated BB, the higher end of the below investment-grade rating scale. Tax-exempt municipal securities were diversified among general obligation bonds of states and local municipalities in the United States as well as special revenue bonds issued by municipalities to finance specific public works projects such as utilities, water and sewer, transportation, or education. Our general obligation bonds are diversified across the United States with no individual state exceeding 8%. In addition, 2% of our tax-exempt securities were insured by bond insurers and had an equivalent weighted average

11



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

S&P credit rating of AA exclusive of the bond insurers’ guarantee. Our investment policy limits investments in a single issuer and requires diversification among various asset types.
Our unrealized losses from all securities were generated from approximately 730 positions out of a total of approximately 2,260 positions at June 30, 2017. All issuers of securities we own that were trading at an unrealized loss at June 30, 2017 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 June 30, 2017, 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 June 30, 2017.
The detail of realized gains (losses) related to investment securities and included within investment income was as follows for the three and six months ended June 30, 2017 and 2016:
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Gross realized gains
$
4

 
$
20

 
$
31

 
$
51

Gross realized losses
(2
)
 
(1
)
 
(3
)
 
(12
)
Net realized capital gains
$
2

 
$
19


$
28


$
39

There were no material other-than-temporary impairments for the three and six months ended June 30, 2017 or 2016.
The contractual maturities of debt securities available for sale at June 30, 2017, 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
$
538

 
$
539

Due after one year through five years
2,666

 
2,680

Due after five years through ten years
2,237

 
2,235

Due after ten years
3,101

 
3,248

Mortgage and asset-backed securities
2,104

 
2,083

Total debt securities
$
10,646

 
$
10,785


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 June 30, 2017 and December 31, 2016, 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)
June 30, 2017
 
 
 
 
 
 
 
Cash equivalents
$
7,786

 
$
7,786

 
$

 
$

Debt securities:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
716

 

 
716

 

Mortgage-backed securities
1,546

 

 
1,546

 

Tax-exempt municipal securities
3,306

 

 
3,306

 

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
8

 

 
8

 

Commercial
394

 

 
394

 

Asset-backed securities
135

 

 
135

 

Corporate debt securities
4,680

 

 
4,676

 
4

Total debt securities
10,785

 

 
10,781

 
4

Total invested assets
$
18,571

 
$
7,786

 
$
10,781

 
$
4

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
Cash equivalents
$
3,654

 
$
3,654

 
$

 
$

Debt securities:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
786

 

 
786

 

Mortgage-backed securities
1,637

 

 
1,637

 

Tax-exempt municipal securities
3,305

 

 
3,302

 
3

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
9

 

 
9

 

Commercial
304

 

 
304

 

Asset-backed securities
160

 

 
160

 

Corporate debt securities
3,597

 

 
3,593

 
4

Total debt securities
9,798

 

 
9,791

 
7

Total invested assets
$
13,452

 
$
3,654

 
$
9,791

 
$
7


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 six months ended June 30, 2017 or 2016.
Our Level 3 assets had a fair value of $4 million at June 30, 2017, or 0.02% of our total invested assets. During the three and six months ended June 30, 2017 and 2016, 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 June 30,
 
2017
 
2016
 
Private
Placements
 
Auction
Rate
Securities
 
Total
 
Private
Placements
 
Auction
Rate
Securities
 
Total
 
(in millions)
Beginning balance at April 1
$
4

 
$
3

 
$
7

 
$
6

 
$
3

 
$
9

Settlements

 
(3
)
 
(3
)
 

 

 

Balance at June 30
$
4

 
$

 
$
4

 
$
6

 
$
3

 
$
9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the six months ended June 30,
 
2017
 
2016
 
Private
Placements
 
Auction
Rate
Securities
 
Total
 
Private
Placements
 
Auction
Rate
Securities
 
Total
 
(in millions)
Beginning balance at January 1
$
4

 
$
3

 
$
7

 
$
6

 
$
5

 
$
11

Settlements

 
(3
)
 
(3
)
 

 
(2
)
 
(2
)
Balance at June 30
$
4

 
$

 
$
4

 
$
6

 
$
3

 
$
9

Financial Liabilities
Our debt is recorded at carrying value in our consolidated balance sheets. The carrying value of our debt outstanding, including the current portion, net of unamortized debt issuance costs, was $4,780 million at June 30, 2017 and $3,792 million at December 31, 2016. The fair value of our debt, including the current portion, was $5,179 million at June 30, 2017 and $4,004 million at December 31, 2016. 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.
Due to the short-term nature, carrying value approximates fair value for our commercial paper borrowings. There were outstanding commercial paper borrowings of $200 million as of June 30, 2017 and $300 million as of December 31, 2016.


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 2017 and 2016. 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 2017 or 2016.
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 further in Note 2 to the consolidated financial statements included in our 2016 Form 10-K. The accompanying condensed consolidated balance sheets include the following amounts associated with Medicare Part D at June 30, 2017 and December 31, 2016. 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.
 
June 30, 2017
 
December 31, 2016
Risk
Corridor
Settlement
 
CMS
Subsidies/
Discounts
 
Risk
Corridor
Settlement
 
CMS
Subsidies/
Discounts
 
(in millions)
Other current assets
$
9

 
$
1,003

 
$
8

 
$
1,001

Trade accounts payable and accrued expenses
(130
)
 
(2,201
)
 
(158
)
 
(128
)
Net current (liability) asset
(121
)
 
(1,198
)
 
(150
)
 
873

Other long-term assets
29

 

 

 

Other long-term liabilities
(110
)
 

 

 

Net long-term liability
(81
)
 

 

 

Total net (liability) asset
$
(202
)
 
$
(1,198
)
 
$
(150
)
 
$
873

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 effective January 1, 2014, including a permanent risk adjustment program and temporary risk corridor and reinsurance programs, which we collectively refer to as the 3Rs. The 3Rs are applicable to certain of our commercial medical insurance products as further discussed in Note 2 to our 2016 Form 10-K. Operating results for our Individual Commercial medical business compliant with the Health Care Reform Law have been challenged primarily due to unanticipated modifications in the program subsequent to the passing of the Health Care Reform Law, resulting in higher covered population morbidity and the ensuing enrollment and claims issues causing volatility in claims experience. We took a number of actions in 2015 to improve the profitability of our Individual Commercial medical business in 2016. These actions were subject to regulatory restrictions in certain geographies and included premium increases for the 2016 coverage year related generally to the first half of 2015 claims experience, the discontinuation of certain products as well as exit of certain markets for 2016, network improvements, enhancements to claims and clinical processes and administrative cost control. Despite these actions, the deterioration in the second half of 2015 claims experience together with 2016 open enrollment results indicating the retention of many high-utilizing members

15



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

for 2016 resulted in a probable future loss. As a result of our then assessment of the profitability of our individual medical policies compliant with the Health Care Reform Law, in the fourth quarter of 2015, we recorded a provision for probable future losses (premium deficiency reserve, or PDR) for the 2016 coverage year of $176 million in benefits payable in our consolidated balance sheet with a corresponding increase in benefits expense in our consolidated statement of income. In the first quarter of 2016, we applied $13 million current period results to the PDR liability. During the second quarter of 2016 we increased the premium deficiency reserve for the 2016 coverage year and recorded a change in estimate of $208 million with a corresponding increase in benefits expense in our condensed consolidated statement of income for three months ended June 30, 2016. There is no premium deficiency reserve in 2017.
On November 10, 2016, the U.S. Court of Federal Claims ruled in favor of the government in one of a series of cases filed by insurers, unrelated to us, against the U.S. Department of Health and Human Services, or HHS, to collect risk corridor payments, rejecting all of the insurer’s statutory, contract and Constitutional claims for payment. On November 18, 2016, HHS issued a memorandum indicating a significant funding shortfall for the 2015 coverage year, the second consecutive year of significant shortfalls. Given the successful challenge of the risk corridor provisions in court, Congressional inquiries into the funding of the risk corridor program, and significant funding shortfalls under the first two years of the program, during the fourth quarter of 2016 we wrote-off $583 million in risk corridor receivables outstanding as of September 30, 2016, including $415 million associated with the 2014 and 2015 coverage years. From inception of the risk corridor program through June 30, 2017, we collected approximately $38 million from CMS for risk corridor receivables associated with the 2014 coverage year funded by HHS in accordance with previous guidance, utilizing funds HHS collected from us and other carriers under the risk corridor program.

On February 14, 2017, we announced we are exiting our Individual Commercial medical business commencing January 1, 2018. As discussed previously, we have worked over the past several years to address market and programmatic challenges in order to keep coverage options available wherever we could offer a viable product. This has included pursuing business changes, such as modifying networks, restructuring product offerings, reducing the company’s geographic footprint and increasing premiums. All of these actions were taken with the expectation that our Individual Commercial medical business would stabilize to the point where we could continue to participate in the program. However, based on our analysis of data associated with our healthcare exchange membership following the 2017 open enrollment period, we saw further signs of an unbalanced risk pool. Therefore, we decided that we cannot continue to offer this coverage and plan to exit this business commencing January 1, 2018.


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 June 30, 2017 and December 31, 2016. Amounts classified as long-term represent settlements that we expect to exceed 12 months at June 30, 2017.
 
June 30, 2017
 
December 31, 2016
 
Risk Adjustment
Settlement
 
Reinsurance
Recoverables
 
Risk Adjustment
Settlement
 
Reinsurance
Recoverables
 
(in millions)
Prior Coverage Years
 
 
 
 
 
 
 
Premiums receivable
$
291
 
 
$

 
$
307
 
 
$

Other current assets
 
 
268

 
 
 
260

Trade accounts payable and
accrued expenses
(150
)
 

 
(117
)
 

Net current asset
141
 
 
268

 
190
 
 
260

Other long-term assets
 
 

 
6
 
 

Total prior coverage years' net
asset
141
 
 
268

 
196
 
 
260

Current Coverage Year
 
 
 
 
 
 
 
Premiums receivable
12
 
 

 
 
 

Net current asset
12
 
 

 
 
 

Other long-term assets
30
 
 

 
 
 

Other long-term liabilities
(40
)
 

 
 
 

Net long-term liability
(10
)
 

 
 
 

Total 2017 coverage year net
asset
2
 
 

 
 
 

Total net asset
$
143
 
 
$
268

 
$
196
 
 
$
260

During the six months ended June 30, 2017, we received $60 million for reinsurance recoverables and $3 million for risk adjustment settlements, in each case associated with prior coverage years. During the six months ended June 30, 2016, we received $214 million for reinsurance recoverables and $8 million for risk adjustment and risk corridor settlements associated with prior coverage years.
To the extent certain provisions of the Health Care Reform Law are successfully challenged in court or there are changes in legislation or the application of legislation, there can be no guarantee that receivables established under the reinsurance or risk adjustment provisions of the Health Care Reform Law will ultimately be collected. If we fail to effectively implement our operational and strategic initiatives with respect to the implementation of the Health Care Reform Law, our business may be materially adversely affected. Additionally, potential legislative changes, including activities to repeal or replace the Health Care Reform Law, creates uncertainty for our business, and we cannot predict when, or in what form, such legislative changes may occur.
The annual health insurance industry fee has been suspended for calendar year 2017, but is scheduled to resume in calendar year 2018. In September 2016, we paid the federal government $916 million for our portion of the annual health insurance industry fee attributed to calendar year 2016 in accordance with the Health Care Reform Law. This fee, fixed in amount by law and apportioned to insurance carriers based on market share, is not deductible for tax purposes. Each year on January 1, except for 2017, we record a liability for this fee in trade accounts payable and accrued expenses 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 was recorded in operating cost expense of approximately $229 million and $456 million for the three and six months ended June 30, 2016, respectively, resulting from the amortization of the 2016 annual health insurance industry fee.

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 2017 business segment reclassifications as discussed in Note 1. There was no impairment. Changes in the carrying amount of goodwill for our reportable segments for the six months ended June 30, 2017 were as follows:
 
Retail
 
Group and Specialty
 
Healthcare
Services
 
Total
 
(in millions)
Balance at January 1, 2017
$
1,059

 
$
261

 
$
1,952

 
$
3,272

Acquisitions

 

 
8

 
8

Balance at June 30, 2017
$
1,059

 
$
261

 
$
1,960

 
$
3,280

The following table presents details of our other intangible assets included in other long-term assets in the accompanying condensed consolidated balance sheets at June 30, 2017 and December 31, 2016.
 
 
 
June 30, 2017
 
December 31, 2016
 
Weighted
Average
Life
 
Cost
 
Accumulated
Amortization
 
Net
 
Cost
 
Accumulated
Amortization
 
Net
 
 
 
($ in millions)
Other intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer contracts/
relationships
9.8 years
 
$
566

 
$
374

 
$
192

 
$
566

 
$
347

 
$
219

Trade names and
technology
8.2 years
 
104

 
75

 
29

 
104

 
69

 
35

Provider contracts
14.1 years
 
51

 
31

 
20

 
51

 
29

 
22

Noncompetes and
other
8.1 years
 
33

 
29

 
4

 
32

 
28

 
4

Total other intangible
assets
8.9 years
 
$
754

 
$
509

 
$
245

 
$
753

 
$
473

 
$
280

Amortization expense for other intangible assets was approximately $18 million for the three months ended June 30, 2017 and $20 million for the three months ended June 30, 2016. For the six months ended June 30, 2017 and 2016, amortization expense for other intangible assets was approximately $36 million and $41 million, respectively. The following table presents our estimate of amortization expense for 2017 and each of the five next succeeding years:
 
(in millions)
For the years ending December 31,:
 
2017
$
71

2018
63

2019
52

2020
48

2021
14

2022
11



18



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

9. BENEFITS PAYABLE
On a consolidated basis, activity in benefits payable, excluding military services, was as follows for the six months ended June 30, 2017 and 2016:
 
 
For the six months ended June 30,
 
 
2017
 
2016
 
 
(in millions)
Balances, beginning of period
 
$
4,563

 
$
4,976

Less: Premium deficiency reserve
 

 
(176
)
Less: Reinsurance recoverables
 
(76
)
 
(85
)
Balances, beginning of period, net
 
4,487

 
4,715

Incurred related to:
 
 
 
 
Current year
 
22,576

 
23,211

Prior years
 
(345
)
 
(435
)
Total incurred
 
22,231

 
22,776

Paid related to:
 
 
 
 
Current year
 
(18,332
)
 
(18,720
)
Prior years
 
(3,626
)
 
(3,925
)
Total paid
 
(21,958
)
 
(22,645
)
Premium deficiency reserve
 

 
337

Reinsurance recoverable
 
78

 
75

Balances, end of period
 
$
4,838

 
$
5,258

Amounts incurred related to prior periods vary from previously estimated liabilities as the claims ultimately are settled. Negative amounts reported for incurred related to prior years result from claims being ultimately settled for amounts less than originally estimated (favorable development).
Our reserving practice is to consistently recognize the actuarial best estimate of our ultimate liability for claims. Actuarial standards require the use of assumptions based on moderately adverse experience, which generally results in favorable reserve development, or reserves that are considered redundant.
Benefits expense excluded from the previous table was as follows for the six months ended June 30, 2017 and 2016.
 
 
For the six months ended June 30,
 
 
2017
 
2016
 
 
(in millions)
Premium deficiency reserve - Individual Commercial
 
$

 
$
161

Military services
 

 
6

Future policy benefits:
 
 
 
 
Individual Commercial
 
(36
)
 
(62
)
Other Businesses
 
20

 
25

Total future policy benefits
 
(16
)
 
(37
)
Total
 
$
(16
)
 
$
130


19



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

Military services benefits expense in the tables above reflect expenses associated with our contracts with the Veterans Administration.
Incurred and Paid Claims Development
The following discussion provides information about incurred and paid claims development for our Retail, Group and Specialty, and Individual Commercial segments as of June 30, 2017 and 2016, net of reinsurance and the total of IBNR included within the net incurred claims amounts.
Retail Segment
Activity in benefits payable for our Retail segment was as follows for the six months ended June 30, 2017 and 2016:
 
 
For the six months ended June 30,
 
 
2017
 
2016
 
 
(in millions)
Balances, beginning of period
 
$
3,507

 
$
3,600

Less: Reinsurance recoverables
 
(76
)
 
(85
)
Balances, beginning of period, net
 
3,431

 
3,515

Incurred related to:
 
 
 
 
Current year
 
20,010

 
19,259

Prior years
 
(287
)
 
(299
)
Total incurred
 
19,723

 
18,960

Paid related to:
 
 
 
 
Current year
 
(16,385
)
 
(15,766
)
Prior years
 
(2,707
)
 
(2,946
)
Total paid
 
(19,092
)
 
(18,712
)
Reinsurance recoverable
 
78

 
75

Balances, end of period
 
$
4,140

 
$
3,838

At June 30, 2017, benefits payable for our Retail segment included IBNR of approximately $2.7 billion, primarily associated with claims incurred in 2017.











20



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

Group and Specialty Segment
Activity in benefits payable for our Group and Specialty segment, excluding military services, was as follows for the six months ended June 30, 2017 and 2016:
 
 
For the six months ended June 30,
 
 
2017
 
2016
 
 
(in millions)
Balances, beginning of period
 
$
578

 
$
616

Incurred related to:
 
 
 
 
Current year
 
2,629

 
2,556

Prior years
 
(31
)
 
(38
)
Total incurred
 
2,598

 
2,518

Paid related to:
 
 
 
 
Current year
 
(2,117
)
 
(2,000
)
Prior years
 
(518
)
 
(543
)
Total paid
 
(2,635
)
 
(2,543
)
Balances, end of period
 
$
541

 
$
591

At June 30, 2017, benefits payable for our Group and Specialty segment included IBNR of approximately $477 million, primarily associated with claims incurred in 2017.

Individual Commercial Segment
Activity in benefits payable for our Individual Commercial segment was as follows for the six months ended June 30, 2017 and 2016:
 
 
For the six months ended June 30,
 
 
2017
 
2016
 
 
(in millions)
Balances, beginning of period
 
$
454

 
$
740

Less: Premium deficiency reserve
 

 
(176
)
Balances, beginning of period, net
 
454

 
564

Incurred related to:
 
 
 
 
Current year
 
304

 
1,816

Prior years
 
(26
)
 
(97
)
Total incurred
 
278

 
1,719

Paid related to:
 
 
 
 
Current year
 
(223
)
 
(1,396
)
Prior years
 
(378
)
 
(417
)
Total paid
 
(601
)
 
(1,813
)
Premium deficiency reserve
 

 
337

Balance, end of period
 
$
131

 
$
807


At June 30, 2017, benefits payable for our Individual Commercial segment included IBNR of approximately $119 million, primarily associated with claims incurred in 2017.

21



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

Reconciliation to Consolidated

The reconciliation of the net incurred and paid claims development tables to benefits payable in the consolidated
statement of financial position is as follows:
 
Reconciliation of the Disclosure of Incurred and Paid Claims Development to Benefits Payable, net of reinsurance
 
 
 
 June 30,
 
 
2017
 
Net outstanding liabilities
 
 
Retail
$
4,062

 
Group and Specialty
541

 
Individual Commercial
131

 
Other Businesses
26

 
    Benefits payable, net of reinsurance
4,760

 
 
 
 
Reinsurance recoverable on unpaid claims
 
 
Retail
78

 
     Total reinsurance recoverable on unpaid claims
78

 
 
 
 
     Total benefits payable, gross
$
4,838


10. EARNINGS PER COMMON SHARE COMPUTATION
Detail supporting the computation of basic and diluted earnings per common share was as follows for the three and six months ended June 30, 2017 and 2016:
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(dollars in millions, except per common share results; number of shares in thousands)
Net income available for common stockholders
$
650

 
$
311

 
$
1,765

 
$
565

Weighted average outstanding shares of common stock
used to compute basic earnings per common share
144,600

 
149,386

 
146,212

 
149,273

Dilutive effect of:
 
 
 
 
 
 
 
Employee stock options
158

 
218

 
179

 
218

Restricted stock
876

 
1,202

 
862

 
1,360

Shares used to compute diluted earnings per common share
145,634

 
150,806

 
147,253

 
150,851

Basic earnings per common share
$
4.49

 
$
2.08

 
$
12.07

 
$
3.79

Diluted earnings per common share
$
4.46

 
$
2.06

 
$
11.98

 
$
3.75

Number of antidilutive stock options and restricted stock
excluded from computation
449

 
676

 
693

 
980


22



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

11. STOCKHOLDERS’ EQUITY
Dividends
The following table provides details of dividend payments, excluding dividend equivalent rights for unvested stock awards, in 2016 and 2017 under our Board approved quarterly cash dividend policy:
Record
Date
 
Payment
Date
 
Amount
per Share
 
Total
Amount
 
 
 
 
 
 
(in millions)
2016 payments
 
 
 
 
 
 
12/30/2015
 
1/29/2016
 
$
0.29

 
$
43

3/31/2016
 
4/29/2016
 
$
0.29

 
$
43

6/30/2016
 
7/29/2016
 
$
0.29

 
$
43

10/13/2016
 
10/28/2016
 
$
0.29

 
$
43

2017 payments
 
 
 
 
 
 
1/12/2017
 
1/27/2017
 
$
0.29

 
$
43

3/31/2017
 
4/28/2017
 
$
0.40

 
$
58

6/30/2017
 
7/31/2017
 
$
0.40

 
$
58

Stock Repurchases
On February 14, 2017 our Board of Directors replaced a previous share repurchase authorization of up to $2 billion, of which $1.04 billion remained unused, with a new authorization for repurchases of up to $2.25 billion of our common shares expiring on December 31, 2017 exclusive of shares repurchased in connection with employee stock plans. 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. Our remaining repurchase authorization was $1.05 billion as of August 1, 2017, which includes $300 million of stock held back as part of the accelerated share repurchase agreement as more fully described below.
On February 16, 2017, we entered into an accelerated share repurchase agreement, or ASR Agreement, with Goldman, Sachs & Co. LLC, or Goldman Sachs, to repurchase $1.5 billion of our common stock as part of the $2.25 billion share repurchase program referred to above. Under the ASR Agreement, on February 22, 2017, we made a payment of $1.5 billion to Goldman Sachs from available cash on hand and received an initial delivery of 5.83 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 $1.2 billion increase in treasury stock, which reflected the value of the initial 5.83 million shares received upon initial settlement, and a $300 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. The final number of shares that we may receive, or be required to remit, under the ASR agreement will be determined based on the daily volume-weighted average share price of our common stock over the term of the ASR agreement. Final settlement under the ASR agreement is expected to occur by the end of the third quarter of 2017. The ASR agreement contains provisions customary for agreements of this type, including provisions for adjustments to the transaction terms upon certain specified events, the circumstances generally under which final settlement of the ASR Agreement may be accelerated or extended or the ASR agreement may be terminated early by Goldman Sachs or Humana, and various acknowledgments and representations made by the parties to each other. At final settlement, under certain circumstances, we may be entitled to receive additional shares of our common stock from Goldman Sachs or we may be required to make a payment. If we are obligated to make payment, we may elect to satisfy such obligation in cash or shares of our common stock. The obligation of Goldman Sachs under the ASR agreement is guaranteed by The Goldman Sachs Group, Inc.

23



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

In connection with employee stock plans, we acquired 0.37 million common shares for $78 million and 0.44 million common shares for $73 million during the six months ended June 30, 2017 and 2016, respectively.
Treasury Stock Reissuance
We reissued 1.34 million shares of treasury stock during the six months ended June 30, 2017 at a cost of $94 million associated with restricted stock unit vestings and option exercises.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income included net unrealized gains, net of tax, on our investment securities of $87 million at June 30, 2017 and net unrealized losses, net of tax, of $17 million at December 31, 2016. In addition, accumulated other comprehensive income included $92 million, net of tax, at June 30, 2017 and $49 million, net of tax at December 31, 2016 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 2016 Form 10-K for further discussion of our long-term care insurance policies.
12. INCOME TAXES
The effective income tax rate was 37.6% for the three months ended June 30, 2017, compared to 51.1% for the three months ended June 30, 2016 and was 35.4% for the six months ended June 30, 2017, compared to 50.3% for the six months ended June 30, 2016, primarily due to the 2017 temporary suspension of the non-deductible health insurance industry fee as well as previously non-deductible transaction costs that, as a result of termination of the Merger Agreement, became deductible for tax purposes and were recorded as such in the three months ended March 31, 2017.

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

13.  DEBT
The carrying value of debt outstanding, net of unamortized debt issuance costs, was as follows at June 30, 2017 and December 31, 2016:
 
June 30, 2017
 
December 31, 2016
 
(in millions)
Short-term:
 
 
 
Commercial paper
$
200

 
$
300

$500 million, 7.20% Senior notes due June 15, 2018
501

 

 Total short-term debt
701

 
300

 
 
 
 
Long-term:
 
 
 
Senior notes:
 
 
 
  $500 million, 7.20% due June 15, 2018

 
501

  $300 million, 6.30% due August 1, 2018
303

 
304

  $400 million, 2.625% due October 1, 2019
398

 
398

  $600 million, 3.15% due December 1, 2022
596

 
595

  $600 million, 3.85% due October 1, 2024
595

 
595

  $600 million, 3.95% due March 15, 2027
594

 

  $250 million, 8.15% due June 15, 2038
263

 
264

  $400 million, 4.625% due December 1, 2042
396

 
396

  $750 million, 4.95% due October 1, 2044
739

 
739

  $400 million, 4.80% due March 15, 2047
395

 

     Total long-term debt
4,279

 
3,792

 
 
 
 
Total debt
$
4,980

 
$
4,092

Senior Notes    

In March 2017, we issued $600 million of 3.95% senior notes due March 15, 2027 and $400 million of 4.80% senior notes due March 15, 2047. Our net proceeds, reduced for the underwriters' discount and commission and offering expenses paid as of March 31, 2017, were $991 million. We intend to use the net proceeds from these issuances for general corporate purposes.
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.
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 $21 million as of June 30, 2017 and $23 million as of December 31, 2016.

25



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

Credit Agreement
In May 2017 we amended and restated our previous 5-year $1.0 billion unsecured revolving credit agreement expiring July 2018 with a 5-year $2.0 billion unsecured revolving credit agreement which expires May 2022. 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 110.0 basis points, varies depending on our credit ratings ranging from 91.0 to 150.0 basis points. We also pay an annual facility fee regardless of utilization. This facility fee, currently 15.0 basis points, may fluctuate between 9.0 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 $8.9 billion at June 30, 2017 and a maximum leverage ratio of 3.0:1. We are in compliance with the financial covenants, with actual net worth of $11.0 billion and an actual leverage ratio of 1.1:1, as measured in accordance with the credit agreement as of June 30, 2017. Upon our agreement with one or more financial institutions, we may expand the aggregate commitments under the credit agreement to a maximum of $2.5 billion, through a $500.0 million incremental loan facility.
At June 30, 2017, we had no borrowings and no letters of credit outstanding under the credit agreement. Accordingly, as of June 30, 2017, we had $2.0 billion of remaining borrowing capacity (which excludes the uncommitted $500.0 million incremental loan facility 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
We previously 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. On June 15, 2017, we increased the size of the commercial paper program to permit the issuance of the commercial notes with the aggregate face or principal amount outstanding under the program at any time not to exceed $2 billion. Amounts available under the program may be borrowed, repaid and re-borrowed from time to time. 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 six months ended June 30, 2017 was $500 million. There were outstanding borrowings of $200 million at June 30, 2017 and $300 million at December 31, 2016.
14. GUARANTEES AND CONTINGENCIES
Government Contracts